Over the past few years, India has been actively adopting the cryptocurrency sector into the national economy. According to 2023 data from Chainalysis, India ranked first among Central and South Asian countries in terms of grassroots crypto adoption. As of September 2023, the Indian government has yet to finalize a legal framework to regulate digital assets. That said, the country has been successful in testing and piloting the CBDC, with taxation rules formulated for private crypto investors and blockchain companies.
CP Media examined the stage of development and adoption of the legal framework for crypto regulation, the taxation of digital asset transactions, and the government’s plans for further industry development.
Crypto Regulation in India
The protracted legal uncertainty regarding the regulation of the Indian cryptocurrency sector has been ongoing since early 2021. At that time, Indian parliamentarians were considering a bill to totally ban all cryptocurrencies and create the legal basis for the Reserve Bank of India (RBI) to test and launch the central bank digital currency (CBDC). The document also proposed to criminalize the use of cryptocurrencies, but no such law was passed.
In June 2021, the New Indian Express, citing its own source in the Indian authorities, reported on the government’s intention to classify Bitcoin as a separate asset class. The Indian publication reported that the Securities and Exchange Board of India (SEBI) was to regulate digital assets, and the relevant bill could be approved by parliamentarians in late 2021 or early 2022. Nirmala Sitharaman, India’s Minister of Finance, refuted the journalists’ info. At the winter session of Parliament in 2021, the Minister said that the government had no plans for the rapid legalization of BTC in the country.
On July 27, 2023, during the hearing on crypto fraud in a number of Indian states, the Supreme Court of India admonished the government. Representatives of the court stated that the country still lacked any legal framework to regulate cryptocurrencies and there were no agencies responsible for investigating digital asset crimes.
However, the lack of legal regulation of cryptocurrencies in India hasn’t stopped crypto companies from actively entering the local market. For example, Singapore-based exchange Coinstore opened access to its official website and mobile app for Indian users. Moreover, company reps announced the opening of offices in Bangalore, Mumbai, and New Delhi.
In September 2023, crypto exchange OKX announced its willingness to enter the Indian market. Haider Rafique, OKX’s Chief Marketing Officer, said that the crypto exchange plans to gain a major foothold in the field once the regulatory framework for digital assets in India is in place. Earlier, companies like Binance and CrossTower have already entered the Indian market.
CBDC Creation, Testing, and Launch
In early 2021, T. Rabi Sankar, RBI Deputy Governor, said that the Reserve Bank of India is developing a step-by-step strategy to introduce the digital rupee. The CBDC is scheduled to be launched in wholesale and retail variants. According to the official, some of the main reasons for launching the digital rupee are to reduce dependence on cash and generate higher returns on issuance by lowering settlement risks and transaction costs. Besides, Sankar added that CBDC adoption will protect users from the volatility of digital assets.
RBI Governor pointed out that in October 2021, the department had tabled amendments to the Reserve Bank of India Act, 1934 in Parliament. The amendments sought to broaden the definition of “banknote” by defining that currency could also have a digital form.
An interim outcome on CBDC implementation was mapped out in a report by the Reserve Bank of India in October 2022. In it, RBI officials stated they would periodically update users on the CBDC’s benefits and core functionality and promised to launch testing of the national digital currency in the near future.
The CBDC testing began on December 1, 2022. The RBI informed that a closed user group of consumers and merchants participated in the pilot testing. The first phase was held in Bhubaneswar, Bangalore, New Delhi, and Mumbai. Later, nine more cities joined in.
The distribution of CBDCs was done through several Indian banks, including:
- ICICI Bank;
- Yes Bank;
- IDFC First Bank;
- State Bank of India.
The Indian Minister of Finance later revealed details regarding the CBDC functionality. Users will be able to make P2P and P2M transactions via a digital wallet provided by banks participating in the pilot testing program. The CBDC has the form of a digital token and a denomination identical to the national cash currency. The bank doesn’t provide a deposit program specifically for the CBDC, but the digital asset can be converted into traditional bank deposits.
In early 2023, the well-known Indian retailer Reliance Retail announced CBDC support. To make a purchase, customers will have to scan a special QR code. Furthermore, the digital rupee has gained new functionalities due to integration with the national payment system Unified Payments Interface (UPI).
Taxation for Crypto Transactions
The lack of the legal framework to regulate digital assets hasn’t stopped Indian parliamentarians from imposing tax levies for cryptocurrency transactions. In March 2022, India’s Lok Sabha backed the Finance Bill that imposes a 30% tax on traders and investors for profits derived from crypto transactions and 1% for transactions using traffic distribution systems (TDS). The legal requirements came into effect on April 1, 2022.
However, the Indian Ministry of Finance clarified that at the time the tax levy is calculated, traders won’t be able to compensate for possible losses in one digital asset at the expense of another.
In addition, under the Indian law, when making a transaction using cryptocurrency, users are independently obliged to deduct the tax from the amount of the transfer and pay the fee to the state. Rajat Mittal, a renowned tax consultant in India, believes that the law’s tax requirements make it much harder to trade digital assets and run exchanges in the Indian market.
How Indian Government Views the Crypto Industry
Indian Prime Minister Narendra Modi believes that the cryptocurrency industry, which is directly related to the stability of the monetary and financial system, is something completely new to some countries. At the G20 summit held in India in September 2023, Modi called on G20 countries to set global standards for digital asset regulation.
Speaking at the third session of the G20 summit, the Indian Prime Minister highlighted the Basel standards for banking regulation and urged the leaders of the summit countries to move faster towards global regulation of the crypto industry. Modi also mentioned the rapid development of artificial intelligence (AI) and other innovative technologies. The Prime Minister promised to provide suggestions to India for responsible management of AI, which is mainly human-centered.
In turn, Ajay Seth, the Indian Minister for Economic Affairs, said that after the G20 summit, a clear position on the cryptocurrency industry can be expected from the government in the near future. According to Seth, the government will definitely consider all the recommendations on crypto-asset regulation presented at the summit by the Financial Stability Board (FSB), the International Monetary Fund (IMF), and other bodies. This is what should determine the future policies and decisions of the Indian government regarding the cryptocurrency sector.
