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In four years, from Late Arun Jaitly who as finance minister once said, ‘we have not given any legitimacy to cryptocurrency,’ to the current FM Nirmala Sitharaman, ‘We are not saying no to cryptocurrency,’ there has been a sea of change in the Indian government’s way of thinking towards crypto.

In the latest development, it has now been widely reported that the Indian government is mulling to regulate crypto as digital commodities. The draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is under development and leading crypto groups have been hyperactive in collating industry viewpoints for the submission to the finance ministry.

The Bill is critical not only for the crypto industry but for users too, which has grown from 5 Mn in 2019 to 15 Mn in 2021. With WazirX alone hitting $290 Mn transactions a day, the volume of crypto transactions in India has grown 2x in the last few weeks from $300 Mn-$350 Mn to more than $600 Mn. The crypto startups in India too have grown to more than 350.

As the interest of the traders, investors and entrepreneurs in crypto has been growing exponentially, there is an urgent need to address policy uncertainties around, demand crypto entrepreneurs.

While tech lobby IndiaTrade.org has already submitted a five-point recommendation to 12 government departments such as the income tax department, Ministry of Corporate Affairs and other bodies including the RBI, the Blockchain and Crypto Assets Council of the Internet and Mobile Association of India (IAMAI-BACC) is about to submit its final viewpoint and report to the finance ministry.

Inc42 spoke to dozens of crypto startups and leading crypto groups on this. Almost all the stakeholders agree with the proposal of classifying crypto as a digital asset/commodity.

“Globally, the currency has been a domain of governments/central banks and thus has been posing a lot of hurdles for crypto. Had crypto been defined as assets since day one, most of the problems would not even arise. Be it currency, capital asset, securities or commodity, the first three are not viable for several reasons and therefore classifying crypto as a commodity can be a good start,” says Naveen Surya, advisory board member, Blockchain & Crypto Assets Council and chairman, Fintech Convergence Council.

That’s a jump start, to say the least. There are still a lot of questions that are yet to be answered.

Who Will Regulate Crypto And How?

The draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 has two key elements:

• Central Bank Digital Currency (CBDC)
• Crypto Assets

While CBDC falls entirely under the purview of the RBI, the SEBI has been responsible for the regulation of the commodity derivatives market in India. With crypto reportedly being defined as a commodity, undoubtedly SEBI is going to be the institution that will have to regulate crypto.

However, the big question is whether the regulatory body is equipped and even willing to monitor and regulate crypto assets and exchanges? Archit Gupta, founder and CEO of Clear (Previously Cleartax) avers, “Cryptocurrencies can be lawfully traded and they may fluctuate in value as the commodity would. It is difficult to form a frame of reference for the prices of digital currency quoted on the spot markets. Though the prices of digital currencies on the spot markets can be observed, you cannot find the connection of these prices to any underlying asset and demand and supply is less clear than for other commodities.”

In July, responding to a petition filed by petitioners-in-person Aayush Shukla and Vikas Kumar in the Delhi High Court, the SEBI averred that the petition was misdirected that the regulator for crypto, if any, would be the RBI and not the SEBI.

Advocate Neeraj Malhotra representing SEBI told the single bench comprising Justice Jyoti Singh that the SEBI regulates securities while the RBI is the regulator of financial markets and, therefore, the RBI should be the right party to look after the crypto-assets.

Speaking to Inc42, a SEBI official, on the condition of anonymity, stated that the SEBI has been a member of various international bodies such as the International Organisation of Securities Commission (IOSCO) and its regional committee Asia-Pacific Regional Committee (APRC). As far as regulating crypto is concerned, IOSCO has already released a final report covering the issues, risks and regulatory considerations relating to crypto-asset trading platforms.

It has laid out a slew of guiding principles covering the aspects of crypto as securities and crypto as commodities. As and when the matter comes to SEBI, the regulations will be in line with the IOSCO principles.

Does the Indian regulatory body have a clear frame of reference in terms of global practices? Gupta of Clear says that in the US, the IRS (Internal Revenue Service) in 2014 decided that cryptocurrencies should be treated as “property” and taxed as capital assets except when cryptocurrencies are earned from mining activities. In the UK, if the frequency of buying and selling the cryptocurrency is high, where it amounts to trading, they are taxed as profits from the business.

However, if they are held as investments for the long-term, they will be taxed as capital gains. Similarly, in Singapore, the cryptocurrencies used for business transactions are taxed as profits from business income. Otherwise, they are taxed as capital gains, Gupta informed.

Responding to the question of how it will deal with Initial Coin Offerings (ICOs) and mining aspects, the SEBI officer stated that while the draft Bill is expected to bring clarity on these issues, the SEBI is equipped to handle issues including the monitoring and enforcement of ICOs in the securities market.

