Within a fortnight of the Budget announcement to tax digital assets, RBI Deputy Governor T Rabi Shankar has called for banning cryptocurrencies in the country, terming it “perhaps the most advisable choice open to India”. He went on to state that the arguments in favour of regulating cryptocurrencies do not stand up to basic scrutiny.
Bemoaning the notion that crypto-technology is underpinned by a philosophy to evade government controls, Shankar said that the digital currencies minted using blockchain technology have specifically been developed to bypass the regulated financial system. These should be reason enough to treat them with caution, he added during his recent keynote address at an Indian Banks Association event.
“We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to ponzi schemes, and may even be worse. These should be reason enough to keep them away from the formal financial system,” Shankar said in his address.
“Additionally, they undermine financial integrity, especially the KYC regime and AML/CFT (Anti-Money Laundering and Combating the Financing of Terrorism) regulations and at least potentially facilitate anti-social activities. More substantially, they can (and if allowed most likely will) wreck the currency system, the monetary authority, the banking system, and in general, government’s ability to control the economy,” he further said.
The RBI Deputy Governor warned that cryptocurrencies threaten the financial sovereignty of a country and make it susceptible to strategic manipulation by private corporates creating these currencies or governments that control them. Shankar also pointed out that the $14 billion financial impact of crimes via cryptocurrencies might not be a substantial amount, but the threat to the AML/CFT framework is.
Even wide adoption of cryptocurrencies, without allowing them to be used as currencies, could be detrimental to the monetary stability of a country as their valuation is largely based on beliefs and could lead to substantial loss of value for investors.
Since long, the Reserve Bank of India (RBI) has been vocal about its dissatisfaction with cryptocurrencies on grounds that they are not backed by any underlying assets. After the monetary policy committee meeting last week, governor Shaktikanta Das had reiterated this stand, warning investors that they are investing “at their own risk”.
Meanwhile, the central government has clarified that its decision to tax the profits from digital assets does not amount to legalisation of cryptocurrencies. As of now, consultations are going on to
“The government has sovereign right to tax profit made from cryptocurrency transactions, and the decision on banning or not banning will be taken based on feedback from consultations. I'm not doing anything to legalise or ban cryptocurrencies at this stage. We have only taxed the profit emanating from the transactions,” finance minister Nirmala Sitharaman told the Rajya Sabha last week in her reply on the Union Budget.
The Union Budget 2022-23 had proposed a hefty 30% tax on all profits from digital assets and a 1% TDS on all transactions involving such assets from April 1, 2022. Any losses from sale of digital assets cannot be offset against other income, the Budget has proposed.
In her Budget speech, Sitharaman had also stated that the RBI will issue a central bank digital currency, or digital rupee, in the next financial year. It will be exactly like the physical rupee, existing in the digital world. It remains to be seen whether the digital rupee will use blockchain technology or not.
While the finance minister has reassured that the Centre and the RBI are on the same page on cryptocurrencies, the investors are in a lurch. With the government refusing to commit to legalising cryptocurrencies and the central bank vying for a ban, it is difficult for millions of crypto investors to be optimistic. For now it seems they will be taxed for an asset that is not even legal yet. This turn of events also reignites the fears over the fate of private crytpocurrencies in the country, which seems to be hanging by a thread for now.