Crypto will never be a legal tender: Finance Secretary on future of digital currencies

Team Udayavani, Feb 4, 2022, 10:09 AM IST

Cryptocurrency will never be a legal tender, Finance Secretary T V Somanathan said on Thursday clearing the air on the legality of private digital currencies in the market.

The 2022-23 Budget has given a clarity on taxation of virtual digital assets and proposed to impose a 30 per cent tax on gains made on such trades, besides subjecting crypto transactions, beyond a threshold, to 1 per cent TDS.

In an interview with PTI, Somanathan said just like gold and diamond, despite being valuable, are not a legal tender, private cryptocurrencies too will never be a legal tender.

“Crypto will never be a legal tender. Legal tender means by law it is accepted in settlement of debts. India will not be making any crypto asset as a legal tender. Only ‘Digital Rupee’ of the Reserve Bank will be a legal tender in India,” Somanathan said.

Except El Salvador, which in September last year adopted Bitcoin as legal tender, no other country has made crypto a legal tender.

India is working on legislation to regulate cryptocurrencies, but no draft has yet been released publicly.

In the meanwhile, a central bank-backed digital currency will start circulating in the next fiscal to usher in cheaper, more efficient currency management.

From April 1, 30 per cent tax will have to be paid on income from cryptocurrencies.

Income tax return form from next year will have a separate column to declare gains from crypto.

Asked why the government has not listed private crypto regulation bill for the ongoing Budget session, despite listing it in the previous Winter Session in December, Somanathan said “it was felt that wider consultation is necessary before the legislation is brought on what should be the nature of regulation, should there be a regulation or should it be only taxation”.

The government had listed for introduction the ‘Cryptocurrency and Regulation of Official Digital Currency Bill’ for regulating cryptocurrencies in the previous session of Parliament.

The bill comes amid concerns over such currencies being allegedly used for luring investors with misleading claims.

Currently, there is no regulation or any ban on use of cryptocurrencies in the country.

“We are in a democracy. In a democracy, the government starts with something but then there is feedback. Government is listening to that feedback; based on that feedback they are yet to come to a final conclusion on how it should be done. Meanwhile, the questions of tax clarity cannot wait forever because volumes had become very large,” Somanathan said.

He further said that regulation of cryptocurrencies will have to take into account the international consensus since there would be cross-border transactions.

“Some international elements will have to be tied up to make the regulation effective. All those consultations are on,” the finance secretary said.

The crypto market in India grew 641 per cent in the year through June 2021, according to an October report by industry research firm Chainalysis.

As the country keeps pace with the global move towards virtual financial instruments, the Budget has also announced the India’s central bank will launch ‘digital rupee’ in the next fiscal.

India favours a global consensus on regulating cryptocurrencies as a local response may not yield the desired results because these instruments are traded on the internet and not tied to any jurisdiction, Economic Affairs Secretary Ajay Seth said.

“Regulation or ban whatever it is, appropriate policy response to crypto assets is in the making. How long, I am unable to put a finger on. I don’t see this happening in the Budget session for sure. The work is in progress,” he said when asked whether the government would come out with a regulation on private cryptocurrencies in the ongoing Budget session of Parliament.

He further said discussions on regulating cryptocurrencies would begin at G20 — a grouping of developed and developing economies.

“Whatever regulations are brought in, unless there is a global consensus they won’t succeed. It may succeed 80-90 per cent but it will not be a comprehensive solution. So at this point of time, we are interacting with various stakeholders, especially the institutional stakeholders and not crypto stakeholders.

“Stakeholders which have the mandate on monetary policy, fiscal policy, financial stability and development economics are in touch. I do expect that in the current year the discussion would be starting in the G20 forum on appropriate global response to crypto assets,” he told PTI in an interview.

The first Finance Ministers and Central Bank Governors Meeting of G20 under the presidency of Indonesia is scheduled to begin on February 17.

The second meeting would take place in April, and the third in July.

Seth further said two actions have been announced in the Budget — first, a central bank promoted digital currency and to facilitate that whatever amendments are needed to the RBI Act have been put in the Finance Act.

So, he asserted, the digital currency promoted by RBI would be a reality in 2022-23, as announced in the Budget by Finance Minister Nirmala Sitharaman.

“Digital currency will also lead to a more efficient and cheaper currency management system. It is therefore proposed to introduce digital rupee using blockchain and other technologies to be issued by the Reserve Bank of India, starting 2022-23,” Sitharaman said in her Budget speech.

A blockchain is basically a digital ledger that records transactions that can be tracked.

The second measure is regarding tax implication relating to crypto assets, Seth said, but added that having tax clarity does not mean the government is legitimising it.

“Every income is acceptable (for taxation purposes) except exempted income like agriculture. Budget has brought that clarity plus the tracing mechanism through TDS has also been provided,” he added.

The Budget has proposed a 30 per cent tax on income from transactions in such assets, and 1 per cent TDS (tax deducted at source) on transactions in these asset classes above a certain threshold to trace the source.

Gifts in crypto and digital assets would also be taxed, the Budget announced.

Currently, there are no particular regulations or any ban on trade of private cryptocurrency in the country.

The government in December had expressed its intention to bring a bill on cryptocurrency seeking to “create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India” in the last session of Parliament.

However, it could not be introduced as the Cabinet had not cleared the draft bill.

The RBI has been vehemently opposing private cryptocurrencies as they could have implications on national security and financial stability.

According to a survey, central banks, faced with dwindling usage of paper currency, are seeking to popularise a more acceptable electronic form of currency (like Sweden).

Also, jurisdictions with significant physical cash usage are looking to make issuance more efficient (like Denmark, Germany, Japan and the US).

Even the RBI is of the opinion that global coordinated action is required and central banks need to come out with digital currencies to meet the need of the public and prevent any damage arising from use of private virtual currencies.