The Union budget
for 2022-23 has evoked different reactions from various sections. One can
detect optimism among corporates, a fatalistic sense of resignation in the
middle-class, and perhaps raised eyebrows among lower income groups. But the
smug expressions visible in various TV debates were sported mostly by crypto
dealers, who were clear winners at the end of the day. There have been off-the-
record clarifications made to the effect that merely making crypto gains
taxable does not confer legitimacy on crypto tokens. This is rather peculiar,
because governments cannot levy taxes on illegitimate activity. But crypto
exchanges and dealers appear to have taken the crypto tax announcement to mean
that their business is now safe.
The declaration
that there will be a central bank digital currency (CBDC) issued by the Reserve
Bank of India (RBI) has been taken as a further sign of crypto legitimacy: If
RBI is doing it, then there can be nothing wrong. But there is a big
difference. Our CBDC will be an e-rupee and thus a substitute for paper
currency, and it cannot be traded as its value is what is on the paper or in
the account. This is not so for crypto coins. The two cannot be likened. The
temptation of CBDCs across the world is ostensibly to leverage blockchain
technology. Here, technology seems to be an end and not the means, which
deserves more deliberation.
Giving some kind of
legitimacy to crypto trading raises some serious questions for regulators.
First, do we know whether all the trades that are taking place in cryptos are
dealing with actual cryptos, or is it a case of these exchanges mimicking what
happens overseas? There is a distinction.
If the dealing is
in actual cryptos, then RBI should ask whether there have been violations of
India’s Foreign Exchange Management Act, as one is not allowed to use forex for
speculative purposes. Payments for most cryptos have to be made in foreign
currency, originally, and only after possession can they be sold domestically
in rupees. But the origin must have a forex link which may not be accounted
for. Even derivatives dealings are not permitted in overseas markets. Crypto
buyers could argue that cryptos are not specifically banned while making use of
forex under our Liberalized Exchange Rate Management System, and hence nothing
wrong was done. Still, RBI should clarify this.
If on the other
hand this is about mirrored trading, which is analogous to what is called
“dabba trading" in our stock and commodity markets that is banned, then
there would be no forex violation. This is like watching a stock-market
terminal and trading separately without any trail being left and gains and
losses being netted off. But that is not permitted. In fact, some crypto
dealers have boldly declared in the media that the 30% tax will only drive
transactions underground. Now that is not a good sign for RBI or Securities and
Exchange Board of India.
The curious thing
about such trades is that even in the NDF (non-deliverable forwards) market
that is based overseas and used for hedging and speculation, no currency
actually gets exchanged, but only the net gains and losses change hands.
The financial
system has gotten complex with all kinds of financial engineering going on.
Another issue is
the origin of the crypto tokens being traded in India. How can we be sure that
purchases were not made from drug dealers or mafia groups residing overseas?
There are strong rules against smuggling and hence these issues will trouble
regulators once legitimacy is given.
The third is an
ideological issue. If we allow trading in cryptos, it would be similar to
trading in fiction. In we go ahead, there would be a case for making gambling
of all sorts legal and letting casinos open across the country. There are lots
of people who would like to try their chances in casinos and would be willing
to pay 30% tax on their gains.
This is no
different from crypto trading. Both are driven by chance and the chips in use
have no underlying value. If cryptos are allowed and so is Dream11 (for online
gaming), then even casinos must be permitted. This could also rake in good tax
revenues for local authorities. Note that for every trade on any exchange,
there is an exchange of a share certificate or commodity or currency. But here,
there is no such back-end. As with a roulette table, crypto trading cannot
distort any real market, which makes it alluring.
The indirect
acceptance of crypto trading is definitely a bid odd, as regulators are still
working on the same. As crypto dealers have argued, just like people should not
trade in equities without knowing the equity market, the same holds for
cryptos. Customer protection, therefore, should not be incumbent upon
regulators. As an extension, one can ask whether trading in fiction is
comparable to trading in a commodity, stock or debt. If it is like none of
these, existing exchanges should be allowed to deal in cryptos, since these
tokens have no underlying value and their clearing and settlement is an easier
process. Commodity exchanges should be permitted such trading, as their scope
has already been restricted with regular bans being imposed.
This may be a good
time to reflect on what should be permitted and what not. If we are
liberal-minded and follow a more open moral code, then everything goes. And if
this is broadly the approach we take, hold your breath, why not also allow
sex-work and tax such income? Germany and others do it.
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