With The Crypto Committee Set To Submit Its Report On Bitcoin Regulations, Cryptocurrency Exchanges Speak On The Unaddressed Issues

Amid huge restrictions, investigations and regulatory threats, cryptocurrency, since attaining its highest peak ever in December, last year, now continues to be on the downside.

Currently trading at $6.6K, Bitcoin has apparently lost its golden charm. However, cryptocurrency proponent John McAfee, still high on Bitcoin, is betting it to cross $1 Mn. Countries like China, Morocco, Ecuador, Bolivia, Bangladesh and Nepal have already banned cryptocurrency exchanges and ICOs.

Microsoft founder Bill Gates who once stated: “Bitcoin is better than the currency” has now lost his faith in Bitcoin. He recently said, “I was wrong about Bitcoin.” Gates is not the only one, a huge number of traders are frustrated with the ongoing hide and seek regulation.

Tron, Ethereum and Ripple are some other cryptocurrencies, the crypto enthusiasts are now betting on. However, keeping the ‘Solaris’ effect aside, the reality is not very encouraging. As the Solaris author Stanislaw Lem puts it, “Every science comes with its own pseudo-science, a bizarre distortion that comes from a certain kind of mind.”

Speaking to Inc42, Sathvik Vishwanath, co-founder and CEO of Unocoin stated,

“Of course, cryptocurrency has its own limitations; but so does the conventional currencies.”

After Coincheck, Japan underwent the largest cryptocurrency hack ever, the Financial Service Agency has further hardened their cryptocurrency regulations in the country. As a result, five cryptocurrency exchanges out of 16 licensed and 11 operating with license pending have now shut down their operations and more are expected to follow the line, citing the regulatory tweak.

In India too, the Central Board Of Direct Taxes (CBDT) has purportedly asked the cryptocurrency traders who were earlier served notices to pay around 30% tax on the capital gain. As part of their self-regulatory measures, a number of the Indian banks have already stopped offering their solutions to cryptocurrency exchanges.

Ajeet Khurana, Head, Blockchain and Cryptocurrency Committee, IAMAI and CEO of Zebpay takes banks’ measures as inaccurate and insubstantial. “RBI has never banned Bitcoin or cryptocurrencies. Hence such a reaction from banks are rather confounding,” Ajeet said.

Indian cryptocurrency community which has now grown over 5 Mn too has witnessed the downfall, as the number of daily new users has gone down by more than 50%, said Ajeet.

Amid growing uncertainties, many cryptocurrency exchanges have shut down their operations including a few major ones such as Belfrics India, ETHX India and BTCX India amongst others.

As Ponzi schemes and crimes in the name of Bitcoin are still operational across the country, N. S. Nappinai, Advocate, Cyberlaw, Cryptocurrency and ICOs, Supreme Court pointed out, “Ambiguity often leads to illegal activities, as it allows bad actors to take advantage of the ignorance. Even if you treat cryptocurrencies as your enemies, then it is advised to keep your enemy closer, under the ambit of certain rules and regulations.”

In recent weeks, right from regulatory issues, taxman’s cudgel to banks’ unbankable attitude, traders and cryptocurrency exchanges have faced an increasing number of issues on many fronts. Inc42, spoke to the exchanges and legal experts to find out these issues.

How Do Social Media Banning Cryptocurrency Ads Affect The Indian Exchanges?

Major digital ad media Facebook, Yandex, Linkedin, Google, Twitter and Reddit have either blocked Bitcoin and cryptocurrency-related ads including ICOs or have announced to do so. While the awareness pertaining to cryptocurrency trading and ICOs are still very low, would the banning affect the Indian exchanges restraining themselves to smaller mediums only to reach out to potential traders?

Abhishek Gopal, Co-founder and CEO of ThroughBit told Inc42, “As an exchange, we’ve never really run a lot of advertisements, and that has been a conscious decision. In fact, we are glad that the said platforms have taken such a stand. It will help keep such projects at bay which aren’t essentially ‘legit’. Also, in a way, it paves a way for a crypto ecosystem of exchanges, news websites, social media platforms and so on.”

