2022 budget: Blockchain, cryptocurrencies and budget regulation

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With the Reserve Bank of India being reluctant in its approach to cryptocurrencies in 2018, to an inclusion of cryptocurrencies in the Union budget for 2022, there is a lot to think about and consider about the world of virtual currencies. To begin with, cryptocurrencies are digital currencies designed to simplify online transactions and to meet the need for a medium of exchange, similar to physical money, as we all know. The most popular cryptocurrencies are Bitcoin (BTC) and Ethereum (ETH). While the Bitcoin blockchain was invented to traditionally transact bitcoins along the network, Ethereum is a blockchain platform that facilitates the use of smart contracts, which can be thought of as digitally enforced business agreements.

In other words, cryptocurrencies are a practical implementation of a versatile and intelligent tool named blockchain. Blockchain is a shared data pool system (open to all participants), in which each packet or block of data is uniquely chained together with other blocks, creating an immutable network of transactions. Blockchain technology offers key advantages for the development of the current financial system; First, it keeps a record of transactions (or all data transmitted over a blockchain network). This not only makes it possible to trace the path taken by a commodity through the parties involved with great transparency, but also creates an irreversible chain of unique blocks, resulting in secure economic exchanges. Secondly, a blockchain system encrypts goods with unique fingerprints (called keys), which further helps in sourcing only genuine goods and reduces losses due to counterfeit goods. Third, transactions that take place in a blockchain are irreversible and immutable, which means two things: (a) any payment once made, cannot be undone and can only be resent with another transaction, which is also recorded and (b) all data once entered into a blockchain cannot be altered, making it a secure platform for processing payments.

Decentralized finance in India
Through the positive aspects of blockchain, we looked at a common topic for a decentralized financial system that can transform our perception of payments. Decentralized finance (or DeFi) is a simplified financial system that eliminates the majority of the time consumed by intermediaries, leading to faster transactions. DeFi, through its introduction, can generate breakthroughs in the financial system by solving inefficiencies and bringing new tools in the form of blockchain and smart contracts. It uses blockchain to create a platform where users can perform almost all economic exchanges by exchanging cryptocurrencies to borrow/lend credit without the usual hassles often caused by a middleman. The absence of a mediator in DeFi makes it a much better alternative to the current banking system. DeFi also celebrates the notion of smart contracts, seen in Ethereum. Smart contracts also reinforce the ideology of transparency, which already exists in a blockchain; the open nature of blockchain allows all parties to analyze the terms involved in a particular transaction or other agreement, forming a safe and legal environment for contracts to exist. Moreover, the great maneuverability that the smart contract offers (its ability to include any condition for triggering transactions) increases the overall efficiency of DeFi as a financial system. Another successful application of DeFi and blockchain is present in the form of NFTs (Non Fungible Tokens), which are digital tokens that can be traded within the network. NFTs these days are in high demand; some digital arts and designs sell for up to millions of dollars and keep increasing in value (well, most of the time). These assets are highly valued due to their originality and ability not to be duplicated, which matters in today’s digital age. Buying NFTs today is like owning a one-of-a-kind piece of art such as Mona Lisa or The Starry Nights. Just look at the Nyan Cat, for example, it’s just a GIF of a pixelated cat with a rainbow trail gliding through space, and is worth around $600,000. Another NFT, CryptoPunk #3100 sold for over $7,500,000, illustrating the endless capabilities of DeFi.

The digital rupee and the fiscal settlement
The Minister of Finance has wisely announced the introduction of a Central Bank Digital Currency (CBDC) to be made by the RBI from the financial year 2022-23. This move will not only reduce the cost of currency management but can also propel India into a much better position in the digital space. It will also make India one of the few countries to implement CBDCs and have its own centralized digital currency. The introduction of the digital rupee can also meet various DeFi principles and can help accelerate economic growth. It is also said to be using blockchain and other technologies to accomplish what could possibly be a valuable addition to the current financial system.

Another inclusion came in the form of taxation of income from crypto and other digital assets (including NFTs). Despite the high tax rate of 30% (the highest tax rate on any commodity) on income from assets, investors and marketers are pleased with the much-needed clarity provided on cryptocurrencies and their classification as a new asset class. A rare case where manufacturers are content with such a tax rate. The budget also recalls a provision of a 1% withholding tax (TDS). Moreover, the introduction of a tax bracket does not mean the absolute legalization of crypto transactions, it is still a matter of reflection for the government and the RBI who have not yet taken a decision to legalize the payments cryptographic, but simultaneously the decision also shows that blockchain and DeFi are key instruments in the digital age, and banning it is not advisable.

Regardless of the direction of crypto regulation, the principles of DeFi have been taken into account in India, and when it comes to the tax rate on digital assets, it is expected to come down, resulting in more flourishing transactions. Finally, cryptocurrency currently represents the risk of the investor but certainly the gain of the nation!

Amit Kapoor is president of the Institute for Competitiveness, India and teaches a course on reinventing capitalism at Stanford University. Praveen Senthil is a Research Fellow, Institute for Competitiveness, India.

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