Union Budget 2022 – Major Crypto Announcements
The Union Finance Minister Nirmala Sitharaman recently cleared all doubts of investors surrounding the uncertainty over the future of cryptocurrency in India. She also mentioned in her budget speech that the Reserve Bank of India (RBI) would launch its own digital currency in the year starting April 1. Also, she specified that the income made from the virtual assets would attract tax at 30 percent. This would protect millions of crypto investors in India who have been worried about the future of digital currency in the country.
The Indian subcontinent would now join a handful of nations that would be launching its own blockchain currency. This has had huge implications for the financial sector overall and also underscores India’s pre-eminence in digitized finance. Even the United States is yet to launch its CBDC (Central Bank Digital Currency) yet. This also implies that the CBDC means leveraging the benefits of blockchain, faster settlements, and lower opex (operating expenses). We still need to wait for the details to understand all implications.
With taxation of virtual assets now clearly defined, the investors now know what tax filers can expect this year. The union government was keen on bringing crypto under the tax ambit as many industrial players and stakeholders were expecting the introduction of a tax policy framework in the Union Budget 2022. With a tax rate of 30 percent which is similar to gains from gambling winnings and lotteries, crypto is now officially recognized by the government. Despite the uncertainty, millions of Indians have already invested in digital currency, and the trend is only likely to continue.
What are the Implications of Taxing Cryptocurrencies in India?
While the critics feel it is harsh to impose a 30% flat tax rate, this is a premium and a price well worth paying in exchange for what is effectively a ruling-out of prospects for a total ban on crypto by the central government. There is a lot of room for innovation though. The higher tax rate imposed would hamper the willingness of investors to convert cryptocurrencies into national fiat, which in turn, may open more doors for innovation-minded and technologically savvy investors.
The extremely high tax rate and the fact that the losses cannot be offset would propel investors to turn to alternative means of storing and transacting in cryptocurrencies without foregoing any significant losses while switching back to the rupee. An inadvertent upside of this is the prospective conversion and reallocation of crypto funds from one form to another. Such transformations would cover DeFi activities such as lending, staking, providing liquidity among others.
Scope for Decentralized Finance in India
Decentralized Finance, or DeFi, is an umbrella term for financial services on the public blockchain. With DeFi, you can do a lot more than most banks support, such as to lend, borrow, earn interest, trade assets, buy insurance, trade derivatives, and more. The only difference is that it is quicker and does not require a third party or any paperwork. DeFi is a global, peer-to-peer system and is not routed through any centralized system. The processes highlighted above would drive innovation in the field of Indian DeFi.
How Blockchain-based Cryptocurrency Can Drive Innovation
Blockchain technology adopts a decentralized approach for creating value and trust. This implies that an intermediary is not needed for completing a transaction between two individuals. You can perform multiple transactions with companies/individuals digitally.
Using a credit card, e-wallet, or a bank account, we pay for food, education, transport, broadband, and even groceries. The intermediary serves as a trusted party for ensuring the transaction made has been validated and takes a substantial cut of the amount transacted. This share can range from 1 to 5 percent based on the transaction. Also, some intermediaries limit operations to certain hours of the day with an inability to support micro-transactions on a global scale.
Bitcoin and other cryptocurrencies were invented to circumvent any need for intermediaries. By authenticating a transaction on a public ledger and by ensuring that it works throughout the day with zero downtime, they provide cost savings as well as authenticity to the global user base.
Monetary Systems and Asset Class
As an asset class, cryptocurrencies offer a level global playing field to invest and grow wealth irrespective of the country of origin. They are still in the developing phase and would naturally have to face opposition from central banks such as the Reserve Bank of India. The financial institutions in the country haven’t been supporting the blockchain ecosystem yet. However, many investors in India have invested in cryptocurrencies via legal exchanges that support the conversion of the Rupee to digital currencies.
This increased adoption has compelled the government and the central bank recently to come up with an impactful approach. The government of India is considering regulating the cryptocurrency segment for protecting and serving the interest of investors. RBI has announced plans to consider a Central Bank Digital Currency (CBDC) based on blockchain technology in India. This has the potential to promote financial inclusion among 190 million unbanked Indians.
Innovation and Trade
Despite being a regulated industry, blockchain-based companies can operate freely in India and showcase leadership to the world. Innovations in the segment in the future can come from India and it can further boost job creation and economic growth in the country. Numerous blockchain projects are in progress which will have global implications.
India’s Polygon is building a framework and protocol for connecting blockchain-based networks and is being hailed as a leader in technology for helping Ethereum overcome its network issues. It is also among the top 20 cryptocurrencies by market capitalization today. Many more companies are going to sprout in the coming time given the massive talent base.
A locally developed Decentralized Finance solution would also complement the traditional financial system globally and will also allow for financial inclusion as present an alternative. Upcoming firms and start-ups get listed in the Indian Stock Exchanges. Concerning global trade, India’s dependence on the dollar can be softened if global trade is done using cryptocurrencies. Moreover, the country and its export-oriented companies can have better predictability for trade and payments.
The future of cryptocurrencies in India seems rich with possibilities. With the right set of regulations and incentives, cryptocurrencies and blockchain technology, in general, can help India achieve the goal of becoming Aatmanirbhar.