Seconding the same, Ajeet stated, “While Facebook appears to be very strict about the measures, other social media platforms are going case by case which is good. As the intent is to block Ponzi schemes related ads.”

Here, it is worth noting that recently, a number of Ponzi schemes in the name of Bitcoin had got people’s attention due to their advertisements on social media. Money Trade Coin, Prizm Coin, Deltin Coin and Suhail Khan promoted BFX Digital Coin are some of the exchanges that were reportedly running Ponzi schemes in the name of cryptocurrency investments.

While Facebook appears to be very strict about the measures, other social media platforms are going case by case which is good. As the intent is to block Ponzi schemes related ads.

The Indian government also joined the bandwagon by introducing an act on banning of unregulated deposit schemes, now social media is also doing something similar and this will eventually help cryptocurrencies and ICOs to get retrenched from all such Ponzi schemes that encash on the popularity of cryptocurrencies.

Asserting that such banning won’t affect the leading Indian exchanges, Shivam Thakral, Co-founder and CEO of BuyUCoin stated that as far as how trading platforms will be affected is not deeply a concern for the exchange platforms like BuyUCoin. The platform is merely a medium of cryptocurrency trading and is not propagating or promoting the usage or non-usage of any cryptocurrencies.

However, for blockchain enthusiasts, that’s not the only valid point. Praveenkumar Vijaykumar, CMD, Belfrics avers,

“This is exactly the issue of centralisation. Since Google, Twitter and Facebook command the global market share of advertisement, they can make decisions like these, which are a threat to their own business.”

Explaining the ban, Google’s Director of Sustainable Ads, Scott Spencer had earlier stated during his conversation with the CNBC that Google doesn’t have a crystal ball to know where the future is going to go with cryptocurrencies, but the platform has observed enough consumer harm or potential for consumer harm that it’s an area that it wants to approach with extreme caution.

Praveenkumar further said that when governments are taking a proactive step to regulate and control the cryptocurrency industry, unilateral actions like these by industry leaders without any directives from the government authorities, give a clear indication that they all see a threat looming in on their own business models.

He further added that their actions will give birth to new age advertising media, which will be decentralised and more productive than the current ones. The current crypto users are not affected by these actions but yes, these actions will make the exchange marketing plans pretty difficult.

Banks Shutting Their Doors To Cryptocurrency Exchanges

Recently, leading Indian banks such as the HDFC, ICICI, YES, Axis and Kotak Mahindra Bank have almost stopped offering banking solutions to cryptocurrency traders and exchanges.

Worldwide, a number of banks including Lloyds, Capital One, Bank Of America, Citibank and JP Morgan have already barred their customers from purchasing Bitcoin and other cryptocurrencies with their cards.

Praveen counts it as one of the biggest reasons to shut his India office, “We have stopped Indian exchange operations a few months before and are concentrating only on Blockchain related services in India. We banked with ICICI and they closed our account without any intimation. The action caused us a loss of revenue and disrupted our exchange operations, after which we decided to shut down the exchange operations.”

In a notification sent to all HDFC bank users, citing RBI warnings, the bank stated that to ensure its customer’s security, the bank has decided to not permit usage of HDFC Bank credit, debit and prepaid cards towards purchase or trading of such Bitcoins, cryptocurrencies and virtual currencies, on merchants suspected to be dealing in cryptocurrency or online foreign exchange trading or both.

On December 28, last year, Inc42 had reported that cryptocurrency exchanges were facing transaction issues from their banks. The transactions were getting delayed by a day or more, particularly when words like cryptocurrency, Bitcoin or any such words were entered in the remarks space.

As per Abhishek, his company also faces difficulties when they credit Indian rupees (INR) to their customers’ accounts. Sometimes, if it is the abovementioned banks that their customers use, the money ends up getting returned to the company’s bank account. Notwithstanding this, some banks also deny payment gateway service providers from providing services to crypto businesses.

“Banking is an essential service to run a business, and this is a clear instance of denial of essential services. That said, we understand that these are the initial testing times, we are sure we’ll either change the face of banking or have banks lining up to serve us. It’s only a matter of time,” said Abhishek.

