The potential for India to drive economic growth through VDAs

In this context, a few recent initiatives have sparked important discussions and created waves of positivity within the VDA community. On various occasions, finance minister Nirmala Sitharaman expressed her intention to arrive at a global standard operating procedure for regulating crypto assets at her upcoming G20 meeting. She has also held discussions with International Monetary Fund (IMF) managing director Kristalina Georgieva, urging the IMF to develop a globally coordinated approach to the regulation of crypto assets. Economic Affairs Secretary Ajay Seth has also stated that the government is working closely with the Financial Stability Board to develop a policy and regulatory framework for crypto assets.

While the developments could be perceived as progress, the most significant element is the Finance Minister’s recognition of crypto as a global asset class which has sent positive signals throughout the community. It is imperative to grasp the distinction that crypto, despite popular belief, is not a form of currency but instead a class of assets. The conflation of these two concepts has resulted in widespread misinterpretation and misconstruction of the nature of crypto-assets.

Crypto markets have matured over the years, with increasing adoption by retail and institutional investors. The retail trading of crypto tokens is just the beginning, as the next phase of adoption by institutional investors is happening today. These investors are now providing access to crypto markets through managed funds, which will ultimately lead to reduced volatility. The rise of decentralized financial platforms, also known as DeFi, is an innovative aspect of this evolution. DeFi protocols provide individuals with access to financial services without paying fees to intermediaries, resulting in more open, fair, and accessible financial markets.

To take benefit of the growth, the industry has repeatedly emphasized that with the progressive regulatory framework, India can create an environment of innovation and stability. This, in turn, could propel the industry to a new level of competitiveness, resulting in a staggering $1 trillion in economic growth. India has a unique chance to grasp this opportunity and make substantial strides towards its goal of becoming a $5 trillion economy.

Additionally, there are several other compelling reasons why VDAs should be embraced.

First, the presence of crypto exchanges and intermediaries within a country will ensure compliance with national laws and security controls. This will prevent bad actors from engaging in illegal activities and unethical practices. It will also ensure that these exchanges are subject to appropriate supervisory and governance controls, protecting consumers and reducing systemic risk.Moreover, India should embrace the adoption of blockchain and distributed ledger technology in its financial system to stay ahead of the curve and foster economic growth. There are strong examples from the past that reinforce this. For instance, the shift towards electronic trading in the past has shown that embracing change and innovation can lead to significant growth in the financial sector.

For VDAs, countries, such as Singapore and Japan, have taken proactive measures in adopting new technology and tokenization, and the EU has provided a supportive environment for financial institutions to experiment with new innovations. India should also adopt a forward-thinking approach and provide a supportive environment for the growth of its financial sector through the adoption of this new technology.

In this context, it is worth recalling that in the early 90s, the Clinton Administration saw the potential of investing in the internet and its impact on American life and the economy. The government then adopted a market-oriented approach to e-commerce and emphasized the importance of competition and consumer choice in the new digital marketplace. This visionary approach has proven to be influential in shaping government policies and continues to benefit the country.

The Indian VDA investment community continues to display resilience and a willingness to explore new opportunities. However, the same could not be channelised due to the current tax regime, which includes a 30% tax rate and a 1% TDS, that acts as a hindrance for VDA traders, who are driven to move their liquidity offshore, thus negating the purpose of the tax policy. This is a concern that has been repeatedly raised by the industry and experts, who warn that regulatory uncertainty in the rapidly growing VDA sector can result in capital flight, discourage foreign investors, and divert investments to other markets, hampering the competitiveness of Indian VDA exchanges in attracting investment.

A report by the Esya Centre, titled “Virtual Digital Asset Tax Architecture in India: A Critical Examination,” supports these concerns and highlights the negative impact of the current tax architecture. The report estimates that the current tax regime could lead to a loss of approximately $1.2 trillion (INR 99.3 lakh crores) in local centralized exchange trade volume over the next four years, as compared to a pro-market scenario where the TDS on VDAs is comparable to that on securities, the tax policy allows for the offset of losses, and the taxation of gains from VDAs is internationally competitive.

Nonetheless, this year’s Union Budget has taken a positive step in improving compliance and revenue collection by introducing both monetary and criminal penalties for non-compliance with the VDA TDS provision. This has led to a greater emphasis on using compliant channels for VDA transactions and has made it difficult for Indian crypto investors on foreign exchanges as global exchanges do not take on the responsibility of TDS deductions. The Indian exchanges, on the other hand, have calibrated their internal processes to be fully compliant with the tax mandate, including conducting TDS deductions on behalf of users for all VDA transfers.

India has the opportunity to lead the crypto revolution and reap its benefits. By adopting a strong crypto policy, the nation can encourage the technology sector while also embracing innovation and staying ahead in the financial system. The time is ripe for India to seize the opportunity and establish itself as a leader. The Finance Minister’s statement marks significant progress.

(The author is Co-founder and CEO at CoinDCX)