Once regulated, the SEBI is expected to standardise the crypto trading system. This might include the eligibility criteria of crypto-assets i.e. not all crypto-assets would be easily listed on any platforms, clearance and settlement processes, cybersecurity norms and so on.

According to Kumar Gaurav, founder and CEO, Cashaa, a crypto-friendly, neo-bank classifying crypto based on its source and use case involve a lot of layering and dig, as this will be a first in the industry, and there are more than 11,000 cryptocurrencies in the world.

“If the commodity path is taken, as it has been reported, SEBI is the right authority; they have adequate experience, knowledge and authority to do it. And if at all in future, you want these commodities to be available as a payment model similar to gold and notify then probably some RBI intervention is required which will be more of a supportive regulator when you do a foreign equity purchase. The RBI will have to provide a mechanism of reporting transactions that are linked with foreign parties,” Surya elaborated.

Draft Bill To Bring In More Clarity Over Taxing Crypto

The draft crypto Bill is expected to bring clarity on the taxation too.

According to reports, going forward, a tax similar to the Security Transaction Tax (STT) may be imposed on crypto once the Bill classifying crypto as a commodity gets enacted by the Parliament.

Similar to tax collected at source (TCS), STT is a direct tax levied on the purchases and sales of securities listed on various exchanges such as NSE and BSE in India. A crypto transaction tax could be levied on crypto assets that fulfil the listing criteria over and above the transaction. This might make crypto a little costlier than what it is today in India, believe experts.

Avinash Shekhar, Co-CEO of ZebPay, stated, “We hope to see cryptos classified as an asset class and have laws in place on their taxation just like the other financial markets. There are thousands of different cryptos in the market with different use cases which work on different Blockchain platforms. We’re sure the policymakers will look into how they can be used both as an asset class and also take advantage of the underlying blockchains for their use cases to cater to improve India’s infrastructure needs in various industries.”

Speaking at the IAMAI-BACC Crypto Asset Conference, R Gandhi, former deputy governor, RBI has suggested that in a citizen’s hand, crypto should be deemed as a foreign asset. Under the Foreign Exchange Management Act, if an asset is stored in foreign wallets, the assessee will be required to provide a slew of details including the country code where their assets are stored, the account number, the peak value hit by the asset, the current or closing balance and so on.

Meyyappan Nagappan, leader, digital tax, Nishith Desai Associates, had earlier said that there is a provision for declaring foreign assets in ITR forms, and even under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. That, again, is another grey area because no one knows where the location of a crypto asset is.

“You could have it in a wallet outside India. So, there is one way of saying that crypto is located where the person is located i.e. if you are in India, you can say that it is located in India but that’s also only a stance. So, it depends on circumstances and also how you want to position your assets,” Nagappan said.

Mining crypto can be separately classified as one’s income and hence, an income tax would be levied on incomes from such businesses.

IndiaTech, in its submission, asked the government to enable necessary provisions in Direct Tax laws to render recognition and treatment under the head of Income ‘Profit and Gains from Business and Profession’ or ‘Income from Capital Gains’ depending on the kind of business of the holder and the timelines of holding.

And, GST should be levied on the brokerage or exchange fees (like it happens in stock markets) and not on the transaction value. Similarly, FEMA regulations and assigned HS (Harmonised System) codes should be applicable for people residing abroad to purchase cryptos in India.

Crypto As A Commodity: Way To Go

Despite all the reports suggesting that the government is mulling to consider crypto as a commodity or digital asset, the journey of crypto from an undefined grey area to legal white is yet to be complete.

The draft Bill, once completed, will go for Cabinet approval. After approval, it is expected to be released for public consultation. With further inputs from the various stakeholders, a revised draft Bill will then be introduced in Parliament.

There are varying reports over what time is the government planning to introduce the draft Bill in the parliament. A finance ministry official earlier told Inc42 that the Bill is expected to be tabled in the Budget Session of 2022 i.e. in February/March, next year. However, some others close to the policy development have also said that it could be the upcoming Winter Session.

In both cases, there are chances that the Bill then could be referred to the Joint Committee or standing committee for further scrutiny, depending on the government choice. The Joint Committee, as it did in the case of the Personal Data Protection Bill, may further invite suggestions from the experts and stakeholders and submit its report to the Parliament.

Lately, the number of Bills that are referred to the Parliamentary Committee has reduced drastically. According to PRS Legislative Research, a total of 28 Bills were introduced and passed in the Budget Session of 2019 and a record 35 Bills were passed in 37 sittings. However, none of the Bills was referred to any committee for any scrutiny.

However, the crypto Bill is different. The government does not want to act in haste and may further be referred to a committee, according to some of the cybersecurity experts.