Future of crypto exchanges in India – The safer bet
By Samraat Basu
Industrial revolution 4.0 has taken the world by storm and India has been at the forefront of developing the Web 3.0 space, blockchain technology and emphasising on digital inclusion across demographics. One of the key use-cases of blockchain technology is the trading and use of cryptocurrencies and other crypto assets. Despite the tremendous headwinds being faced by the crypto industry due to recessionary fears, a significant number of Indians are participating in the crypto eco-system. However, in India, cryptocurrency is traded as an asset class and heavily taxed at 30% (plus additional surcharges and cess) which has led to dissuading Indian traders from using Indian trading platforms. In fact, Indian traders have resorted to making a beeline for foreign ‘cryptocurrency exchange platforms’ in order to avoid paying the high taxes as it has made trading in cryptocurrencies unviable. This has several negative consequences. First, this has a direct impact on the amount of tax revenue that is being collected by the exchequer. Second, Indian fiat currencies that are being converted into foreign currencies (for the purpose of trading) or cryptocurrencies are significantly more difficult to track and trace by the Indian Government. Third, it is indirectly benefitting the economy of those countries which have comparatively liberal taxation policies for the trading of cryptocurrencies. Fourth, in case of fraud or any other negative situation, it may leave Indians using such foreign platforms without adequate recourses in law.
Dangers of the current trend
One of the key geo-political dangers of the flight of crypto trading to foreign shores is that it may end up in a state which is potentially belligerent towards India. Echoes of a similar situation wherein the data of unsuspecting Indian users was being collected, monetised and tracked by Chinese platforms resulted in the ban of a number of applications such as TikTok, PUBG, UC Browser, Cam Scanner etc. by the Indian Government. While it may be debated whether the ban was excessive or whether there were potentially better alternatives to protecting the data of Indians as I have pointed out in this article published by the Oxford Law Faculty; there is little doubt that the use of Chinese trading platforms may have adverse consequences for lakhs of Indians who trade in crypto assets. China, unlike India, has a lot of unfettered control over companies operating in their shores and there is significant risk of misuse of Indian financial data stored with these companies which may lead to the financial instability of lakhs of Indians, which will, in turn, have attendant fiscal and geo-political consequences in India.
Given the decentralised nature of cryptocurrency and the global phenomenon it has become, it does not make much sense to clamp down, restrict or disincentivise activities in this sector of the economy as it is easy to circumvent those restrictions by using VPN services to access foreign crypto exchanges. In my opinion, as history has often shown us, the carrot usually works better than the stick. Further, the slow demise of this sector will also have a negative impact on the thousands of jobs that have been created to support this industry.
Hope for the Future
Policymakers need to work on formulating clear, transparent laws bereft of legalese to regulate the broader digital and crypto-asset space. Instead of using a sledgehammer to kill a fly, it is much more prudent to engage with experts and design a nuanced regulatory framework that has a sunset/appraisal clause which makes it mandatory to review developments in this space and update the law (especially given the breakneck speed in which this sector is developing).
The upcoming G20 2023 summit, with India at its helm, should follow-through on the finance ministers announcement of debating our cryptocurrency policy with high level leaders from other countries which have a shared vision in using policy to advance research and development in new technologies.
Recently, the representatives of US Treasury on a visit to India had called for a combined effort to regulate the cryptocurrency space in order to reduce the cost of cross-border payments to ensure financial stability with the Financial Action Task Force (FATF).The FAFT is an intergovernmental policymaking body whose purpose is to establish international standards, and to develop and promote policies, both at national and international levels to combat money laundering and the financing of terrorism. A coherent policy on cryptocurrency will also ensure that the dangers of terror financing through cryptocurrency are also addressed.
India has a large number of cryptocurrency trading platforms where traders invest in cryptocurrency as an asset class. Top exchange platforms like Bitbns, Coin DCX and WazirX have internal regulatory mechanisms in place where they ensure that the traders upload relevant documents for KYC, as required by Indian law. This subsequently ensures that traders, irrespective of their trading volume, have traceable investments, and are protected by the law. Further, Indian exchanges have shown a track record of being compliant with existing regulations, unlike notable foreign exchanges such as FTX, which has recently collapsed and filed for bankruptcy.
The Indian government should trust, support and facilitate legitimate and compliant Indian start-ups and businesses especially in the high-tech sector as they can significantly contribute to the broader goals of employment generation, economic growth and prevention of crime and terrorism.
The author is a legal expert
