Cryptocurrencies including bitcoin, etherium and dogecoin, which had attracted lot of interest in 2021 due to the stellar rally in prices are currently passing through a rough patch. Bloomberg galaxy crypto currency index, which is designed to measure the performance of the largest cryptocurrencies traded in US dollars, is down 40 per cent since the peak recorded in November 10, 2021. The index has lost 11 per cent since the beginning of 2022.
The trouble for cryptos began when China clamped down on private cryptocurrency trading and mining in September last year. Talks about Indian government planning to ban transactions in private cryptocurrencies towards the end of last year further roiled sentiments. Regulators in other countries including the US are also discussing ways to regulate the trades and check illegal money transfers through these instruments.
As the regulatory heat began building up, most cryptocurrencies began sliding lower. Bitcoin, the most popular cryptocurrency is down almost 39 per cent since the peak of $68,991 recorded in November last year. Other popular cryptocurrencies such as etherium, dogecoin and litecoin have also lost more than 35 per cent from their 2021 peaks.
Federal reserve actions
The party in the private cryptocurrencies has also been impacted by the US Federal Reserve’s change of stance in the December policy meeting. The Fed revealed that it will be hiking interest rates 3 to 4 times in 2022, by 25 basis points each time. The FOMC minutes further revealed that the Fed will also begin shrinking its balance sheet in 2022.
These actions spell bad news for risky assets such as cryptocurrencies. One, it will increase the cost of borrowing, for leveraged trades. Two, the amount of surplus available in the financial markets would shrink with Fed not rolling over the maturing government bonds. Three, higher interest rates result in fund managers reallocating funds to fixed income.
Unfriendly Indian government
The Indian government has not been too supportive of private cryptocurrency investments. Tax authorities cracked down on crypto trading platforms including WazirX, CoinDCX, BuyUCoin and Unocoin demanding GST at the rate of 18 per cent on the commission charged by these exchanges early this month. More than Rs 100 crore was collected from these exchanges as tax dues, penalty and interest.
While the above pertains to crypto exchanges, investors are still in the dark about how their gains or losses will be taxed. There are several complicated questions that the cryptocurrency bill that will be tabled in the Parliament needs to address.
What is the nature of cryptocurrencies? Are cryptocurrency trades legal or illegal? Are they assets under the Securities Contracts Regulations Act? This needs to be spelt out clearly before the manner in which the transactions are regulated and taxed can be decided.
Two, will the income from cryptos be treated as speculative income or non-speculative income.
If the income is non-speculative, then capital gains tax could be charged on the gains whereas if these are treated as speculative income then can be taxed at the corporate tax rate.
Three, should they be treated as commodities and thus levy GST on the value of purchase and sale.
The bigger worry is money laundering and other illicit activities taking place with crypto currencies. These need to be checked. The questions are many and it is hoped that the FM has some answers on February 1.