What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
What is Blockchain?
Blockchain is a specific type of database. It differs from a typical database in the way it stores information; blockchains store data in blocks that are then chained together. As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block, which makes the data chained together in chronological order.
Different types of information can be stored on a blockchain but the most common use so far has been as a ledger for transactions. In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group has control—rather, all users collectively retain control. Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.
Hence, all cryptocurrencies are just a subset of the blockchain technology. As cryptocurrency is decentralized, it becomes blatantly obvious that regulating it would be a task and also pose a direct threat to the values that it was built on.
History Of Cryptocurrency
To understand the ongoing controversy over cryptocurrency in India, we need to examine how we got here.
- 2008: A paper titled ‘Bitcoin: A Peer to Peer Electronic Cash System’ is published by a pseudonymous developer by the name of Satoshi Nakamoto.
2010: The first sale of an item using Bitcoin takes place, with a customer swapping 10,000 Bitcoin for two pizzas. This attaches a cash value to the cryptocurrency for the first time.
2011: Other cryptocurrencies began to emerge, including Litecoin, Namecoin and Swiftcoin. Bitcoin becomes embroiled in a controversy over claims it is being used on the dark web to pay for guns and drugs among quite a lot else. - 2012-2017: Cryptocurrencies steadily gain traction. The price of Bitcoin shoots up from around $5 at the start of 2012 to almost $1,000 at the end of 2017. This period also sees cryptocurrency exchanges mushroom in India, including Zebpay, Coinsecure, Unocoin, Koinex and Pocket Bits.
- It is also almost perfectly bookended by two RBI press releases on cryptocurrencies. The first, dated December 24, 2013, saying Virtual currencies are not backed by a central bank and their value isn’t underpinned by an asset and thus a matter of speculation.
- Oct-Nov 2017: Two PILs are filed in the Supreme Court, one asking it to ban buying and selling cryptocurrencies in India, the other asking for them to be regulated.
- Dec 2017: The RBI and the Ministry of Finance issue statements on cryptocurrencies. The ministry compares them to ponzi schemes.
April 6, 2018: Suddenly, everything changes. The RBI issues a circular preventing commercial and co-operative bank, payments banks, small finance banks, NBFCs and payment system providers from dealing in virtual currencies and providing services to all entities which deal with them. Crypto exchanges, unable to access banking services in India, find their businesses crippled overnight. Trading volumes fall by 99%.
May 15, 2018: Faced with an existential threat, several exchanges filed a writ petition in the Supreme Court.
July 2019: The committee submits its report, recommending a ban on “private cryptocurrencies” in India.
March 4, 2020: Hope at last. The Supreme Court strikes down RBI’s banking ban on crypto
Jan 29, 2021: The government says it will introduce a bill to create a sovereign digital currency and simultaneously ban all private cryptocurrencies. The recently-revived industry realises it faces a second existential threat.
Like other countries, crypto is a massive opportunity for India. The sector is well-suited to attract crypto-related capital investments, considering the market size and growing internet connectivity. Apart from FDI, the emergence of this sector would enhance the country’s technological skill set resulting in the creation of employment opportunities. However, for these opportunities to materialise in India, regulators and the government would need to devise and implement practical policies that will promote the growth of the sector yet mitigate the threats of fraud, money laundering, and tax evasion. While India has adopted a careful approach towards adopting crypto, India has experience of having dealt with similar novel technologies in the financial space and established thoughtful regulations which can be replicated for crypto.
The concerns become easier to address if India starts defining cryptocurrencies as digital assets that accords them a treatment similar to gold, stocks, or marketable securities and stops viewing them as currencies. For further assurance and oversight mechanism, India should introduce a system of registering and recognising Indian crypto exchanges by allowing only Indian founders to operate such businesses. This will also ensure the saving of potential billions of dollars that may be payable to overseas exchanges in the future. India could look at a 26 percent ownership structure by Indian founders/entities as applicable to the banking sector with a 74 percent FDI. This backed by a mandatory KYC system for all customers would be a good start for assurance and oversight.
Accounting Standards, disclosure norms and valuation models need to be prescribed through accounting bodies like the Chartered Accountants/Cost Accountants with appropriate disclosures in the Financial Statements, Directors Report, Notes on Accounts, Audit Report etc. of companies and business establishments holding or dealing with crypto. Ideally, crypto-assets should be classified under “Current assets”. Moreover, aspects such as Suspicious Transaction Reporting (STR) and the designated authority to report to, should be clearly prescribed by the Government. India should also look at the Financial Action Task Force (FATF) guidance around safeguards.
Traceability has been a concern for regulators and therefore recognition should be given to only those classes of crypto assets that provide access to forensic analysis, for example, Bitcoins are completely traceable due to their open-ledger blockchain system. Crypto assets should be brought within the purview of established money laundering regulations. The Income Tax Act should recognise income from crypto trades under the heading “Income Profit and Gains from Business and Profession” or “Income from Capital Gains,” depending on the holder’s type of business and timelines of ownership.
