Legality of Cryptocurrency

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Is Cryptocurrency legal?

India currently has no special legislation to regulate virtual currencies and cryptocurrency. However, they have a 30% tax under the Income Tax amendment to enable taxation on virtual assets and currencies. With the launch of the digital rupee, we are moving a step further towards adapting to the virtual revolution. However, the legal status of cryptocurrency differs from country to country.  

Difference between digital currency and cryptocurrency

Digital currency is often confused with cryptocurrency. A digital currency has features similar to the actual currency. For instance, the digital rupee or digital dollar is a digital currency, meaning real currency available in a digital format. Digital currency can be used for all kinds of monetary transactions. 

Cryptocurrencies do not have legal tender status. This means crypto cannot be used to purchase and sell goods and services. Cryptocurrency is an investment similar to gold or any other bond. Simply put, Cryptocurrency is not money. 

Legal Status of Cryptocurrency in India

The Indian government has repeatedly gone back and forth on legalising cryptocurrency. However, some actions taken by the authorities indicate the intent to provide and recognise the cryptocurrency’s legal status slowly. Cryptocurrency has yet to be a regulated payment mode in India.  

At Union Budget 2022, our finance minister announced that any gain from virtual digital asset transfer, including NFTs and cryptocurrencies, would be taxed at 30 per cent, and 1% would be deducted at the source. However, he stated that taxation on virtual assets does not imply legalising cryptocurrencies. 

While this may be controversial, the government hasn’t recognised the income earned from cryptocurrency as a criminal charge. Hence, we can safely assume that the government indirectly agrees that income from cryptocurrency is revenue generated from a lawful source, and there is no ban on it.

Why is Cryptocurrency a problem for the Government?

While cryptocurrencies have many advantages and are gaining popularity, there are a few constraints to legalising them from the government’s perspective.

  • The decentralised nature of cryptocurrency makes it more difficult for the government to trace it. 
  • Since Cryptocurrency is fairly new, the general population is unaware of its security features, making them more prone to fraud. 
  • Crypto prices are highly volatile, with huge jumps and drops. It is not best suited for people who invest heavily following the trend. 

The U.S. President’s Impact

In March 2022, the U.S. President, Joe Biden, signed an EO (Executive Order) acknowledging the existence of cryptocurrency. It marked a significant moment in the history of cryptocurrencies. This step was considered a drive to take Bitcoin, Ethereum, and other crypto coins closer to becoming a legitimate financial option. 

Mr Biden’s order directed the U.S. treasury department and Federal Reserve to explore the impact of cryptocurrency on national security and financial stability. Mr Biden’s executive order has been widely accepted and anticipated by the finance industry as a positive move towards the future. 

Although cryptocurrency is considered a volatile form of money, it reached its all-time high in 2021, partially due to wider acceptance by more companies in payment. A few athletes and politicians are now receiving salaries in crypto. Wall Street has created ETFs (Exchanged-traded funds) around crypto futures. 

After the price of Bitcoin, Ethereum, and many more skyrocketed, crypto tokens made splashy moves. Despite the risky wild price swings, nearly 40 million people in the U.S. have invested in cryptocurrencies. Coinbase got listed on NASDAQ in 2021, and aired with massive web traffic. 

Elon Musk Effect

The interest shown in the cryptocurrency market by Tesla CEO Elon Musk, which was back by the move to purchase $1.5 billion worth of Bitcoin, provided the token another boost. Bitcoin is now an acceptable form of payment for a growing number of retailers and online marketplaces, including PayPal, Microsoft, Rakuten, Tesla, and The Home Depot. Recently, Goldman Sachs has provide a cash loan that is back by Bitcoin.

Launch of the Digital Rupee (CBDC)

The Reserve Bank of India launched the pilot of its digital currency, CBDC, on December 1, 2022. CBDC is categorise as legal tender in a digital format. It is commonly known as the digital rupee and will be exchangeable at par with existing currencies. Digital Rupee is also acceptable for payments and a safe store of value. 

Digital Rupee is similar to the currently issued banknotes. Still, it aims at creating an additional option to use money. It is expect to facilitate easy digital transactions. The RBI also views CBDC as a way to stabilize the financial system of our economy. 

“Digital Rupee is fiat currency in a different avatar.”

CBDC is the digital twin of regular paper currency and is exchangeable with cash. However, it is not a decentralize asset like cryptocurrency, as the central bank of India regulates it. Unlike cryptocurrency, Digital Rupee can be use as legal tender to buy anything.

Need for Digital Rupee

The RBI aims to push India ahead in the virtual currency race with the launch of the Digital Rupee. The growing importance and worldwide acceptance of cryptocurrency increased the need to launch our digital presence. Here is why it was the need of the hour.

  • Blockchain technology will allow easy ledger maintenance and real-time tracking. 
  • The digital rupee will increase the transparency and efficiency of money.
  • Payment without intermediaries.
  • Reduce demand for cash and strengthen the government’s vision towards a cashless economy.
  • The payment system will be available to customers 24/7. 
  • Convenient cross-border transfers, making them less challenging and inexpensive.
  • Lower transaction costs.
  • More mobile than currency notes and will save printing, distributing, and storing costs.
  • Keeping up with the times of cashless-digital financial framework and making operations seamless.
  • Safer because it is centralize and back by the RBI.

Bottom Line

Crypto trading platforms like LotusX are witnessing a giant volume leap of investors. We all know an unregulated market is highly volatile and risky for investors. However, introducing the Crypto Bill, the Digital Rupee, and the taxation of gains from the transfer of digital assets are all favourable steps towards regulating cryptocurrency. The launch of Digital currency will strengthen the underlying technology of cryptocurrency.

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