Aruna Sharma, development economics practitioner and former secretary at the Ministry of Electronics and IT, talks about the need to introduce regulation on cryptocurrencies. She likened ‘regulated cryptocurrencies’ to stocks for investors who understand the rules of risk and volatility. While speaking to Outlook Money, she also clarified that RBI’s central bank digital currency (CBDC) will be completely different from cryptocurrencies.
Cryptocurrency regulation appears to be the need of the hour as investors wait for clarity. Can we expect a regulation in the short term?
Sharma: The government is yet to come up with rules to regulate crypto products and that is desirable for clarity for both investors and operators.
As Finance Minister Nirmala Sitharaman has repeatedly pointed out, it is important to take a comprehensive approach. Many countries, including Singapore, the EU, the US and Dubai, have submitted their regulation forms, addressing AML (anti-money laundering) concerns, methodology for KYC (know your customer rules) and transactions between countries.
Informed decision making and clarity of regulation will help investors in their decision making.
The Reserve Bank of India (RBI) has expressed reservations about the possibility of an impact on macro and fiscal controls. The government should move from simply (collecting) “heavy direct and indirect taxes” to regulation.
Do you think crypto has the potential to disrupt the current financial system in India and how?
Sharma: If regulation comes in, cryptocurrencies will be like capital for investors with an understanding of volatility and potential gains. Rising interest rates around the world had an impact on the entire stock and crypto market. It has clearly shown that there is a correlation between the behavior of cryptocurrencies and that of the stock market. Both showed sensitivity to sudden high rates and demand collapsed.
What could be the possible contours of the digital currency that RBI plans to launch? Do you think it will replace the current format cryptocurrencies?
Sharma: What the central bank brings is a central bank digital currency or CBDC. That is legal tender. Crypto in India is not legal tender and that has been made abundantly clear. Therefore, the two are completely different products.
CBDC will switch currency “issuance” to digital mode. That can be wholesale or retail. Wholesale will not have much of an impact on banks, but retail will have an impact on how “liquid” banks are and their lending capabilities.
RBI plans to test the pilot, so it will clarify the steps the banking system will need to take. CBDC is the way to go. It is not speculative. cryptoon the other hand, it is an investment and speculative option.
CBDC will be stable and as good as legal tender. It will enable faster transactions at a much lower cost, including FEMA-compliant cross-border transactions.
It is an evolving process and will benefit users, bankers and the government to ensure fiscal discipline.
How will crypto taxes affect investor behavior?
SharmaNote: For crypto, right now in India, taxes are 30 percent on profits, with no compensation for losses on other transactions, TDS (tax deducted at source) 1 percent, and GST. The mechanism for executing taxes is still evolving and making crypto operations cumbersome and expensive. It is important to watch how it develops and that will have an impact on investor behaviour.
Does the government’s proposed data protection regime currently cover crypto?
Sharma: The data protection bill for ‘Personal Data’ is a must for a sovereign country. It’s still on the discussion table. It will be applicable to the entire digital world.