Aruna Sharma, a practitioner of development economics and former secretary, Ministry of Electronics and IT, talks about the need to bring in a regulation on cryptocurrencies. She likened ‘regulated cryptocurrencies’ with equities for investors who understand the rules of risk and volatility. While talking to Outlook Money, she also clarified that RBI’s central bank digital currency (CBDC) will be completely different from cryptocurrencies.
Regulation on cryptos seem to be the need of the hour as investors await clarity. Can we expect a regulation anytime soon?
Sharma: The government is yet to come up with norms to regulate cryptos product and that is desirable for clarity to investors as well as the operators.
As Finance Minister Nirmala Sitharaman has pointed out repeatedly, taking a global approach is important. Many countries, including Singapore, EU, US and Dubai, have come up with their formats for regulation, addressing apprehensions of AML (anti money laundering), methodology for KYC (know your customer norms) and cross-country transactions.
Informed decision-making and clarity of regulation will help investors in decision-making.
The Reserve Bank of India (RBI) has been vocal about its reservation on the possibility of an impact on macro and fiscal controls. The government should move from just (levying) “heavy taxation—direct and indirect” to regulation.
Do you think cryptos have the potential to disturb the current financial system in India and how?
Sharma: If regulation comes in, cryptocurrencies will be like equity for investors with an understanding of volatility and possible gains. The rise in interest rates across the globe had an impact on the entire security market and cryptos. It has clearly shown there is a correlation between the behaviour of crypto and that of the security market. Both showed sensitivity to sudden high rates and demand collapsed.
What could be the possible contours of the digital currency that RBI is planning to launch? Do you think it will replace the current-format cryptocurrencies?
Sharma: What the central bank is bringing is a central bank digital currency or CBDC. That is legal tender. Crypto in India is not a legal tender and that has been made amply clear. Thus, the two are entirely different products.
CBDC will shift the “issue” of currency to digital mode. That can be at “wholesale” or “retail”. Wholesale will not have much impact on banks, but retail will have an impact on the “liquidity” banks hold and its lending capabilities.
RBI is planning to test the pilot, so that will clarify the steps the banking system will have to take. CBDC is the way forward. It is not speculative. Crypto, on the other hand, is an investment option and speculative.
CBDC will be stable and as good as legal tender. It will enable faster transactions at much lesser cost, including FEMA compliant cross-border transactions.
It is an evolving process and will benefit users, bankers and the government to ensure fiscal discipline
How will crypto taxation affect investor behaviour?
Sharma: For cryptos, at this point in India, taxation is at 30 per cent on the gains, with no offset of loss in other transactions, TDS (tax deducted at source) of 1 per cent and GST. The mechanism to execute the taxation is still evolving and making crypto operations cumbersome and expensive. It is important to observe how it pans out and that will have an impact on investor behaviour.
Does the government’s proposed data protection regime cover cryptos currently?
Sharma: Data Protection Bill for ‘Personal Data’ is a must for a sovereign country. It is still at the discussion table. It will be applicable to the entire digital world.
