A singular event has given India an opportunity to shape global policy for everything involving crypto – its presidency of the Group of 20 (G-20). Its term, which began in December, puts the country in the driver’s seat as the developed world looks to define the future of money.
The presidency comes after India announced steep crypto taxes on Feb. 1, 2022, that were blasted by crypto companies operating in the country. As a result, Indians moved more than $3.8 billion in trading volume from local to international crypto exchanges between February, when the taxes were announced, and October 2022, after the new taxes were implemented, according to the Esya Centre, a New Delhi-based technology policy think tank.
There’s a lot that could happen for the crypto industry in India and how the nation regulates it. What India does during its G-20 presidency may provide some clues.
This feature is part of CoinDesk Policy Week, a comprehensive look at the outlook for crypto regulation and legislation. Amitoj Singh is a CoinDesk regulatory reporter based in India.
India’s year-long G-20 presidency gives the nation the power to set the crypto agenda for the intergovernmental forum. India can now bring together different stakeholders – the 19 countries and the European Union that make up the G-20, which together represent over 85% of global GDP – with invited international institutions including the United Nations, the International Monetary Fund (IMF) and the Financial Stability Board (FSB).
Indian Prime Minister Narendra Modi has stated the G-20 presidency is an opportunity for the nation. Finance Minister Nirmala Sitharaman has said that “how to regulate crypto assets” will be one of the presidency’s priorities.
The crypto-related discussions will take place as part of the G-20’s Finance Track. Crypto has been included as part of the working group titled “Financial Sector Issues.” This is the only working group in which discussions directly involve G-20 finance and central bank deputies, signifying the priority crypto-related discussions have been given. (The seven other working groups have senior staff of finance ministries and central banks leading discussions.)
The first meeting of the financial working group was held in the middle of December, when “each member presented their stand on the global crypto regulation,” a senior official familiar with the discussions told CoinDesk. The second meeting will be held Feb. 24-25.
Thus far, FSB’s “comprehensive” international crypto rules have served as the world’s blueprint. Its discussion papers have facilitated multilateral discussions. But India made a major change by giving the IMF more of a role in crypto negotiations for the duration of the nation’s presidency. Under India’s presidency, deliberations will focus on contentious issues such as crypto-asset risk assessments.
It hasn’t taken long for two broad camps to emerge, according to two people familiar with the discussions.
“Emerging economies are wary of the proliferation of crypto assets due to dollarization concerns,” one person who is familiar with India’s crypto-related discussions told CoinDesk, referring to the widespread use of dollar-denominated crypto instead of government-regulated money. “Developed economies have capital controls, emerging markets don’t. And the developed nations don’t have an answer to this concern.”
By September, when India hosts the G-20 Summit in New Delhi, officials are hopeful of a collective agreed-upon position steered by the IMF.
Meanwhile, the Indian central bank has not changed its position that cryptocurrencies should be prohibited. The government, through the finance ministry, has said global coordination is required for a regulatory framework for crypto. Without that coordination, no jurisdiction’s individual crypto legislation will be successful.
“The finance ministry and government have to think about the political economy while the central bank looks at the economy,” said another person familiar with the thinking of both the government and the central bank. Both want to avoid what they consider the systemic risk of a parallel economy – one without government supervision, which crypto would encourage.
This is why the Indian central bank has repeatedly advocated for a complete ban on crypto while the government has stopped short of a ban, instead imposing stiff taxes.
The thinking of the people in power in India has evolved on crypto. Publicly, opposition politicians have berated the government for imposing stiff taxes. But privately, when tasked with the responsibility of protecting India’s investors as part of a parliamentary committee on finance, the government has chided the crypto industry for doing too little to mitigate the risks associated with the industry like terrorism financing.
In short, where a person of power stands on crypto depends on where he or she sits.
A minister tasked with skill-development, entrepreneurship, electronics and information technology has supported the technology, saying, “There is nothing that outlaws crypto as long as you follow the legal process.” It is not entirely clear what he means by that because India has not laid out a clear legal process for crypto.
What India has done is create an uncertain status quo.
“I don’t wait till regulation comes into place for taxing people who are earning profits,” the Indian Finance Minister said when asked how a nation can tax something that it doesn’t acknowledge is legal.
Which is why the G-20 presidency is forcing India to crystalize its position on crypto. Two recent events have put a spotlight on this.
