SEBI’s Concerns Around Cryptocurrency

In News

• Recently, the Securities and Exchange Board of India (SEBI) has given recommendations on cryptocurrencies regulations in India. 

Concerns raised by SEBI:

• Consumer protection and enforcement of any regulatory regime over crypto assets would be challenging due to the decentralised nature of digital instruments.
• There is a great likelihood of execution of unauthorised trades not in consonance with any regulatory framework.
• Clarity needs to be brought on whether cryptocurrencies can be legally defined as securities.

Recommendations by SEBI:

• Investigating authority:
  • Crypto assets related to unregulated activities may be entrusted to an investigating authority appointed by the government and take further legal action.
• Tokenised versions:
  • If crypto assets are not banned, then there is a need for feature-based characterisation of the tokenised version of the assets, which may attract the supervision of different sectoral regulators
• Legislative framework:
  • The legislative framework, if proposed, would need to delineate the role for different regulators and authorities including for regulation purposes, it recommended. 
• Crypto Regulators:
  • Different regulators currently regulate various entities based on the services and products they offer. 
  • There could also be a crypto asset referencing goods or services offered by entities, which are not regulated by any sectoral regulator. 
  • Consumers availing of such products should be protected through the Consumer Protection Act.
• Regulations by FEMA:
  • It also suggested possible regulation of crypto trading platforms by the RBI under the Foreign Exchange Management Act (FEMA) as crypto assets are available for trading in a foreign jurisdiction as well and consumers abroad can remit funds to India using such currency.

Features of Cryptocurrency

• Anonymous: 
  • Cryptocurrencies make it possible to lend, sell, buy, or borrow without an identity, credit score, or even a bank.
• Highly secure: 
  • All records of its creation and when it’s sent or received are stored in a sort of big digital book that anyone can access, keeping it honest. 
  • It can’t (easily) be stolen or seized and can be used anywhere in the world.
• Cheaper to transfer: 
  • Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means. 
  • Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
• Illegal and highly volatile: 
  • However crypto is NOT just used for illegal purposes. In fact, due chiefly to its price fluctuation and other reasons it has fallen out of favor on the black market.
• No physical form: 
  • Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. 
  • However, it can be and many governments are working to create a crypto coin version of its respective fiat currency.
• Decentralised: 
  • Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency. 
  • When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.

Challenges

• Security Risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
  • They are prone to issues like Hijacking, Routing Attacks, Distributed Denial of Service (DDoS) attacks.
• Shield to Crime: Used for illicit trading, criminal activities and organised crimes. 
• Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
• Price Volatility: Prone to price fluctuations and waste of computing power.
• Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.

Position of the Indian government on Cryptocurrency

• Definition for crypto assets:
  • The government in the Union Budget for 2022-23 has for the first time provided definition for crypto-assets and set out a list of proposals on the taxation of this new asset class.
• Coverage:
  • The tax proposal covered all emerging digital assets, including non-fungible tokens (NFTs), assets in the metaverse, digital currencies and tokens, among others.
• Tax deducted at source:
  • The Budget also said a 1% TDS (tax deducted at source) will be applicable on payments made on the transfer of digital assets.
  • Loss from the transfer of virtual digital assets
  • It will not be allowed to be set off against the income arising from the transfer of another VDA in the proposed amendments.
• 30 percent tax on income:
  • The government will define virtual digital assets with a view to levying a 30 percent tax on income from all transfers of such assets.
• Infrastructure cost:
  • Incurred in the mining of virtual digital assets including cryptocurrencies will not be allowed as a deduction by the taxman.
• Penalty:
  • Deduction of surcharge and cess, which has been claimed and allowed to the taxpayer, will be deemed to be under-reported income and will attract a 50 percent penalty.
  • They can voluntarily declare such classification and avoid the penalty.

Way Forward

• Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology. 
• Some of the cryptocurrencies have also seen a massive dip in their per-unit trading prices lately, leading to erosion of investor wealth.
• Establishing safeguards, measures and regulations after taking inspirations from developed countries would be the better way ahead.

Source: TH