Budget 2022: Cryptocurrency sector riddled with bottlenecks; time to bring policy change

The cryptocurrency sector in India is riddled with regulatory bottlenecks which makes it challenging to operate retail businesses. The finance minister should consider formulating policies to leverage growth from emerging technology such as blockchain tech which serves as the backbone of crypto.

Here are some of the sops the sector expects from the government:

GST rules for cryptocurrencies

Trading in crypto should be classified as similar to trading in shares. This will provide more clarity on the classification of trading in crypto and will ensure that GST is applicable only on commission.
Lending and staking are two of the most promising activities in the crypto space which can potentially mobilize a lot of capital for India. Given that many investors will want to hold assets from this asset class, it will be a prudent approach to enable cash flows in the asset by developing a framework around lending and staking for passive participants. Both these activities should be classified as similar to lending in INR so that GST rules are clear on that also.
Given the global nature of the crypto industry and easy movement of assets across borders, specific provisions governing the taxability of such movement should be created.

Crypto is a combination of finance and technology and India should be at the forefront of this. Capital expenditure incurred by Crypto companies should be allowed accelerated depreciation.
To support the industry, the tax rate of 18 percent (applicable only to manufacturing entities) should be extended to the crypto industry too.
Tax provision for investors should be clearly defined and should be in line with LTCG/STCG on shares.
Given that crypto exchanges will have to undertake operations to keep markets from turning illiquid, the Budget should consider provisions for market-making and liquidity enabling trades on the platforms and appropriate taxation for resultant P&L gains

Promoting innovation should be a topmost policy priority, incentivizing the blockchain developer community and establishing clear guidelines to list tokens on a platform.
Facilitate the specialised training program/education to create skilled manpower to service the industry.

Crypto exchanges should be allowed to apply for the Merchant Identification Number (MID) to conduct the Third-Party Validation (TPV). Currently, it is only allowed for the BFSI Sector to do TPV of their customer’s pre-registered bank accounts.
Cybercrimes, asset appropriation, identity thefts, money laundering, etc. are some of the challenges faced by the financial sector. In order to reduce the risk, it is very important that all payments to Crypto Exchange must be made by their customers exclusively from the pre-registered bank accounts. Here a pre-registered bank account is the bank account of which the details are shared by the customer at the time of registration.
Encourage seamless fund movement between crypto exchanges and banking & financial intermediaries by laying out a clear inclusive policy.

Draft a comprehensive crypto policy in consultation with crypto ecosystem players. Establishing a clear legal framework around crypto will boost investor confidence in the industry which will help the cryptocurrency sector gain momentum. The government may refer to the WEF report on navigating cryptocurrencies and encourage self-regulation with defined boundaries.
To curb the risk of money laundering and financial terrorism, Crypto Exchange (as a new category) should be allowed to become a reporting entity under FIU. At present, the reporting format is specifically drafted for banking institutions, NBFCs, and other PSPs. The introduction of a new format standard from a Service Providers’ frame of reference will ease the process of reporting suspicious transactions.
Establish regulatory safe harbours to promote innovative ideas for the crypto industry.
Encourage working group, self-regulation for the industry, including a code of conduct and regulatory framework in alignment with the government’s primary objective of safeguarding consumers and financial stability

Establishing a clear framework for the import of crypto for businesses. Authorize and license crypto exchanges as a channel for import of crypto under the Authorised dealer category.
Implement Travel Rule and define the standards for information exchange on the source and beneficiary details along with each crypto send and receive transaction between exchanges. Globally there are about 7 protocols for information exchange today, India needs to identify the most efficient protocol and define the guidelines for the same to increase coordination among Indian and International exchanges for transparent movement of crypto funds.