Bitcoin gains acceptance

India needs clear rules on cryptos

Bitcoin, and more broadly cryptocurrencies, is edging closer to becoming a “mainstream alternative financial asset” as it becomes more easily available via traditional financial (or TradFi) instruments. The government of El Salvador (which uses Bitcoin as an alternative currency) has completed the formalities for launching a Bitcoin “volcano” bond. A proposal to list a spot Bitcoin exchange-traded fund (ETF) from one of global finance’s most marquee firms, BlackRock, awaits approval from the United States’ markets regulator, the Securities and Exchange Commission (SEC). This is in addition to the Nasdaq listing of several companies focused on cryptomining.

Given such developments, India needs to review and clarify regulatory attitudes to cryptocurrencies. India is a signatory to the G20 declaration document that ensures overseas transactions in cryptocurrencies by Indian citizens will be reported to Indian tax authorities, under the Crypto-Asset Reporting Framework. However, there’s no clarity on what Indians can do with cryptocurrencies. The regulations start and end with the imposition of a very high tax on trading in these assets. There’s regulatory silence on whether these digital instruments can be used for cross-currency remittances, or as alternatives to the rupee in buying goods and services, or if they are to be treated as art objects, in Indian law.

Bitcoin has been the standout financial performer in 2023. It has returned over 150 per cent in US dollar terms since January. Other cryptocurrencies too have done well. Investors see cryptos as “digital gold” which provides a hedge against inflation. In addition, cryptocurrencies have proved to be useful in some key areas. For example, cross-currency remittances done via cryptos are substantially cheap compared to conventional bank transfers. So are swaps. This is an area of interest since remittances to India amount to roughly $100 billion per annum and there are also significant outward remittances for students studying abroad, and so on.

Indian techies doing freelance gigs in crypto and blockchain startups are often offered payment in cryptocurrencies. They are hesitant to accept such assignments because they don’t know if they are legal. 
 

Startups with the skills to enter the cryptocurrency mining space are cautious, given the opacity of regulation. And of course, Indian players have fallen behind in the thriving gaming and non-fungible token (NFT) ecosystems, driven by these instruments. Clarity on deployment into all such areas is urgently required.

El Salvador’s “volcano” bond is Bitcoin-denominated and offers 6.5 per cent annualised returns for 10 years. The bond is intended to pay down sovereign debt and fund the construction of a proposed “Bitcoin City”. It will be issued and traded on the Bitfinex Securities Platform, a site for blockchain-based instruments in El Salvador. The name arises from the fact that El Salvador has launched a 241-megawatt Bitcoin mining project worth $1 billion, using geothermal energy derived from the country’s volcanic resources to mine cryptocurrencies.

Assuming the SEC approves BlackRock’s spot Bitcoin ETF, Wall Street’s biggest institutional players will get an opportunity to enter the cryptocurrency space in a big way and it may lead to similar ETFs targeting other cryptocurrencies such as Ethereum. Indian lawmakers and regulators’ concern around cryptos’ impact on financial stability and their role in facilitating money laundering is understandable. But equally, the country requires a clear regulatory stance on cryptocurrencies and needs to come up with acceptable rules on the deployment and taxation of these instruments or risk falling behind the curve with implications for developers, entrepreneurs, and investors.