India’s taking a go-slow approach to crypto

The world’s largest democracy hasn’t rolled out the welcome mat for crypto. Does that mean it’s missing its crypto moment, or avoiding the technology’s growing pains?

Cricket bat hitting a crypto ball

So far, India has held back on introducing crypto-specific legislation domestically, taking more of a wait-and-see approach.

Illustration: Christopher T. Fong/Protocol

With China closing itself off to crypto, the sector’s hopes turned to India as the next big thing. The world’s largest democracy outgrew China in 2021, and a population that embraced smartphones and new payment technologies made it seem like a natural market.

But Coinbase suffered an embarrassing reversal when it tried to enter India with a splash. CEO Brian Armstrong traveled to the country in April to talk about Web3 as his exchange began offering services there. Banking regulators shut it down by abruptly cutting off access to India’s payments infrastructure.

The co-founders of WazirX, India’s largest crypto exchange by volume, relocated to Dubai. While they maintain that they still have a headquarters in Bengaluru, the company now says that it is a “remote-first organization,” with employees who are free to work from wherever.

A recent hike in crypto taxes and mixed signals on how India might regulate digital assets have left the industry in limbo, despite burgeoning venture investment. Balaji Srinivasan, a former partner at a16z and Coinbase CTO, called India’s approach a “trillion-dollar mistake” in an interview last year.

India doesn’t seem to view the stakes the same way, and its go-slow approach may be vindicated by the recent crash in crypto prices and disasters like the implosion of Terra’s UST stablecoin and the ongoing hacks draining funds from DeFi projects. Officials have also signaled that they don’t think India can rein in crypto on its own, given the global nature of the technology.

So far, India has held back on introducing crypto-specific legislation domestically, taking more of a wait-and-see approach. Richard Lyons, a professor and chief innovation and entrepreneurship officer at UC Berkeley, told Protocol that Indian regulators seem to be letting other jurisdictions experiment with regulation first. “The idea is [they] don't have to be on the vanguard of creating it,” he said. “[They] just need to be flexible enough in the future to adopt it.”

Indian Prime Minister Narendra Modi noted at the World Economic Forum in Davos that crypto is “an example of the kind of challenges we are facing as a global family with a changing global order,” and that governments around the world would need to take “collective and synchronized action.”

Indian Finance Minister Nirmala Sitharaman also emphasized that the Indian government is going to take a more cautious approach to crypto regulation, saying that “it can’t be rushed” and that more information is needed.

"Our intention is in no way to hurt this [innovation around crypto] … but [we need to] define for ourselves,” Sitharaman said in April at Stanford University. She stressed that the government is open to blockchain innovation and has called the technology “absolutely imperative.”

In the meantime, India seems content to tax crypto, even if that means scaring away some traders and companies. A 30% income tax on crypto came into effect April 1.

On top of the income tax, a 1% tax on all transactions above 10,000 rupees, or roughly $130, comes into effect July 1. Smaller transactions that add up to 50,000 rupees in a year are also taxed. WazirX executives strongly criticized the tax, saying it would drive liquidity out of the market.

A 28% goods and services tax on crypto payments is also reportedly being considered, and several members of parliament have called for crypto to be taxed like casino and lottery earnings.

Many Indian users have reportedly moved to decentralized exchanges that don’t collect know-your-customer data in an attempt to avoid taxes, according to the Times of India. Those users may face a challenge converting their crypto to fiat, at which point taxes might also be imposed.

The government isn’t completely opposed to digital currencies. The central bank’s annual report published last month outlined a three-step phased approach to introducing a digital rupee, set within the Union Budget for fiscal year 2022-23. India joins dozens of other countries, including the U.S., in seriously exploring a central bank digital currency and its pros and cons.

India could be moving closer to a formal crypto policy. Ajay Seth, secretary of the Finance Ministry’s Department of Economic Affairs, said that consultation papers are “fairly ready,” after discussions with both the International Monetary Fund and the World Bank. And signs point to some accommodation with cryptocurrency — not a China-style prohibition.

"Whatever we do, even if we go to the extreme form, the countries that have chosen to prohibit, they can't succeed unless there is a global consensus," Seth said.

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