Tag: #cryptocurrency

INTRODUCTION

A virtual asset is a digitalized representation of an item that has a proper value in a particular environment, for example, Bitcoin, Litecoin, or Dogecoin. In virtual assets, the medium of exchange or the property can be traded, transferred, or invested digitally. Over a decade virtual currencies are also considered virtual assets, virtual currencies are a digital representation of value that has a unit of account, store of value, and medium of exchange, it has also proliferated and has the potential for abuse, corruption, and illicit activity. Virtual assets have potential benefits like they could make payment easier, faster, and cheaper. The Financial Action Task Force (FATF) is an inter-governmental body that aims at preventing the laundering of money and terrorist financing.

All virtual assets are considered to be digital assets, but not all digital assets are virtual assets. Digital assets like bank records, which represent ownership are not considered to be virtual assets. The virtual asset must-have features like whether it can be traded or transferred and used for payment. If the asset is merely just ownership it is not considered a virtual asset. NFT (Non-Fungible Token) is a digital asset that is unique and interchangeable; it is considered to be a digital asset unless used for payment or investment purposes. Worldwide NFT is classified as a non-taxable asset and in the future, it should be considered that the Crypto token is different from digital NFT. Cryptocurrency is a kind of virtual currency that is distributed across an oversized number of computers which makes it impossible to counterfeit or double spend. It is a new paradigm of money. Bitcoin is the most popular cryptocurrency. Other cryptocurrencies are Binance Coin, Solana, and Cardano.

BACKGROUND

The first virtual digital asset, the digital coin Bitcoin was introduced in the year 2009 and now there are nearly 10,000 different types of different assets. In recent years the prices of virtual assets are growing rapidly. Since 2017 the government monitors the development of the virtual asset sector and it also aims to develop the market, prevent unlawful activities and improve transparency in financial transactions. The government also promotes blockchain technology so that innovation can be brought in several areas. The government helps to improve transparency in virtual asset transactions.

VIRTUAL ASSET SERVICE PROVIDER (VASP)

Virtual Asset Service Providers means organizations or persons who conduct activities related to the transfer, exchange, or administration of virtual assets. Regulating the Virtual Asset Service Provider can play an important role in preventing terrorist funding and money laundering. The Virtual Asset Service Provider is an entity that conducts –

1. Exchange between virtual assets and fiat currencies
2. Transfer of virtual asset
3. Exchange between one or more forms of virtual asset
4. Administration of virtual asset
5. Participation in the provision of financial services

FATF closely monitors the development in the crypto-sphere mostly in the virtual asset sector. With the help of G20, FATF has some standards to prevent the misuse of money, laundering, and terrorist financing. FATF standards ensure that virtual assets are treated fairly and the rules apply when they can be exchanged for fiat currencies. VASP includes virtual asset trading service providers, virtual asset safekeeping and administrative service providers and virtual asset digital wallet service providers, and virtual asset digital wallet services that are engaged in purchase and sale, safekeeping and administration, and virtual asset transactions. VASP is engaged to report their transactions to KoFIU. KoFIU set up guidelines in 2018 for anti-money laundering regulations. While dealing with VASP, details are provided about types of suspicious transaction activities while using virtual assets so the bank rejects the opening of the new account for VASP when user information is not provided.  KoFIU has oversight and supervisory function over the virtual asset sector. The government will continue to upgrade the regulatory framework to enhance supervision and risk management.

UNION BUDGET 2022

The Finance Minister announced a scheme for the taxation of virtual digital assets like Cryptocurrencies, Non-Fungible Tokens at the rate of 30%. As there is an increase in the magnitude and frequency of these transactions there is a need to provide a specific tax regime. The income which is proposed under this regime is to be computed without reducing the effect of deduction. Any loss arising out of this would not be allowed to be set off income in any other head. The Budget proposed to introduce TDS at a 1% rate on the transfer of virtual assets. Virtual Digital Asset gifts are also taxed at an applicable rate. The provisions are effective only from April 1, 2022, if a cryptocurrency is transferred before April 1, 2022, these provisions are not applicable.