Crypto assets should be treated like stock and GST should be levied on the brokerage or exchange fees but not on the transaction value. All individuals holding crypto assets must disclose their holdings in their income tax returns.
In the current scenario the infrastructure for cryptocurrencies in India is lacking to say the least. With RBI having issued warnings to banks regarding crypto transactions and not having reliable payment gateways to deposit money through UPI, Indian investors face a problem. Although this has not deterred them but it has definitely posed a challenge. Indian investors have adopted a P2P lending system which negates all these concerns.
What is a P2P Lending system?
P2P trading is the act of buying and selling cryptocurrencies directly between users, without a third party or intermediary. When you buy or sell cryptocurrencies using a traditional exchange, you don’t get to transact directly with the counterparty. Instead, you use charts and other market aggregators to determine the optimal time to buy, sell, or hold cryptocurrencies. The exchange organizes the transaction on your behalf, and the market price determines your final price at the time of transaction.
P2P trading gives you more control over who buys your cryptocurrencies and who you buy from, the pricing and settlement time. While P2P trading gives users finer control over the process, it is vital to note that peer-to-peer transactions carry some risks when there is no third party to broker the deal. This is where an exchange like Binance P2P becomes essential for risk-conscious users.
How Does a P2P Exchange Work?
Some people compare a P2P exchange to marketplaces like Craigslist or Facebook Marketplace, because P2P exchanges connect crypto buyers and sellers. Buyers and sellers can browse crypto ads or post ads of their own. P2P exchanges can also provide a layer of protection for everyone involved in the transaction, by implementing a feedback or rating system.
How do you invest in Crypto?
There are two ways to invest in crypto currency, one is directly buying from the exchange as a retail consumer or the other is to participate in an ICO.
The process of Investing in Crypto is very similar to investing in the stock market. The fundamentals remain the same, the key difference being there’s no regulator, depository participants and depositories. The first step would be registering on an crypto exchange, there are plenty of options available, each having its own merits and demerits. After which you’ll have to authenticate your bank account and do a KYC which takes a couple of minutes. And you are good to go. Crypto exchanges in India are nowhere near as efficient as stock exchanges with various technical glitches and payment problems. It’s always advised to do your research first.
What’s an ICO?
An initial coin offering (ICO) is the cryptocurrency industry’s equivalent to an initial public offering (IPO). A company looking to raise money to create a new coin, app, or service launches an ICO as a way to raise funds. Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company. This token may have some utility in using the product or service the company is offering, or it may just represent a stake in the company or project.
CoinDCX has lower fees. CoinDCX charges a 0.1 per cent takers fee and 0.1 per cent makers fee. In contrast, WazirX charges almost 0.2 per cent as the takers’ fee and makers fee for each transaction. Moreover, the CoinDCX app provides many other features such as DCXmargin, DCXfutures and DCXstake which are not available in most Indian apps. Moreover, the main selling point for CoinDCX is the fact that it has more than 200 cryptos listed on the exchange, as they proclaim on their app. In this aspect, CoinSwitch Kuber charges nothing for depositing and withdrawing money to their application, but they do have hidden charges. Whenever you purchase a cryptocurrency on CoinSwitch, the company deducts 1-2 per cent from the cost of the purchase. Moreover, CoinSwitch has different buying and selling price for their cryptocurrencies, which is an unusual practice.
WazirX was recently served a show cause notice by the Enforcement Directorate. The ED has claimed that WazirX had allowed the exchange of crypto tokens held in pool accounts of wallets to other exchanges, which may be held by individuals in foreign locations. It noted that the crypto exchange had not documented these transactions under the prescribed regulations under FEMA for remittances in foreign currency, or followed KYC procedures for non-WazirX wallets. Other documentation such as addresses, transaction purpose and IP addresses of other wallet users were also not collected, it alleged.
This leaves WazirX in clear violation of the basic mandatory Anti-Money Laundering and Combating of Financing of Terrorism precaution norms and FEMA guidelines which are also applicable to Virtual Currency exchanges. Crypto-currencies have tangible value and are being used as an instrument of ‘payment’ and are, thus, akin to money for the purpose of FEMA.
The investigation, the ED said, was part of an ongoing probe into alleged money laundering being carried out by Chinese-owned illegal online betting applications concerning cryptocurrency transactions totaling Rs 2,790.74 crore. Since, WazirX is owned by Binance, internal transactions are not recorded on the blockchain and hence can’t be verified. ED also scrutinized the onboarding process of customers and their due diligence.
Prepared by – Karan Das, research intern at MMI, Jun 2021
References –
https://www.investopedia.com/terms/b/blockchain.asp
https://www.investopedia.com/terms/c/cryptocurrency.asp
https://www.cnbctv18.com/views/unlocking-cryptocurrency-ecosystem-with-necessary-locks-9338541.htm
www.timesnownews.com/amp/cryptonow/article/ed-targets-wazirx-with-show-cause-notice-why-the-crypto-exchange-has-fallen-on-radar-of-the-federal-agency/770809
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