Despite this, the number of exchanges that are operating in India is still on the rise. While four exchanges Zebpay, Unocoin, Coinsecure and Koinex have successfully raised the funding, a few more exchanges are expecting to raise some funding this year.

The Taxman’s Bitcoin Policy

Taxman’s approach towards Bitcoin continued to be an issue with the exchanges, while CBDT has asked the users or traders, it had earlier sent notices to, to pay almost 30% tax over the gain, how traders and exchanges in India should tackle this issue, as part of precautionary measure?

As per Nappinai, out of capital gains and business gains, the cryptocurrency profit must be treated as capital gain. This makes one liable to pay capital tax gain, whatever gets decided by the authorities.

Speaking of how tax should be calculated, Shivam explained,

((Current rate of the cryptocurrency) X (Volume)  – (Cryptocurrency rate at the time of investment) X (Volume) divided by (Cryptocurrency rate at the time of investment) X (Volume)) X 100 will give us the percentage gain over our investment accordingly users can file the tax liability.

To tackle these issues, exchanges are not taking various measures. Singapore-based multi-cryptocurrency exchange Zebpay has partnered with the Indian tax filing platform, ClearTax to help investors deal with cryptocurrency taxation.

However, the debate is whether Bitcoin should be treated as capital gains or business gain and further whether the transactions occurring in Bitcoins or other cryptocurrencies are speculative or not under Section 43(5).

While Ajeet averred that it doesn’t matter as the tax rates are same in all these cases, ‘what’s more important is the volume of trade and duration for which these assets are kept,’ Praveen stated, “If the traders have earned from trading cryptocurrencies, it should be treated as capital gains and should be taxed as per the local norms of the country. For exchanges to operate without hiccups, clarity should be given on the fact that the exchanges can pay the GST on the commissions that they charge or earn.”

Despite having several meetings with tax officials, the facts are still unclear. The authorities are trying to figure out how to bracket crypto. The confusion is here to stay for a while.

However, neither the CBDT officials nor the exchanges are able to draw a clear picture pertaining to the taxation policy in case of cryptocurrencies.

Despite having several meetings with tax officials, according to Abhishek, the facts are still unclear. The authorities are trying to figure out how to bracket crypto. The confusion is here to stay a while.

The government recently had cleared that there can’t be two parallel currencies working within the territory, hence Bitcoin will not be accepted as a legal tender in India. Thereafter, cryptocurrencies in India are often called as crypto-assets. However, while speaking to Inc42, Prashant Phillip, Partner, Lakshmikumaran & Sridharan Attorneys stated,

“Crypto-asset is a vague term. One can’t and should make much sense out of it. It is not clear whether it should be treated as goods, security or token, or all.”

Nappinai took it further, “While extending my legal advice to the last committee led by Dinesh Sharma (The Former Principal Secretary who led the interdisciplinary committee on cryptocurrency constituted earlier), I had advised that instead of using the term crypto-asset, it will be wise to call them digital asset, that will help not only increase people’s understanding but in regulation and taxation as well.”

What Do The Cryptocurrency Exchanges Expect From The Latest Subhash Chandra Committee On Cryptocurrencies?

Committee after committee. In April 2017, Finance Minister Arun Jaitley had announced the formation of an interdisciplinary committee under the chairmanship of Dinesh Sharma, Special Secretary, Department of Economic Affairs (DEA) to look into cryptocurrency legitimacy. With members from the RBI, SBI, DEA and MHA, the committee met with the founders of leading Bitcoin exchanges in the country and experts. American Blockchain Council had also submitted its say to the committee.

On August 2, 2017, the committee submitted its report to the DEA. While the committee head Dinesh has already retired now, the committee had proffered to ban cryptocurrency, as widely reported by media.

Apparently, unsatisfied with the report, Arun Jaitley, Finance Minister, Indian Government, later announced the formation of another committee pertaining to the cryptocurrency trading in India. The committee is now set to submit its report this month.

Regulations must not be single dimensional i.e. it should not be limited to cryptocurrencies but must include the entire ecosystem.

