It has been a torrid time since November last for investors in private cryptocurrencies such as bitcoin, which have fallen by more than 50 per cent from the peak. The slide has intensified this year as the US Federal Reserve moves closer to its first interest rate hike since the beginning of the pandemic and ends its monthly fund infusions. A sense of great urgency was felt in regulating cryptocurrency trading transactions in the second half of 2021 since a large wave of new investors had begun trading in these cryptocurrencies in unregulated platforms in India. These investors had been lured by the eight-fold appreciation in the value of bitcoin and other cryptocurrencies since early 2020. But the ongoing crash that has wiped out almost half the gains in just two months, underlines the fact that these are highly speculative instruments with no underlying value, purely driven by demand. Many of the new investors who bought these assets last year would be staring at losses now. While the recent crash in the price of cryptocurrencies reduces the exigency in regulating these instruments — the assumption is that fresh money is unlikely to be invested in a falling asset — the Centre will soon have to decide one way or the other on its policy towards cryptos.
Ignoring the unregulated trading happening on domestic cryptocurrency platforms is not a good idea. Since the platforms are not registered with any regulator, their activities and actions go unmonitored, and they don’t function with uniform rules either. A complete ban on domestic crypto-trading is also not a viable option as it will only push traders to shift to overseas platforms. It will be best if the private cryptocurrencies such as bitcoin, litecoin, etc., are recognised as high-risk assets and their trading is brought under the supervision of a regulator. Gains made through the trading should be taxed at double the capital gains tax rate on direct equity instruments. Given the extremely risky and volatile nature of this investment, it is best that smaller investors are deterred from investing in them. There are multiple benefits in this solution. One, investor interest will be protected since only trustworthy entities will be allowed to operate exchanges based on rules framed by the regulator. Two, details about the investors buying and selling private cryptos can be accessed by the government and the Reserve Bank of India. Three, the exchequer will also earn revenue from these assets.
The RBI is right in being worried about unauthorised and illegal payments using cryptocurrencies. But once these trading platforms are regulated, their KYC compliance can be aligned with the Prevention of Money Laundering Act, and the Enforcement Directorate can also maintain strict vigil on large value transactions on these platforms to prevent money laundering or terror financing. Eventually, a global consensus needs to be reached between all countries to implement uniform rules for regulating private cryptocurrency trades and its use in cross-border payments. Since the cryptocurrency miners and traders are scattered across the globe and are mostly unregulated, unilateral ban or control by any one country will not suffice to control their misuse.