The Centre’s move to tackle speculation in the highly volatile and risky cryptocurrencies through the imposition of punitive taxes came in for much criticism from investors but it has actually helped protect them. The global sell-off in risky assets caused by central bank tightening has resulted in a sharp decline in the prices of cryptocurrencies in the last few weeks. Bitcoin, the most popular cryptocurrency recently moved below $20,000 to register a loss of 70 per cent from the peak value last November while the global market capitalisation of cryptocurrencies has declined from $2.5 trillion towards the end of last year to around $800 billion. But the loss suffered by investors trading in these assets on Indian trading platforms would be minimal since trading volume had dropped almost 60 per cent this year. This decline in trading activity is a direct fallout of the Centre’s action in the Union Budget this year wherein it had imposed 30 per cent tax on transfer of all virtual digital assets including cryptocurrencies, disallowed deductions and set offs while calculating the profit and had imposed a TDS of 1 per cent on transfer of these assets. With the TDS on cryptocurrency transfers coming into effect from July 1, activity on these platforms is likely to decline further. A recent CBDT notification has specified that the onus will be on the exchanges to collect and deposit the TDS and submit periodic reports to the tax authorities. This will further discourage activities in this segment.

The proliferation of usage of digital technology in payment, investment and other financial transactions has created unique challenges for regulators since many of these companies originate and grow in a regulatory vacuum. Regulators typically tend to be one step behind in framing laws for these digital products. Controlling cryptocurrencies and virtual digital assets has proved even more difficult since the creation and trading of these assets takes place outside the country, beyond the reach of regulators. But there was an urgent need to control speculative trading in cryptocurrencies in India last year with many investors getting lured into dabbling in these assets due to the 10-fold increase in their value during the pandemic. India did well to control this speculation through fiscal measures, even as most other countries are still deliberating on it.

Speculative trading in cryptocurrencies is however, just one of the regulatory challenges. The other problem – use of these assets for illegal payment transactions involving money laundering, drug-trafficking and terror financing – still continues. The Enforcement Directorate has unearthed many such illicit transactions violating FEMA on Indian crypto-trading platforms. While the Reserve Bank of India has repeatedly expressed its reservations about allowing these currencies to be held and circulated in the country, it is tough to control them through a unilateral ban in India. It is only through concerted cross-border collaboration and cooperation that the destabilising effect of these assets in the global payment ecosystem can be addressed. A global standard needs to be framed for payments using cryptocurrencies, with companies enabling these transactions mandated to be registered with the local central bank and being supervised by it. A parallel payment system, which is completely unregulated cannot be allowed to exist.

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