Establishing a favorable legal regime is crucial for the development of the financial market in India, especially considering that the middle class is expected to reach 90% of the population by 2039.
Financial market regulation involves government control, which contradicts the decentralized nature of blockchain technology (DLT). The challenge lies in finding a balance between freedom of transactions and government oversight, since issuing currency is a sovereign function.
Current uses of blockchain technology in the cryptocurrency market
1. Cryptocurrency payments between users that can be made through wallets, cryptocurrency exchanges and brokers, including stablecoin transactions.
2. Trading and Investing on Centralized Cryptocurrency Exchanges.
3. Fundraising for projects through Initial Coin Offering (ICO) and Initial DEX Offering (IDO).
4. Trading in derivative financial instruments based on cryptocurrency assets.
5. Non-Fungible Token (NFT) operations and verification of ownership of unique digital objects such as images, videos, audio files or game items.
6. The use of crypto applications and platforms based on decentralized finance (DeFi).
Cryptocurrency Regulatory Framework
In March 2020, the Supreme Court of India overturned the ban on cryptocurrencies. The government then introduced the Cryptocurrency and Official Digital Currency Regulation Bill, 2021. This bill, which is currently under revision, aims to recognize cryptocurrencies as regulated assets under the Securities and Exchange Board of India (SEBI).
The current regulatory status remains undetermined. On behalf of the Ministry of Finance, Minister of State for Finance Shri Pankaj Chaudhary said: “Crypto-assets are by definition borderless and require international cooperation to prevent regulatory arbitrage. Therefore, any legislation on the subject can only be effective with significant international cooperation to assess risks and benefits and develop a common taxonomy and standards.
The main objectives of establishing a favorable legal regime are, on the one hand, to ensure the protection of the rights and legitimate interests of investors who use DLT technology for financial transactions and, on the other hand, to protect the state against the use of cryptocurrencies in financing terrorism, tax evasion and other illegal activities. The regulator should therefore develop a framework that addresses the following tasks:
1. Determine the legal status of cryptocurrencies, which may include categorization as securities, commodities, etc.
2. Creation of a licensing mechanism for cryptocurrency exchanges and payment systems that will provide robust protection for investors against fraud.
3. Implementation of transparent customer identification procedures and compliance with anti-money laundering regulations.
4. Develop a favorable tax regime that is competitive with other jurisdictions, making India attractive for launching startups and crypto projects.
According to Kar Yong Ang, financial market analyst at broker Octa, “The most important issue for the regulator to consider is the regime for digital assets that include cryptocurrencies. If the tax rates are high (above 5%), a large part of individuals carrying out cryptocurrency transactions will continue to remain in the gray area, which on the one hand will reduce tax revenue and on the other hand increase the risk of fraud and fraud for consumers of cryptocurrency.
About Okta
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