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The Crypto Saga Unfolds
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Top Stories |
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Satish Reddy (Source: IANS) | 21 Jun, 2022
PART 1
There is no dearth of issues in the financial
world with sharply dividing opinions. Please welcome the new entrant,
Cryptocurrencies, rapidly emerging as the most prominent bell weather of
the global economy. For decades, market pundits have kept a
hawk-eye out on four asset classes-- Stock & bond indices, Oil, Gold
and Currencies. It has taken centuries, geographies, discoveries,
inventions, complex supply chains, millions of jobs and hundreds of
global financial institutions to build these markets, which are today
valued in trillions. Suddenly, the world sees this new kid (read asset)
on the block, built with a software code, authored by a mysterious and
untraceable soul (Satoshi Nakamoto) driving their century old markets.
Very few people understand cryptocurrencies. Even fewer have actually
transacted in one. But today everyone has an opinion on it.
Globally
speaking, the jury is still out on whether cryptos are a virtual
digital asset or a digital currency. Even the most advanced economies
are still to develop regulations or find a regulator for this industry.
Leading financial doyens, for one, Warren Buffet, has gone on record to
say that cryptocurrencies are not a productive asset and he wouldn't buy
the whole of bitcoin even for $25.
European Central Bank
President Christine Lagarde has said that crypto-currencies are "based
on nothing" and should be regulated to steer people away from
speculating on them with their life savings. On the other side of aisle,
there is this huge momentum built by global icons like Elon Musk
(Dogecoin), Snoop Dogg (Rapper) and Lebron James (US Basketball player),
Mark Cuban (billionaire investor & Shark Tank icon) and Gwyneth
Paltrow (film actress), who has been the face of Bitcoin since 2017. And
of course, its not endorsements alone. Knowing that you could buy a
Tesla with Dogecoin or shop for a meal at Burger King or Subway, or that
Wikimedia Foundation accepts donations in crypto, makes one feel that
Cryptos are well on their way of running alongside fiat currencies as a
peer-to-peer electronic cash system. While one should not dare to
forecast whether and how soon this could be a reality, the ongoing
meltdown, more commonly being called crypto-winter (but not death), has
shaken the faith of most.
It all began with the meltdown of Luna
and TerraUSD, also called stablecoin, which meant that it was always
supposed to be worth $1. However, Luna tokens, once worth more than
$100, kept falling till they were below a penny. Within few days, wealth
of US$ 60 billion had vanished. At one point in time, TerraUSD holders
were offered yields of 20 per cent. Elsewhere, Coinbase Global Inc., a
crypto exchange, which had made a grand debut on the stock exchange in
April 2021 has seen its stock price shrink by 80 per cent, wiping out
$51 billion. Incidentally, Coinbase describes itself as a distributed
company; all employees (reportedly, over 3700 in 2021) operate via
remote work and the company lacks a physical headquarters. It is the
largest cryptocurrency exchange in the US by trading volume.
The
Wall Street Journal has eloquently summed up the ongoing rout by
reporting an evaporation of some $1.5 trillion from cryptocurrency
markets in the past six months. That is more than 50 per cent of their
value and effectively sets the stage for its biggest survival test yet.
Bitcoin, the most well-known of cryptos (almost a synonym for
crypto-currencies), had peaked at$67,802 in November 2021 and is
currently trading at $28,350, having lost over 60 per cent of its peak
value. Ether, the other big boy on the block, is currently trading at
$1,501, having fallen from its height of $4,865. It is not to be
forgotten that Ether's journey began at 42 cents, some five years ago
PART 2
The
fact that in this market environment Bitcoin, Ether and some others are
holding out, one can unmistakably predict that these instruments very
much here to stay. We will probably witness a major industry shakeout,
where 90 per cent of the players are going to disappear, with associated
pains for investors. This lesson portends to be very meaningful for
regulators, look at crypto as akin to a security or scrip (certainly not
a currency) and quickly build a regulatory framework.
US laws
impose elaborate regulations and detailed disclosure requirements on
issuers and intermediaries that sell securities, stocks and bonds. SEC
law also creates serious criminal and pecuniary liabilities on anyone
who skirts the statute.
Cryptocurrency platforms have managed to
sidestep SEC regulators in US arguing that the tokens are commodities,
like gold, which have no federal regulator (instead under Futures &
Commodity Trade Commission). The regulatory gap has allowed ponzi
schemes to proliferate, as bad actors rush to skim from the hype
generated by the new asset class.
The Indian government has, in
fact, emerged as a global thought leader by legislating that
cryptocurrencies, including non-fungible tokens, are a "virtual digital
asset" (Section 2(47A) of the Income Tax Act). India has taken a
definitive stand by classifying crypto as an asset in face of an opinion
of regarding them as a "digital currency". With nearly 40 crypto
exchanges in India, already organised into an industry association
called the Blockchain & Cryptoassets Council, this was a timely
move. While the definition pretty much becomes the building block for
other regulations, namely, taxation under GST and appointment of a
regulatory agency, we are still to see definitive statements emerging
from the Ministry of Finance.
Considering the imperatives and
need for investor protection, one sees a clear path for bringing
intermediaries under regulation by SEBI. With some regulatory
improvisation, there should also be some cross-controls by RBI, in order
to match the rapid innovation taking place by re-packaging crypto into
exotic financial instruments in the market. There is a compelling case
for countering a repeat of the Lunar & TerraUSD type of debacle.
Regulations as are applied for financial institutions like licensing and
SLRs, can minimise risks for investors. Post the amendment
under income tax law, the crypto industry is anxiously anticipating
legal clarity under GST for crypto currencies. Since India has taken the
stance of defining cryptos as a "virtual digital asset", it logically
follows that all associated services, whether those of intermediaries or
even crypto-miners, are financial ancillary services, liable to GST of
18 per cent. The oft heard debate that whether the entire value of
crypto-coins will be taxed, seems quite improbable from the position
taken by the lawmakers so far.
And finally, we come to the
oxymoronic aspect of crypto trade, KYC. Cryptocurrencies were inherently
designed with the notion of decentralisation, cryptography and
anonymity. But in last three years there is a flurry of reports relating
to hacking, ransomware, bad actors involving national security and
Ponzi schemes.
In a report published on April 12, Bloomberg said
that a cryptocurrency expert was sentenced to more than five years in
prison after pleading guilty to helping North Korea evade US sanctions.
In
another article published by Bloomberg on May 13, it was reported that
tax and financial crimes officials from the UK, US, Canada, Australia
and the Netherlands, a group known as the J5, met in London to share
intelligence and to identify sources of cross-border illegal crypto
activity. The officials specifically focused on emerging trends in
decentralized finance and nonfungible tokens, or NFTs and had identified
a billion dollar Ponzi scheme.
The report goes on to add that
the ease with which crypto transactions can cross international borders
has necessitated closer collaboration between countries. It also said
that the US IRS has pivoted to making crypto one of the agency's top
enforcement priorities. India cannot afford any compromise on all these
fronts.
Cryptocurrencies and trading in virtual digital assets
has to be brought within the ambit of FEMA and all intermediaries
mandated to maintain full KYC records. India's message should be loud
and clear, we welcome the innovation and technology, but this isn't a
playground for fraud. (Satish Reddy is a former Commissioner
(Customs & GST) and presently founding partner of SKR Tax &
Technology Consultants LLP)
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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82.60 |
UK Pound
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106.35
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102.90 |
Euro
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91.00
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87.90 |
Japanese
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54.30 |
52.70 |
As on 16 Aug, 2024 |
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