Digital dilemma: Cryptic messages on cryptocurrencies

In the Union Budget for FY 2018-19, the government’s thrust to strengthen the digital economy has been spelt out clearly. While the allocations for Digital India programme has been doubled to Rs 3,073 crores for FY2018-19 and the increased focus is on creation and augmentation of telecom infrastructure by allocation of Rs 10,000 crores in 2018-19, the message sent out regarding cryptocurrencies like Bitcoins, Ethereum and Litecoin etc., continues to be cryptic. The jury appears to be out on the treatment of cryptocurrencies and lack of any definite notification or provision banning the use thereby increasing the scope for confusion.

The Finance Minister Arun Jaitley in his speech has taken a favourable view on the blockchain technology by recognising its use in organisation of records without the need for intermediaries. However, in the same breath he has refused to accord any legitimacy to cryptocurrency and so there appears to be no shift in the policy decision to treat such cryptocurrency as legal tender. The interesting aspect to note is that the use of such cryptocurrencies has been proposed to be banned only when such use is made for illegal purposes. 

The Indian Government also seems to be keeping a close watch on the developments of regulations on cryptocurrencies the world over. While most economies are still grappling with the true implications of allowing the currency to be used as a legitimate tender, the recent news related to the hacking of the Japanese cryptocurrency exchange also make the lawmakers tread cautiously. It is also pertinent to note that in spite of such challenges, countries like Sweden, Korea, Estonia have recognised the potential of such technology and have encouraged the use of such cryptocurrencies.     

Even if the larger reason that restricts the government from legitimising such cryptocurrencies is the anonymity of the users and lack of any practical method of identifying or regulating the exchange of cash for such cryptocurrencies, it appears that without any specific sanction against its use in trade, it will be difficult to ignore its existence. One may argue that the best way to control the use of such cryptocurrencies would be to regulate its usage rather than an absolute ban going by the amount of trade generated by cryptocurrencies.

Due to the conundrum created around the usage of cryptocurrency and its non-recognition as legal tender, it appears that any transaction using such cryptocurrency to secure other goods or services will have a legal validity equivalent to that of a barter transaction and in case it is being traded for cash, it will appear to be a pure purchase or sell transaction. This begs the question as to what should be the nature of such cryptocurrency for the purposes of taxation, should it be ‘goods’ or ‘services’. Since it is used in the context of purchase or sale of any other item or money, there is an impending impact from the indirect tax perspective. There are strong arguments which call for classification of such products as goods, services or actionable claims as is usually the case with any set of intangible items. In this context, the IRS in the US has taken a view that cryptocurrencies would amount to a ‘commodity’ while the Australian government treats cryptocurrency as ‘property’. Taking a cue from these countries, arriving at a definite answer is the need of the hour for India and this will ensure further compliance in the hands of intermediaries through whom such transactions are carried out as on date. Moreover, the complex models of business that are run to facilitate such transactions also require clarity. Probably the increased awareness would contribute to the acceptance of cryptocurrency as a legal tender at a future date.

With the increasing popularity of cryptocurrencies and the increasing amount of public money that is invested in them, the better approach by the Indian government would be to acknowledge its existence and issue proper regulations. The US appears to have taken the early hint and have resorted to proactive action by coming down hard on the sham companies set up which were raising substantial funds through initial coin offerings from investors without any substantial business. Even in India, there appears to be a sudden slew of new sham companies which allegedly deal in cryptocurrency which are attracting gullible investors. This again brings to light the need to separate the genuine players from the host of sham set-ups. This can only be achieved through co-operation from the trade since understanding the advanced financial technology involved would be the key to solving this puzzle. It can also be reasonably expected that legitimising the cryptocurrencies may even help raise revenues for the government. 

Going by the precedents set in the past like the demonetisation move, the current Government is not the one shying away from taking bold decisions. Moreover, with the introduction of a complex GST structure despite a strong resistance from all corners, the government has displayed ample appetite to deal with advanced technological revolutions. When conservative economies like China are reportedly taking the leap of faith and are due to launch their own cryptocurrencies, the time is ripe for India to rally and create sufficient knowledge base and regulatory framework for setting up a model for the rest of the world.

The author is Associate Partner, Khaitan & Co. Views expressed are personal.