The Flight of Crypto Brains
By Shivanand Pandit
The Indian law on cryptocurrencies was long anticipated. In spite of it being in the pipeline for over two years, India has not been able to come up with a law for cryptocurrency. India’s uncertain stand on virtual assets and backsliding tax policies are compelling its cryptocurrency trading platforms to move to friendlier nations. Even though the Reserve Bank of India frequently expressed its concerns relating to cryptocurrencies, few investors remained hopeful about constructive legislation due to the sheer volume of the Indian crypto market. But since the Union Budget 2022 was announced, many entities and investors have redirected their focus to more crypto-friendly nations.
The co-founders of India’s largest cryptocurrency change WazirX—Nischal Shetty and Siddharth Menon—have relocated to Dubai with their families. Polygon co-founder Sandeep Nailwal is also amongst those that have moved to Dubai. That is along with a previous round of exits. ZebPay and Vauld shifted to Singapore; CoinDCX now has a Singapore arm.
India’s formal recognition of cryptocurrency began in 2018 when the Reserve Bank of India instructed banks to reduce cash offers to crypto buying and selling platforms—a transfer that the Supreme Court overturned in 2020. In 2021, the central government listed the launch of a Bill in Parliament to ban non-public cryptocurrencies. However, the Bill didn’t get tabled.
Earlier in 2022, through the Union Budget for 2022-23, a 30% tax on digital assets was introduced. Furthermore, effective from July 1, the government introduced a 1% TDS on cryptocurrency transfers with the aim of sustaining a path of cash. However, the crypto industry has argued that the 1% TDS locks the cash capital for crypto dealers.
Recently, the government published suggestions specifying the obligations of various units similar to crypto exchanges, consumers, sellers and brokers on deducting the 1% TDS. It put the obligation on the entity closest to the customer for deducting the TDS. The direct tax division additionally stated that even when there is an exchange of a cryptocurrency towards another, the tax will have to be deducted at a corresponding exchange payment.
The lack of precision on policies regarding cryptocurrencies and blockchain technology is not only projected to lessen crypto investments but is also likely to initiate the immigration of Web 3.0 developers from the country. Also, the debacle involving Coinbase and the National Payments Corporation of India has further clouded the supervisory issue. Banks and payment aggregators are now reluctant to partner with crypto exchanges following this development.
This “brain drain” is especially concerning as Web 3.0—being welcomed as the next internet revolution—could play a critical role in boosting India’s economy. Highlighting this, a statement from the US India Strategic Partnership Forum and Cross Tower stated that Web 3.0 and digital assets could add $1.1 trillion to India’s GDP over the next decade.
The growth of the World Wide Web has been segregated into stages—Web 1.0 was linked with the launching of non-interactive web during the late 1990s and early 2000s, Web 2.0 refers to the development of YouTube, Facebook and other social media behemoths, and Web 3.0 is associated with decentralisation and greater adoption of blockchain technology.
When the internet was introduced, we could just read and publish content online. This stage is considered Web 1.0. The epoch of social media sites has been labelled as Web 2.0. This was the era when users could not just read and write, but also share and interact through social media platforms.
In Web 3.0, users will read, write, interact, share and even own a stake in blockchain networks that run an internet service. The basic premise of Web 3.0 is decisions concerning online platforms like seizing usernames and banning accounts would not be taken unilaterally by tech giants (like Google and Facebook) but jointly by all those who have a share in that specific platform.
While India has not been competent to reap the initial gain in the area of Web 3.0, numerous nations around the world have actually outlined or finetuned rules and regulations to make themselves favourable for the growth of Web 3.0 start-ups. Accordingly, these countries host a huge number of Web 3.0 talents from other nations, including India.
In June 2022, Dubai, an already preferred destination for cryptocurrency and Web 3.0 firms in the region, approved legislation to control the functions of cryptocurrencies and digital assets like non-fungible tokens (NFTs). In December 2021, it was publicised that the Dubai World Trade Centre would be made a crypto zone from where all companies operating cryptocurrencies and virtual assets can function.
Actually, a crypto-based relief fund in India was channelled via business units in Dubai last year as rules in the UAE were found to be more encouraging. Singapore, a country with no capital gains tax, has always been an investment heaven. The law in Singapore considers the crypto assets of an individual as intangible property inviting no tax. Thus, more Web 3.0 talents are attracted by the helpful policies of Singapore for self-governing trades.
In the US, one can even run into an ATM that deals with cryptocurrency or get a crypto credit card. The nation has been simplifying the monetisation of cryptocurrencies. Moreover, quite a few financial firms, including JP Morgan, are adopting blockchain technology. As a result, the US has a flourishing environment of blockchain start-up entities. The Cayman Islands has not prescribed any restrictions or licensing conditions targeting the title, possessing or trading of digital assets. So it has arisen as one of the most well-liked for blockchain-related businesses and cryptocurrency funds.
In June 2022, Malaysia’s communications ministry stated its desire to make cryptocurrency a legal tender. Although the suggestion was ruled out shortly, the fact remains that the nation continues to witness progress in its blockchain start-up ecosystem and crypto investments. Malaysia regulated cryptocurrency in 2019 and has become a productive land for Web 3 developers.
Popularly known as the “Blockchain Island”, Malta has a prepared outline for entities and start-ups that work with blockchain. Despite local banks not being onboard with the idea, the Maltese government supports cryptocurrencies. Recently, Robert Abela, Malta’s prime minister, called cryptocurrency “the inevitable future of money”.
Thailand cancelled its early suggestion of a 15% crypto tax on capital gains and also exempted traders from value-added taxes on regulated exchanges to promote the use of crypto.
As anticipated, the Indian government has not optimistically reacted to cautions from numerous patrons about the possible harsh impact of crypto tax on the blossoming crypto industry. Consequently, within just a few weeks of the new crypto tax law coming into force, trading volume across main crypto exchanges plunged as much as 90%.
The RBI is presently the biggest supporter of a complete prohibition on crypto use, while many ministers have insisted on a higher crypto tax, quoting its use for illicit activities. However, that view has been demystified many times over the years and the latest report from Chainalysis indicates crypto use for illegal activities has gone down to less than 1% of the total circulation supply.
Prejudicial tax laws in India are making people consider alternative nations for their new projects. On the other side, people are more likely to consider working for foreign countries to avoid tax confusion. The challenges that crypto investors are confronting today can lead to an array of drawbacks for the entire system. It can also lead to traders transacting on peer-to-peer exchanges instead of the Indian exchanges that are Know Your Customer compliant. It will also result in the government losing out on tax revenues. Under such adverse circumstances, India will witness more and more start-ups in crypto and Web 3.0 move abroad
Therefore, the need of the hour is an admirable crypto frame. The government can take inspiration from other countries to design it. India needs to fix up its taxation laws for the crypto industry. There is an immediate requirement for the government to implement remedial measures to stop this brain drain. The government will have to act fast to undo the injury. Otherwise, it will be a spectator in the Web 3.0 race.
—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa