A large and fast-growing digital-led economy, widespread availability of highly skilled tech talent, a thriving startup ecosystem, and favorable demographics are all the right ingredients for India to become a global leader in the Web3 and VDA sector. India is poised to be the world’s third largest economy, and Web3 holds immense potential to be a key driver of India’s digital economy dominance. Make in India, for the world.
The 2023 Geography of Cryptocurrency Report shows India leading the world in grassroots crypto adoption. The recently released India’s Web3 Landscape Report 2023 by Hashed Emergent states India has one of the largest Web3 ecosystems in the world, boasting 1,000+ startups, with Bangalore being the major hub. Electric Capital’s latest Crypto Developer Report says India has 12% share of crypto developers while the UK, Germany, and France have >5%. All these data sets point to one undeniable truth: India has the potential and is destined to be the global hub of Web3 activity.
However, there is an urgent need to build upon and expand the regulatory and compliance progress made over the last two years, including recognizing and defining Virtual Digital Assets (VDA) in Feb 2022, securing global consensus on regulations during India’s G20 Presidency, and granting Reporting Entity status for VDA Service Providers (VDASPs).
Bearing this in mind, and driven by passion and commitment to see India assume leadership in the global Web3 and VDA space, CoinSwitch is proposing the below HODL strategy and request for inclusion in the 100-day agenda of the new government and the upcoming July 2024 Union Budget:
A HODL strategy for crypto regulations
Harness: In order to Harness the untapped potential of Web3 to improve the Ease of Doing Business & Ease of Living, there is a need for focused government intervention to give greater attention to the different elements that comprise the Web3 sector — entrepreneurs, developers, tech workforce, service providers etc. — and to set up Centres of excellence, focussed skill-development programs, regulatory sandboxes, etc. The mainstreaming of the Web3 sector is a crucial first step toward its recognition and growth.
Operational Efficiency: The Union Budget in 2023 proposed a simplification of Know Your Customer (KYC) process. The recent Financial Stability and Development Council (FSDC) also discussed strategies for prescribing uniform KYC norms, inter-usability of KYC records across the financial sector, and simplification and digitalization of the KYC process. More than a year after the VDA sector was brought under the ambit of Prevention of Money Laundering Act, VDA service providers still don’t have C-KYC access. Besides KYC simplification, C-KYC access must be enabled at least for FIU-IND registered compliant exchanges, in order for them to fully and seamlessly comply with their compliance obligations under the FIU registration. Similarly, even after the Supreme Court verdict from 2020 (IAMAI Vs RBI), several banks deny banking services including Merchant Category Codes for VDA sector/transactions. There is an urgent need to usher in Operational Efficiency in implementing these existing provisions, for the benefit of customers, businesses as well as for the Government.
Develop: The maiden Budget of the next government in July 2024 is an excellent opportunity to Develop a customer-friendly tax regime for the VDA sector and re-examine the prescriptions made in the Feb 2022 Union Budget. High rate of TDS, disallowing offset/carry forward of losses, and a flat 30% tax on gains has forced Indian VDA users to shift their trading and business to non-compliant offshore exchanges (and other informal channels) resulting in loss of revenue to the Government and increasing the AML/CFT risk and threat. With greater Government oversight via the PMLA and other provisions introduced since Feb 2022, it is an opportune time to reduce the rate of TDS on VDA transactions to 0.01%; allow for set off or carry forward of losses arising from transfer of VDAs as per the prevailing income-tax law; and bring the tax on VDA gains, set at flat 30% tax, on par with other capital assets.
Lead the Way: Levering its leadership position from the recent G20 Presidency, India must Lead the Way by regulating digital assets. While a comprehensive legislation for the VDA sector might not be possible within the first 100 days, the Government must introduce a discussion paper addressing all aspects of regulation and form a consultative committee to engage with all stakeholders including the industry. This can be the starting point toward eventually creating a robust regulatory framework for VDAs in India, one that fosters innovation in the sector and mitigates the accompanying risks.
We believe the implementation of the above HODL strategy in the first 100 days of the next Government will enable and accelerate the development and growth of the Web3 ecosystem in India, creating a win-win situation for all concerned stakeholders.
