The move by the Ministry of Corporate Affairs (MCA) asking companies to disclose their cryptocurrency transactions is interesting. It has to been seen in the context of the tabling of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the Budget session of Parliament and the vociferous protests by stakeholders based on reports that the Bill intends to ban private cryptocurrencies. The MCA’s directive implies that the Centre is now considering regulating the transactions in private cryptocurrencies as opposed to banning them. That is a good strategy as not only will it save the Centre the futile effort in trying to trace and curb these complex digital transactions but it will also bring in revenue for the exchequer.
The MCA has directed companies to give details regarding profit or loss on transactions involving cryptocurrencies, amount of outstanding cryptocurrencies held in the books, and deposits or advances from any person for trading or investing in cryptocurrencies, thus attempting to capture the dealings of corporates in crypto assets. It is likely that this is a precursor to other government arms, including the Income-Tax department, seeking similar disclosures in the tax returns. The value of cryptocurrencies such as bitcoin have doubled since the beginning of 2021 and have appreciated over seven-fold since last April. With turnover on trading platforms surging, it is obvious that many investors and traders in the country would have profited from these trades. Since MCA has asked for profit or loss on these transactions, the next logical step would be to tax them. The Tax Department however needs to decide if the gains are to be defined as speculative income or as capital gains. Such a move is tantamount to legitimising private cryptocurrencies but the Centre has little choice. Failing to acknowledge these transactions will lead to non-disclosure and misreporting. Banning them in India is also not an option because trading and speculation is then likely to migrate to overseas platforms which are largely unregulated. Besides seeking information from users, the Centre should work towards a comprehensive regulation for private cryptocurrencies governing trading platforms, investors and miners.
The regulation needs to specify that private cryptocurrencies can be held as assets and traded but cannot be used for payment in lieu of fiat currency. Price volatility and opacity in private cryptos such as bitcoin make them unsuitable for use as currency. These are also open to misuse by money launderers and terrorists, as flagged by the Reserve Bank of India. Finance firms such as BNYMellon, BlackRock, Mastercard and Visa have begun integrating cryptos with their platforms. There is clearly need for a digital currency, linked to an official fiat currency in India as well. The RBI should expedite its central bank issued digital currency project to provide an alternative to private cryptocurrencies.