The first was a closed-door focus group meeting involving officials of more than 10 emerging-market economies earlier this month in New Delhi, where the consensus was that crypto assets are “risky” and not “worth it.” This is expected to represent the view of the Indian Central Bank. The IMF is expected to include the observations on crypto in an upcoming discussion paper, potentially offering to replace the FSB’s blueprint for the G-20 talks, a person familiar with the discussions told CoinDesk.
The second was a discussion held at the National Institute of Public Finance and Policy (NIPFP), an autonomous research institute based in New Delhi. It was a first in terms of bringing policy think-tanks and industry players together. The government wanted to learn about the latest developments in crypto. Three different people confirmed to CoinDesk the developments of this meeting.
“I think [these discussions have] all been triggered by India’s G-20 presidency,” said a senior industry representative. “They [India] want to lead. They can’t be in a position where the majority of the G-20 nations are more informed about [crypto]. And they were keen on understanding the industry.”
Another person attending said the government’s representatives asked questions and “listened without engaging much.”
A government official asked, “Is the risk of investing in crypto for an Indian equivalent to the risk of an American investing in crypto?” said a person from a research organization.
All of these discussions have resulted in the Indian government sharpening its position: If there is to be a globally coordinated crypto regulatory framework, which many nations want, then it should be optional.
“It shouldn’t be that if one nation is following crypto regulation, the other must also,” said a senior official party to the discussions.
The IMF and NIPFP did not immediately respond to requests for comment.
Day of hope: Feb. 1, 2023
On Feb. 1, 2022, as part of revealing the annual budget, the government announced the 30% tax on crypto profits and 1% tax deducted at source (TDS) on all transactions. Within 10 days crypto trading volumes plummeted, in some cases more than 70%.
The 30% tax went into effect on April 1, while the more controversial 1% TDS came into force on July 1.
The taxes became effective at a time when macroeconomic factors exacerbated the dire prospects facing the industry. Crypto trading had tailed off dramatically even before the taxes went into effect.
According to Chainalysis’ 2022 Global Crypto Adoption Index Top 20, India ranked first in four of the five methods to measure a nation’s crypto adoption. Its poor P2P exchange trade volume ranking (82) placed it fourth behind Vietnam, Philippines and Ukraine but ahead of fifth-place United States.
In the meeting with the finance ministry, the industry and think tanks referred to this unappealing data and said they are now hopeful the government has taken notice and will adjust the tax regime. The Bharat Web 3 Association, representing the Indian crypto industry, has called for a change in the taxation structure as part of the new budget to be announced on Feb 1, 2023.
In order of priority, the association wants a reduction in the TDS ideally to 0.01%, or at minimum to 0.1%, at par with the securities transaction law, or establishing progressive taxes on gains instead of the flat 30% tax and allowing losses to offset gains. The securities transaction tax is a direct tax levied on every purchase and sale of securities that are listed on Indian stock exchanges.
“We have done everything we could and so we are hopeful that we will see a positive response from the government,” said Kiran Vivekananda, chief of public policy at Indian crypto exchange CoinDCX. “It’s still too early for us to expect a crypto exchange licensing regime to be brought forward by the government.”
But several industry and think tank experts in close contact with the government told CoinDesk that, realistically, they “did not expect any change to the law.”
While it is leery of crypto, India is all for launching its retail central bank digital currency by the end of 2023, several people told CoinDesk.
India launched wholesale and retail CBDC pilots last year. The retail pilot is meant for the private sector and citizens. The wholesale pilot is restricted to financial institutions. India wants to launch its retail central bank digital currency nationwide by the end of 2023, several people familiar with the matter told CoinDesk.
The focus has been on the retail pilot. While several banks and cities are involved, a true picture of the results will emerge in the coming months.
In the meantime, India is grappling with two big questions regarding its CBDC: how will the central bank secure citizens’ privacy, and what is the public policy use case of the CBDC when you already have a successful digital payments system through its unified payments interface (UPI).
“While India’s digital rupee will work to complement the payments system, the pilots are ongoing and will give us a better understanding of all the best public use cases,” said a senior official familiar with India’s CBDC pilots.
In short, there’s a lot that could happen in Indian crypto regulation and development in the months ahead. How the nation manages the G-20 presidency may provide a blueprint.