The Indian government has enacted a new anti-laundering law that will also affect cryptocurrency markets. In an effort to tighten its supervision of digital assets, the government will monitor transactions between virtual tokens and cryptocurrencies. In the past, these transactions have not been monitored and users could transact anonymously.
As per the notification that the finance ministry released in early March, all local crypto exchanges and any entity that deals with cryptocurrencies and virtual tokens is required to conduct Know Your Customer due diligence for verification. In addition, they are to keep records of any transaction that is worth at least $12,200 for at least five years.
Indians have caught on to the rest of the world in the use of e-currencies. Most of the online gaming and some merchants have already started to accept various coins. Many of these platforms accept e-currencies along with fiat money. Some of the newest online casinos in India are purely crypto platforms, which shows the growing popularity of virtual tokens.
Cryptocurrencies took the world by storm, offering benefits that were not available with fiat money. One of such benefits was the anonymity part. While it was good, it allowed people to commit financial crimes by money laundering and ‘cleaning’ blood money without being detected. Authorities around the globe have been looking for ways to reign in on these crimes with regulations and policy changes.
Indian authorities move in sync with a global push to curb money laundering using digital assets. These rules have been running mainstream money conduits such as stock brokers and banks. Countries like Canada had placed virtual currency bodies under their money laundering units as early as 2016. Other countries, such as South Korea, are creating a policy to reign in financial crimes pegged to crypto coins.
In 2021, India faced its largest money laundering scare yet when authorities discovered a stash of about $488 million that had been laundered in the year 2020 alone. They suspected that much more had been laundered without being noticed.
When the use of cryptocurrencies picked up in late 2020, India did not have a policy to regulate it. It was hard to keep track of what was happening in the market and prevent criminal elements from hiding in the system. However, in 2022, the government saw an opportunity to make some revenue from the currencies.
It imposed a 30% tax on any income that was gained from cryptocurrencies and a further 1% was deducted at the source for any monetary gains that exceeded a given threshold. Besides, gifts in the form of crypto-assets were also subjected to tax. These drastic rules led to a sharp fall in trading volumes. In three months, the trading volumes were a mere 10% of the initial figures.
Unfortunately, this had a bad effect on crypto entities that had opened shop in the country. Many of them closed down, while others moved to crypto-friendly countries such as El Salvador and Dubai. In the end, the government lost the little revenue it would have earned from the industry.
Before the introduction of the policy, there was rampant advertising of cryptocurrencies. However, the government introduced a pre-emptive ban on any crypto advertisement. It also prevented sponsorships of any sports teams. The government has also lobbied other governments, especially under the G20, to come up with collective measures.
In the meantime, in Dubai, one of the countries with relaxed crypto laws, there was an influx of companies that offered crypto services. In the first quarter of 2022, these companies made 16% of the new company registration requests. The market is expected to grow bigger in 2023.
There has been growing uncertainty that India is likely to ban cryptocurrency trading in the country. This has not happened, even with the introduction of strict rules. Many analysts are changing their outlook and projecting that e-currencies will continue to work in India into the foreseeable future despite the strict regulation.
Unfortunately, the strict regulation has affected the growth of the industry heavily. It may take several years before the industry returns to the volumes it once traded, given that there is little chance that the laws will be relaxed in the future. For those planning to invest in e-currencies, India might not be the best market to do so as of now.
Everyone is speculating about what might happen. To be on the safe side, it is good to consider investing in offshore accounts where the laws are relaxed, as you are guaranteed better returns. On the other hand, those that would like to use it to make transactions can continue doing so without worry as they are still accepted in the country.
Not all the laws are bad when it comes to regulating cryptocurrency. When the industry is not regulated, there is always a chance that criminals may infiltrate and freeze unsuspecting investors out of their money. These individuals cannot then be tracked, as there is no mechanism in place for that. Yet, with the right regulation, one is assured that digital assets are protected as much as others.
The taxes are a little harsh, especially for an industry that has yet to pick up. It will negatively hamper growth and the development of other solutions based on cryptographic technologies. Should the central bank introduce its own virtual currency, we would see a shift in the market as it would receive a more favourable status compared to the private ones.
Overall, India’s movements in the cryptocurrency industry are good and bad. While users will be protected from theft and predatory practices, growing wealth will be difficult due to the harsh tax regime.
