Why we shouldn’t take the lead in regulating crypto

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While there are a number of items on the legislative agenda for this winter session of Parliament, reports on a proposed cryptocurrency regulation for India appear to have received a lot of attention from the public. While early news indicated that the government was planning to impose an outright ban on private cryptocurrencies, more recent reports suggest we may be hoping for a more balanced regulatory regime.

In previous columns, I wrote about the futility of banning Bitcoin trading, arguing that a ban is rarely an effective solution. I pointed out that at the end of the day, the only people who comply with the terms of a ban are those who have always intended to use the service for a legitimate purpose. Everyone is just taking their already infamous activities deeper underground. “

That said, there are other complexities that the proposed cryptocurrency regulation will need to address. First, given that anonymity is a widely touted feature of cryptocurrencies and given that most of them are relatively freely tradable with fiat money, there are concerns that they may be used for money laundering. silver. Many countries have solved this problem by requiring cryptocurrency exchanges that platforms that convert cryptos to real money and vice versa to perform customer verification checks and by requiring them to keep transaction records for a period of time. stipulated period. In some jurisdictions, regulators have gone so far as to require exchanges to employ trained personnel to detect suspicious transactions.

Another concern is how crypto transactions are taxed. While capital appreciation resulting from sales of cryptocurrencies is obviously subject to capital gains, it is a bit more difficult to determine how services that have been paid for the use of cryptocurrencies should be taxed in. under indirect tax regimes such as the GST. It can be argued that any service, whether paid for in fiat or crypto currency, should be subject to GST, but what is not immediately clear is how the tax should be calculated on a payment mechanism. also volatile. One possible approach could be to base the actual tax payable on the fair market value of the cryptocurrency on the date of payment or receipt.

And then there is the question of how to tax the income that is specifically generated by cryptocurrency technologies, such as mining operations (in the context of proof-of-work-based cryptocurrencies like Bitcoin). Since crypto mining income has no real-world equivalent, it might be necessary to change the tax code so that income from this activity is treated as a new category of income.

We will also have to decide how we regulate crypto exchanges. Since they are at the heart of the regulation of this sector, we could require that they be registered in India in order to bring them unequivocally within the scope of Indian regulation. Some countries also impose licensing obligations on these exchange platforms, so that their continued operations are subject to specified conditions.

And then, finally, the question arises of how to regulate other crypto assets (new types of crypto tokens, initial coin offerings, etc.) which have all the characteristics of a security but which operate on a blockchain. . Most countries have placed crypto assets within the scope of securities regulations, requiring issuers to adhere to specific disclosure requirements at the time of issuance as well as securities regulations. insiders and market manipulation when trading these crypto assets.

All of this seems to suggest that rather than introducing brand new cryptocurrency legislation, as is currently being proposed, the government should simply change existing regulations on anti-money laundering, taxation and securities. securities to ensure that they also cover the cryptocurrencies and assets discussed above. This would ensure that our existing regulatory frameworks, as well as the associated enforcement apparatus that we have already put in place, are extended to regulate crypto as another asset class.

That said, this approach excludes all transactions that take place entirely in the cryptocurrency realm, those that never enter the real world as some goods and services can be purchased directly using cryptocurrencies. At present, most governments have chosen to ignore this category of transactions, based on the fact that these currencies are still not widely accepted and hence most people who wish to spend cryptocurrencies in their possession should first convert them. in ordinary fiat currency.

While this is true at the moment, that will inevitably change sooner rather than later. Mainstream businesses have already started to accept cryptocurrencies as a means of payment for goods and services, and over time I can see that we will be able to buy whatever we need directly using cryptocurrency. . Likewise, an ever-increasing number of entrepreneurs are choosing to raise funds by issuing crypto tokens and voluntarily subjecting their organizations to decentralized blockchain-based governance systems. This gave rise to a veritable explosion of decentralized autonomous organizations.

All of these developments will be indicative of a more fundamental societal shift towards the widespread use of crypto. But it’s only when this actually happens that we should think about adopting bespoke cryptocurrency regulation.

Rahul Matthan is a partner at Trilegal and also has a podcast called Ex Machina. His Twitter handle is @matthan

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