A Look at the India Crypto Industry in the Shadow of Regulations

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As a result of the government’s introduction of two regulations requiring crushing taxes on transactions and unrealized gains related to cryptocurrency, the Indian crypto landscape lost some impetus this year.

On April 1, India’s first crypto law went into force, requiring its people to pay a 30% tax on unrealized gains. Investors and businesspeople struggled to understand the implications of the hazy news, which caused a stir in the Indian cryptocurrency community.

Numerous crypto entrepreneurs from India thought about relocating their bases to friendlier jurisdictions due to India’s second crypto law, which imposes a 1 percent tax deduction at source (TDS) on every transaction.

Additional tariffs were imposed, and Indian cryptocurrency exchanges reported a sharp decline in trading volumes. Trading volumes on Indian cryptocurrency exchanges have decreased by an average of 56.8%, according to data from CoinGecko, as investors look to offshore platforms to avoid paying harsh taxes.

Nirmala Sitharaman, India’s finance minister, previously acknowledged the subsequent reaction and announced steps to reevaluate changes to crypto-related taxes after due deliberation.

Indian Crypto Legislation’s Impact on the General Public

Within a few days of implementing India’s controversial cryptocurrency rules, regional crypto exchanges noticed a dramatic decline in trade volumes. According to Nihal Armaan, a part-time Indian cryptocurrency investor, taxation is not a disincentive when dealing with cryptocurrencies.

The TDS isn’t the problem; the quantity of TDS is — since it reduces the number of transactions an individual can carry out with their equity on hand. Instead, he compared the imposition of a flat 1 percent tax as a manner of capital lock-in, a characteristic used among corporate entities to prevent shareholders from taking it away their funds.

The Central Secretariat’s North Block, which houses the Central Board of Direct Taxes Chairperson’s residence, is located in New Delhi. Inventor: Edmund Gall.

According to Kashif Raza, introducing TDS is a solid first step toward ring-fencing the cryptocurrency industry in India. While Raza acknowledged that “the amount of TDS is a point of controversy as there are many active traders in the crypto market who have been affected by this decision,” he added that investors like himself who trade less might not see the effects of such a rule.

Om Malviya, president of Tezos India, said that he does not anticipate trade slowdowns to impact long-term investors, contrary to popular assumption. Instead, he anticipates pro-crypto changes to existing regulations over the next three to five years. He urged investors to learn more about the technology. At the same time, they waited for friendlier tax reforms, noting that “Even users from smaller towns will be required to learn the cryptocurrency, study about the team and technology, and study the fundamentals behind it, before making any investment or trading decision.”

The TDS won’t have an impact on serious cryptocurrency investors, also known as hodlers, because they have a long-term horizon in mind; according to Rajagopal Menon, vice president of cryptocurrency exchange WazirX said that despite declining trading volumes, the exchange remains focused on compliance with the applicable taxes rules and meeting the requirements set by the local regulators. The exchange saw an increase in signups from smaller locations like Guwahati, Karnal, and Bareilly of over 700 percent in 2021.

Anshul Dhir, the chief operations officer & co-founder of EasyFi Network, layer-2 decentralized finance (DeFi) lending protocol, said that genuine investors might follow crypto entrepreneurs in leaving India if the government does not enact more accommodative crypto regulations with extended exposure to taxes.

Cryptocurrency Taxation and the Emergence of Long-term Investors

Even though the amount of cryptocurrency trading on Indian exchanges has drastically decreased, investors are ready to hold onto their assets until pro-crypto policies take effect.

Indian investors have been awaiting a bull run to sell some of their assets for profits to secure profitable trades. Malviya stated, “if you want to pay this level of high taxes, you have to be extremely convinced that your capital is likely to be useful more than what you’re more so than today.” Malviya agreed that the current investor thinking has changed.

The TDS alone, Armaan emphasized, does not deter cryptocurrency traders. However, “the 30% tax on the profits without the option to offset losses is punitive and inhibits any new trader even to start trading in the cryptocurrency market.” Dhir thinks that “the tax rate is a deal-breaker and will force many interested parties to hold their investment in virtual digital assets.” However, “many Indians welcomed the tax regime as it offers a sense of respectability to the crypto business in the country.”

Menon cautioned investors against attempting to use decentralized exchanges, peer-to-peer websites, and overseas exchanges to get around the rules in this regard. No of the platforms utilized, all Indian nationals are required to pay the TDS; failing to do so would violate the country’s current tax rules.

The dropping liquidity coincided with a reduction in trade volume, which affected the global liquidity for the entire crypto ecosystem.

Relationship between India and CBDCs

All central banks have decided to test out or introduce their versions of central bank digital currencies (CBDC). India is anticipated to launch a digital rupee around 2022–2023. Nirmala Sitharaman, the nation’s finance minister, claims it will provide a “huge boost for the digital sector.”

Governments are vying to develop a fiat-based system that integrates the best characteristics of the crypto ecosystem, although CBDCs essentially differ from just how cryptocurrencies function. According to Raza, a CBDC backed by the Indian rupee “would aid in faster and cheaper inward remittances and global payments.” Still, he is skeptical about whether or not retail will accept it as a store of value.

Malviya said that CBDCs are well equipped to handle use cases that require the fast release of payments, but she added, “but it is not going to nullify the argument for cryptocurrencies effectively.” Dhir thinks CBDCs will support the DeFi projects and the digital asset market in general. Additionally, the Reserve Bank of India, India’s central bank, must develop policies encouraging innovation and growth while educating the people about the advantages of emerging technologies.

Many people believe that India’s cryptocurrency taxes are an active effort to deter trading. However, from an investor’s perspective, Armaan contended that the government did its best, given the information at its disposal, to explain the tax system.

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Its a Game Of Wait and Watch

Indian businesspeople and inventors are playing a waiting game for friendlier tax reforms, but both communities must adhere to the law while making plans for better times ahead. Investors should do this by being knowledgeable about the trading ecosystem and best practices. In the current situation, Armaan’s strategy is to invest with a small allocation and a structured investment plan.

Dhir recommends the population to connect with the administration in their capacities with a good attitude, avoid engaging in aggressive banter on social media and keep an eye on market trends.

“New projects, new products, and new use cases will continue to be developed, and this market will continue to expand. Therefore, whether you decide to split or not, you must do your studies and be devoted.”

Menon advised business owners to continue interacting with the government in the hopes that it will one day change its policies. In addition, all the developments must be shared with the government. Hence, they are aware of the innovation being done in this field by domestic talent, which might have a favorable overall effect on the industry, said Raza.

Malviya added that entrepreneurs “don’t inevitably have to focus on changing out of India; I think the first focus should be what problem you’re trying to solve.” In addition, Malviya said that business owners must be committed to the idea as they work to develop solutions catering to a growing number of use cases.

Investors are hoping for positive frameworks surrounding cryptocurrencies in the interim to help screen out undesirable actors from the picture.