A glimmer of hope for cryptos in India

Rashmi Deshpande | Updated on May 10, 2021

The MCA move requiring companies to disclose their crypto assets appears to be a step towards recognition of the market

Around ten years ago, Satoshi Nakamoto, speaking about Bitcoin technology, said: “If you don’t believe me or don’t get it, I don’t have time to try to convince you, sorry.” Back then, it was difficult to gauge the potential of this technology. However, today, it is impossible to dispute the increased advantages of Bitcoins over fiat currency.

Despite this, India has been dithering over whether trading in cryptocurrencies and allied technologies should be recognised and regulated within the domestic legal framework. The Ministry of Corporate Affairs (MCA) notification of March 24, mandating companies to make certain disclosures about crypto assets, comes as a beacon amidst the prevailing uncertainty around the future of cryptocurrencies in India. All stakeholders are eager to know under what legal paradigm will the crypto industry operate.

During the Budget session this year, the government announced its decision to ban all private currencies and its intention to encourage a central bank digital currency. It is uncertain whether the Bill will become law. Hence, different institutions of the government have taken varying standpoints at different points in time, resulting in lack of legal and operational clarity amongst players in the crypto market, including traders, miners and investors.

MCA notification

In the March 24 notification, the MCA announced amendments to Schedule III of the Companies Act, 2013 with effect from April 1, 2021. The schedule provides for general instructions for preparation of balance sheet and statement of profit and loss of a company.

The amendments make it mandatory for companies dealing in virtual currencies to disclose profit or loss incurred on crypto transactions and the amount of crypto they hold in their balance sheets.

Further, companies that have traded or invested in cryptos during a financial year must disclose profit or loss on transactions involving cryptocurrency, the amount of currency as held on reporting date, and deposits or advances to any person for trading or investing in cryptocurrency.

The MCA’s move comes as a relief amidst the speculation around banning cryptocurrency. It gives investors some glimmer of hope as reporting requirements under the Companies Ac can be seen as a definite recognition of the crypto asset market in India. Additionally, this will bring a lot of transparency with respect to how much investment companies hold in crypto assets.

This may indicate that the government is inclined towards regulation of cryptocurrencies rather than imposing a blanket ban on the same.

This step is largely being welcomed by industry experts as it recognises crypto assets as a legitimate asset class and hence it is expected that companies will be able to diversify their investment portfolios.

It shall be expedient at this stage for the government to introduce similar amendments in other laws to regulate the functioning of crypto assets in India, including the Securities and Exchange Board of India Act, 1992, to combat the anticipated dangers of trade manipulation and mismanagement in exchanges, and the Prevention of Money Laundering Act, 2002, to avoid money laundering activities.

Similarly, the government may introduce clarificatory amendments in the domain of taxation laws to address how exactly this activity shall be taxed.

The introduction of crypto assets in the existing accounting framework could also be seen as a move by the government to garner information on a company’s crypto asset holdings before actually coming out with a legislation.

It appears difficult to conclude whether the amendment comes as a positive or negative signal qua the crypto asset market. However, amendments to allied and ancillary laws may act as a more definitive signal towards regulation of cryptocurrencies, which is needed to fully augment the scale of operations and growth potential of this technology.

The writer is Partner, Khaitan & Co. With inputs from Shefali Chawla

Published on May 09, 2021

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