The Budget proposals have raised fears that the crypto industry may shift out of India to avoid the high taxes. How real are these fears?
One of the most important objectives of the tax proposal seems to be to have a clear trail of transactions for all crypto users. While that objective can be easily achieved with a host of measures, the current tax rules might actually end up working against the overall goal. Firstly, the new tax rules do not allow set off or carry forward of losses. During the past few years and especially during the pandemic we have seen many small traders and trading businesses flourish. If these crypto trading businesses are not allowed to set off their expenses on staff and office infrastructure against the income from crypto trading, how will they survive? Secondly, the onerous rules might lead people to figure out other ways to avoid the high tax in India. The high tax could make people devise ways of tax evasion and people could also resort to P2P trades where exchanges are not involved.
What are some key measures you want to see in the crypto legislation that the government is currently working on?
Hoping to see some concrete measures that will help the industry grow. For instance, we want the government to set up an independent regulator who understands the crypto space and works with the industry to establish a balanced and fluid regulatory framework. Crypto technology is evolving fast and any rigid rules at this stage may impede innovation rather than foster it. Further, the Bill should take inputs from the industry which has a self-regulatory code of conduct in place. Unless there is a solid regulatory framework that addresses all our concerns and encourages developers to build global crypto businesses in India, we are at a huge risk of continuing to remain the developer back office of the world as well as experiencing massive brain and capital drain to other countries like Dubai, Singapore, Thailand and the US.
What about the tax proposed in Budget?
The Budget proposes to tax income from cryptos at 30%, which is the tax rate for income from gambling and speculative activity. To liken crypto to gambling is an extremely rudimentary approach as there are several tools, research reports, development metrics, on-chain metrics and adoption signals that can be studied to take investing decisions in crypto. Unless there is a change in this perception of crypto trading as speculation, all the rules will be stringent for the industry. We want cryptos to be taxed at a fair rate like other assets. Only this can boost the industry and its chances of success in India.
Last week the RBI governor said cryptos have no underlying value. What do you make of this statement?
It is a very common misconception that cryptos have no underlying value. If that was true you would never see such widespread adoption. Let’s look at the Ethereum blockchain for instance. Ethereum is a base platform that enables creation of multiple applications on the Ethereum platform similar to a Google Play Store. Each app on the Ethereum blockchain solves some or the other use cases. As these platforms gain traction and more applications and use cases get added to them, the price of the crypto also rises. So it is not correct to say that there is no underlying value of crypto.
What the RBI Governor may have meant was that there is no tangible underlying asset of a crypto.
Technology itself is intangible. What do you suppose is the underlying of a company like Google? The software that drives the Google search engine and other tasks is the underlying value of the company.
The software that picked out websites from hundreds of thousands of search results and ranked them according to their relevance was valued at billions of dollars in the early days of Google. So, anybody who understands how blockchain technology works will know what is the value of a crypto like Ethereum or Bitcoin.
It is possible that the RBI might be looking at this from a currency perspective. However, they should look at cryptos like an asset or utility as well. Today there are more than 7,000 companies listed on Indian stock exchanges. Each company is solving some use case and adding value to its consumers. On the basis of this utility they command a particular price in the market. The same is the case with cryptos. The only difference is that in case of stocks, it is centralized so you get quarterly statements and other information on the company. In cryptos, all of this information is openly available on-chain and can be accessed by everyone in real-time. This is a new way to engage with an investment asset and not many people are aware of the tools available to access and verify such on-chain information. Yes, some of these tools are currently quite complex and many people (including investors) don’t understand the technology that goes into crypto. However, thousands of developers are working each day on changing that and making such information easily accessible to the common user.
Another senior RBI official has likened crypto to Ponzi schemes. What is your response to that?
Let me put it this way. What is the underlying value of gold, or of diamonds? At the heart of it all, it is the trust that people have in gold as a store of value. In India, gold is also used as jewellery, so that is one use case, however, in other countries such as the US, gold is not used so much as jewellery, but is used more as a store of value. The level of trust that people have in Bitcoin and other cryptos is a store of value. Not everybody who buys and sells Bitcoins on crypto exchanges is going to use it for transactions. They have bought Bitcoin because they see it as a store of value. The large number of developers building apps, transactions that take place each day, and the number of applications built on the Ethereum blockchain are what give Ethereum its value in the secondary markets, not blind trust that the next person will value it more.
- Sumit Gupta Co-Founder and CEO, Coin DCX