It was also clearly stated that mere recognition of the digital asset under the income tax is not amounting to granting legal status. This tax is similar to a tax on gambling as it mainly focuses on the interest of an investor. By this budget of 2022, it is clear that if you hold the cryptocurrencies then income derived from these will be taxed to 30 percent and any profit generated by the cryptocurrency trade will be taxed 30 % including the gifts and transfer of these assets. The government has kept a fixed rate of 30% so that all investors pay an equal percentage to the government in the form of tax. The cryptocurrency tax method includes the HIFO method. HIFO inventory helps to decrease taxable income in the company where the highest cost of goods is sold. HIFO method is very beneficial for investors those who often use the highest cost basis coin and apply it to coin sold.

TAXATION

The tax imposed by the central government is quite harsh. The 30% tax rate and restriction to set off losses is a significant deviation from the existing tax principles. It is tough to accept that gifts with respect to digital assets are also taxed. The taxation is clearly defined. Taxation of virtual digital currency means the crypto asset will not be banned. The Cryptocurrency and Regulation of Official Digital Asset Currency Bill, 2021 was also established which threw away the concern of virtual currencies being banned in India. This is another drastic move where even this is recognized as alternate investment equity. Most probably in the future, the RBI may launch its own cryptocurrency. The identity of the payee is difficult to be found in digital asset trade, if the PAN is not available then the TDS will be 20% and provisions related to TDS can also lead to some complications. Government should also allow the gaming industry and others to be developed without the tax burden.

CONCLUSION

Taxation of cryptocurrency to 30% is a positive move as it brings some faith in the investors. The taxation and recognition of crypto is an asset for income tax but it does not provide recognition under the law. When we use cryptocurrency the transaction cost is so low and the transaction can be made at any time and there is no limit for the purchases and withdrawal. It is good that people are exposed to new kinds of digital assets. The main disadvantage of cryptocurrency is that it may have many illegal transactions and it is not possible for the government to keep track down of all of its users. There is a high risk of loss of data, if the user loses the private key to their wallet they will not get it back. Cryptocurrencies within the market are controlled by their creators and some organization. These cryptocurrencies familiarize Indians with the benefits and efficiency of cryptocurrency; it builds an appetite for crypto and employment opportunities that can be given in the field of cryptocurrency. Cryptocurrencies are a worldwide phenomenon that may replace general currencies. It progresses to a cashless society.

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REFERENCES

1. Quimbayo, C. V., & Broby, D. (2021). The Regulation of Initial Coin Offerings, Virtual Assets and Virtual Asset Service Providers.
2. Besley, T., & Persson, T. (2013). Taxation and development. In Handbook of public economics (Vol. 5, pp. 51-110). Elsevier.

This article is written by Sree Lekshmi B J, third year law student of Sastra University, Thanjavur.

WHAT IS CRYPTOCURRENCY?

Cryptocurrencies are a kind of virtual system which enables their holders to use that for digital payments. One major advantage of cryptocurrency is that distance is not a barrier and it allows individuals to send money from any part of the world to any other. An individual is not required to present there in person and the entire transaction can take place online. The term “cryptocurrency” stems from the fact that transactions are verified through encryption. Since cryptocurrency works on a high level of coding then storing it is a task and also a high level of coding is required but all this is worth it as all this encryption and high level of coding ensures the safety and security of the cryptocurrency and protects it from potential attacks.

In 2009 first cryptocurrency was made although its developer is still unknown and there are various theories regarding the origin of Bitcoin, the first cryptocurrency The temptation to trade for profit is at the root of much of the excitement with cryptocurrencies, with speculators driving prices up at times.

HOW DOES CRYPTOCURRENCY WORKS?

They can be termed as blockchain technology, a blockchain that stores all the data in a virtual format “Mining, which requires using computer processing power to solve complex mathematical problems” in order to earn coins, is how cryptocurrency units are created. If you are interested in buying cryptocurrencies then there are a lot of ways to proceed for the same one is going through a broker or using various kinds of apps available these days.

