Budget 2023 gives a virtual cold shoulder to cryptocurrencies

The narrative of virtual digital assets (VDAs) has policymakers worried. The legal sanctity on them is unclear, and taxation on them is high (when compared to those in other nations). The cause for concern is the market volatility this asset class has seen past many months, of global VDA platforms shutting shop, and of concerns of the misuse of similar platforms in India for illegal activities.

Yet, many young Indians it as a serious investment class.

The February 1 Union Budget gives the VDAs a miss. That would mean the tax structures introduced in the previous Budget — a levy of a flat 30 percent tax on gains from VDA trade applicable from April 1; a levy of 1 percent tax deducted at source (TDS) on transactions above Rs 10,000 from July 1; and, provisions disallowing the offsetting of losses from April 1 — are still applicable. Incidentally, India is the only country that imposes a TDS on VDA transactions.

It is a puzzle why VDAs did not feature in the Budget announcement at all, considering that even the Reserve Bank of India (RBI) has been having a strong view against it. A reason could be because the topic will see greater discussion at the G20 level later this year. India had raised this topic at the IMF, and World Bank last year.

Read | Budget 2023: Read Nirmala Sitharaman's full speech here

If the intent were to track and reduce VDA transactions by resident Indians, the taxes have not achieved it. Data about VDA exchanges show that the volumes fell in the Indian exchanges at every regulatory announcement time, and there was an increase in volumes in foreign exchanges. Peer-to-peer trades mediated by offshore VDA platforms have emerged as a convenient and difficult-to-trace option for VDA investors. This not only defeats the intent of tracking Indian investors, and to assumably discourage them from VDAs, but makes the asset class go underground.

The government must reconsider its current stand of cryptocurrencies and regulate VDA exchanges as a Market Infrastructure Institution (MII), such as the securities exchanges. There needs to be a strict fit and proper for ownership, and efforts to bring risk governance and data governance. It should be ensured that VDA exchanges have a minimum level of capital adequacy, and additional funds for volatility-risk-coverage. This can be strengthened by having them showcase their proof-of-reserves daily. Finally, reduce the TDS on VDAs, make them like that of the Securities Transaction Tax (STT), and rationalise other tax slabs to enhance tax revenues.

One hopes for healthy policy discussions on the newer types of assets that emerging technologies are bringing on. It needs to be devoid of moral hazarding, as well as asset-shaming. For example, theoretically, the volatility of VDAs could come down when it gets more regulatorily established. But then, the regulatory establishments cannot make volatility the sole basis for their regulatory philosophy. Instead, it would benefit the Indian stakeholders (government, financial regulators, industry, and academicians) to discuss the merits, and to railroad the negatives.

Digital technologies have brought ideas that have allowed for financial access and inclusion; just as every industrial revolution brought in the idea of newer asset classes, and concepts in finance.

Regulatory development is a thankless role. Every critic opposes anything done, or not. Yet we must build capability and talent in regulatory bodies to work with digital technologies. The challenge of VDAs starts with its very name — virtual: something that’s not tangible, and not a service in its entirety. The next comes the valuation part of the asset, to enable for smoother market transactions, if it must be mainstreamed.

If there is sufficient reason to believe that any asset of financial structure/product will create instability to financial systems, or to the citizens, governments and regulators must ban such product/service—at the same time it should also ensure that such a product/structure is available underground.

Srinath Sridharan is a corporate adviser and author. The views expressed are the author's own. They do not necessarily reflect the views of DH.