Relevance of cryptos rising amid war

Of late, cryptocurrency is getting a lot of attention. And reasons are very different this time. Amid the Russia-Ukraine conflict, cryptocurrencies are being used to raise money for Ukraine to defend itself from Russian invasion. Supporters of Ukraine are donating digital currencies to help fund the nation's defense and aid humanitarian efforts. This is in a way has bolstered crypto's reputation. While cryptocurrencies are being used for defending a nation, some analysts have also raised fears that Russia can evade the sanctions that have been imposed by the US, Europe and other nations for waging a war against its neighbour. As per some reports, sanctioned Russian oligarchs could try to use crypto to mitigate some of the impact of sanctions. Amidst such debates, the relevance of digital assets like cryptos seems to be rising in the world stage.

Meanwhile in India, crypto exchanges are facing a slump in investors' interest. Higher tax rate on earnings from crypto assets in India has started to impact the volume on crypto exchanges in the country. Trading volumes on cryptocurrency exchanges have declined by 30-70 per cent after hitting a monthly peak on March 31 owing to new taxation measures. On April 3, volumes at these trading platforms were down 30-50 per cent compared to March 31, according to data compiled by secondary research firm Crebaco, but were steady compared to April 2. From April 1, the new tax regime has kicked up. Now, traders or investors are required to pay a flat 30 per cent tax on gains made on virtual digital assets like cryptocurrencies. A tax deducted at source (TDS) of 1 per cent will also come into effect from July. Further, unlike in other asset classes, retail investors will not be able to set off losses incurred against crypto coins, claim expenses or acquisition costs, or benefit from a reduced slab for long-term capital gains under the new tax regime.

These two scenarios indicate that virtual currencies are gaining interest among investors across the world. Such interest may dampen temporarily due to unfavourable policy environment, but the movement towardsdigital currencies is real. Therefore, it is better for the government to regulate the space than outright banning such assets. As seen in past instances, banned geographies have seen rise in unaccounted crypto transactions. This not only gives rise to fears of money laundering, but also leads to losses in tax revenues.

This takes us to the question of Indian quest for regulating this space. Currently, India is considering a law regulating digital currencies. Before the law coming into force, earnings from such assets have already been liable to taxation. It indicates the initial willingness of the government to resist the temptation of putting an umbrella ban on these assets. Notably, cryptocurrencies work on blockchain technology. This technology has many use cases that can be leveraged to provide better governance. As crypto assets are allowed, the innovation in the blockchain space will rise. Therefore, it is always better to regulate an emerging asset class that leverages technology than walking away from it. Such approach will be a win-win for India.