Praveen noded, “It will be interesting to see how the government will take its stance after the report as, if the report suggests any kind of classification on the crypto assets, some form of authentication will come in to place for the crypto. If so, then the major cryptocurrencies, including Bitcoin, also might fall under the same category and approve them for trading will create challenges for the government in terms of capital control.”

Whatever be the report, it must include all the stakeholders and aspects, said Prasanth. He stated, “Regulations must not be single dimensional i.e. it should not be limited to cryptocurrencies but must include the entire ecosystem. This includes crypto-goods, ICOs, cryptocurrency-based futures contracts, amongst others. Thus, any regulation must accommodate all these, their security aspect, taxation and all the other necessary aspects.”

Speaking of the expectations, Abhishek doesn’t have any. “None,” he said, “We’ve so much going on right now, a report that isn’t in our control is the last thing we’re spending our time on. We’ll deal with it when we are made aware. We are focussing on making sure there isn’t a wrong step we are taking and on making sure the best interests of our users are served.”

Giving an example of the last committee meetings, Sathvik said,

It was always one way communication.

Enthusiastic about the step, Shivam said, “We are quite positive about the report and believe that this report may include policies and procedures on how taxes can be implemented on trading of the cryptocurrencies in India. We are also expecting some defined prerequisite for operating an exchange in India.”

And, ICOs

While ICOs are getting a lot of attention these days. Startups do avoid the India route owing to the lack of regulations in the country and the risks it poses. Recently, Indian startup Drivezy raised around $5 Mn in ICO in Japan, using a US exchange.

While cryptocurrency trading has never stopped, why do startups shy away from raising ICOs in India?

As per Prasanth, as such, there is no hurdle. However, there are certain risks when you go for an ICO. The biggest risk that remains is what if the Indian government outlaws ICOs in the future? So, if Indian startups are raising ICOs then they must be ready enough to take the risks.

He further added that from an investor’s point of view, any ICO, if to be considered for investment, should be investigated properly. Requirements imposed by the government agencies are to be complied with whenever a company goes for an IPO. A similar mechanism should be in place for the ICO so that they are considered to be more secure.

Editor’s Note

As traced by the CBDT, demonetisation, as it did to digital payments companies, helped kickstart the cryptocurrency momentum in India. The criticism, in 2008, that government authorities often abuse their power in terms of policies that make people suffer losing their own money, was more or less the same during demonetisation that resulted into rampant criticisms that how can the government attempt to take down 86% of the cash without any notice.

While the government had appreciated the unprecedented rise in cashless transactions and companies going digital, it was completely unprepared for cryptocurrencies which hugely benefited from the cashless campaigns. There was no guideline, no framework, no taxation policies in place but, an RBI warning.

While earlier when there was no ban, the cryptocurrency trading was a mix of white and grey which has now turned to fully grey zone.

Even the committee formed a year ago could not help shape any regulation or guidelines. It is true that cryptocurrencies lead the transactions occurring at darknet, however, it is also worth noting that cryptocurrencies are still being traded frequently in China, despite the ban. While earlier when there was no ban, the cryptocurrency trading was a mix of white and grey which has now turned to fully grey zone.

Therefore, the authorities must be aware of the risks in both the cases. Though there has been a downturn in the cryptocurrency trading, the trading has been there right since 2011, the delay in regulation might fail the implementation later.

It has been a decade since blockchain technology came into the picture. Since then, a number of PoCs are being submitted at various blockchain conclaves and other platforms almost on a daily basis; however, there is still not a single blockchain application that could stand out against cryptocurrency.

Interestingly, unlike the other cases, in case of Bitcoin or cryptocurrency, it is the application that led to the discovery of platform, which rarely happens in the history of technovations.

While many countries including Russia, China, India, etc. are already exploring the space of having fiat cryptocurrencies, it is only a matter of time that cryptocurrency will be realised as the biggest application of blockchain, among all.

Former Vice President of the US, Al Gore did offer some understanding, “When bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the bitcoin universe an algorithm replaces the function of the government …[that] is actually pretty cool.”

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