If you own cryptocurrency, you don’t own anything tangible. You have a key that allows you to move a record or a unit of measurement from one person to another without the use of a trusted third party.

IS CRYPTOCURRENCY SAFE?

Blockchain technology is commonly used to create cryptocurrencies. This method followed to create cryptocurrencies is a long and complex process but it also ensures full safety and a secure environment is created for the same.

STATUS OF CRYPTOCURRENCY IN INDIA

Currently, there is no rule in place in the country regarding the usage of cryptocurrencies and the citizens of India are free to trade in cryptocurrency. The Supreme Court of India also passed a judgment and overturned the Reserve Bank of India’s (RBI) rule prohibiting banks from enabling crypto transactions in March 2020. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is set to be introduced in Parliament during the Winter The session, and it aims to outlaw all “private cryptocurrencies”. But still, there are some speculations about that bill and how will the global market react to that bill.

CHALLENGES OF CRYPTOCURRENCY

Security risks: If hackers and bad individuals get access to virtual currency, they can create as cryptocurrency as much as they wish as once the system gets hacked, they know how to make virtual cryptocurrencies hence they can manufacture false virtual currency or steal virtual currency. There are many games that allow the sale and purchase of items in cryptocurrency therefore, a lot of users visit that site to buy those virtual currencies.¹ They require certain components. Many WoW gold-selling websites are untrustworthy and susceptible to hacking. Many users have expressed their dissatisfaction with paying real money for nothing or for phony virtual currency.

Concerns about cryptocurrency systems collapsing: Because virtual currency is not issued based on demand and supply, it will cause economic problems in a number of virtual communities. Cryptocurrencies also face some threats from Inflation and economic problems that can cause them to collapse.

Impact on real-world monetary systems: Because some virtual currency systems are linked to real-world monetary systems, they may have an impact on real-world money demand and supply. Allowing consumers to buy virtual and real products and services using virtual currency on some platforms, for example, may lower the demand for actual money. Users will no longer use real money to purchase items; instead, they will use virtual money. Since there will be sites that will allow users to buy things in cryptocurrencies therefore the use of real money will be severely affected and will also cause fluctuations in its prices.

Money laundering is a concern that is very likely to increase as a result of the use of VC, particularly with platforms that allow users to swap virtual currency for real money. Ill effects of cryptocurrency are already seen in Korea where around 38 million dollars were illegally acquired by the gang of 14 people.

Unknown identity risks: Because most virtual currency platforms, such as social games and social networks, do not require authentication, financial transactions are difficult to track. There is no way to identify the source of the virtual currency that is created or cashed out.” This makes it impossible to track transactions if money laundering is suspected. Furthermore, offenders will be able to receive rewards in virtual currency for their crimes if they have an anonymous identity.

CONCLUSION

It can be easily concluded that though Cryptocurrencies provide an efficient payment option it also has some drawbacks and governments of counties all over the world need to work on them to bridge those gaps. It also offers an alternative payment mechanism, in addition to real money, that allows users to conduct financial transactions like buying, selling, transferring, and exchanging with ease.² Cryptocurrency platforms, despite opening several channels for digital financial transactions and providing a new form of currency with many procedures and methods, are not properly monitored and regulated. There have been various studies on the fields of cryptocurrency and those studies have highlighted a lot of issues being faced by the industry. Lack of legislation regarding it being the major issue.

References

• What is a cryptocurrency and how it works? https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency#:~:text=Cryptocurrency%20is%20a%20digital%20payment,to%20send%20and%20receive%20payments.&text=When%20you%20transfer%20cryptocurrency%20funds,is%20stored%20in%20digital%20wallets.
• Jani, S. (2018). The Growth of Cryptocurrency in India: Its Challenges & Potential Impacts on Legislation. Research gate publication.

This article is written by Dalima Pushkarna student at Dr. Ram Manohar Lohiya National Law University, Lucknow.