Developments on cryptocurrencies in general and the bitcoin in particular make headlines every now and then. They are becoming the latest rage in town and the increase in their prices reportedly gives a return on investment that no investment can match. That said, the bitcoin is also used for dubious purposes such as trafficking drugs and arms due to lack of regulation.
At present, bitcoin is valued around ₹235,000, much lesser from the greater than ₹300,000-levels it had seen a couple of years ago. India is not exactly a laggard as far as bitcoins are concerned; India-specific bitcoin exchanges have come up and a few restaurants across the country accept the coins as payment.
Some countries have laws in place to prevent money laundering and fraud in bitcoins. Japan has recognised it as a legal currency (the ‘inventor’ bitcoin, Satushi Nakamoto, has a Japanese connection) after applying anti-money laundering rules and capital requirements to the cryptocurrency. Capital requirements will help buffer bitcoin exchanges against speculative activity. Accounting standards are also being developed for reporting bitcoin transactions.
The new normal in India is to compare whatever we are doing with what is happening in China. Recently, Chinese authorities have ordered Beijing-based cryptocurrency exchanges to cease trading and immediately notify users of their closure, signalling a widening crackdown by authorities on the industry to contain financial risks. Exchanges were also told to stop allowing new user registrations.
India can use GST as a tool to curb the frenzy over bitcoins by taxing their supply. Section 7 of the CGST Act defines ‘supply’ as all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. The definition is comprehensive enough to include trading in cryptocurrencies. GST demands a certain level of transparency which will ensure that only really serious players will trade in bitcoins.
Levy of GST on supply of bitcoins and income tax on the profits made on bitcoins is certain to curb their use purely for the purposes of speculation- which seems to be the main purpose behind doing anything in bitcoins today. If the indiscrete generation and supply of bitcoins is not curbed at an early stage, it could spread its tentacles to various parts of the economy.
There are two types of cryptocurrencies: fiat and non-fiat. Non-fiat currencies are largely in existence today while the fiat ones are blessed by Governments. In the past, the RBI has been ambivalent in its thoughts on cryptocurrencies. It has been reported that the RBI is working on a project to develop fiat crypto currencies. They have even thought of a name for it: Lakshmi. This is a welcome measure as the RBI can be extremely prudent in policies regarding cryptocurrencies.
At this stage, it appears that all it would take to regulate cryptocurrencies in India would be for the RBI, CBDT and GST Council to sit across the table and talk to each other. If this is not done at the earliest, they may be forced to sit down a few years down the line and decide on an action that is bound to be as controversial as it was when it was last done — demonetise crypto currencies.
The writer is a chartered accountant