The Economic Times this week reported that through the bill the government may finally come clear on many questions surrounding the cryptoverse. This is a welcome development and may spur a lot of economic activity and innovations around cryptos. Apart from that, there may be follow-through acceptance happening in many other areas like state laws and various policy frameworks.
Will Crypto Remain a Crypto?
As a starting point, the bill will have to define what may qualify as a valid crypto. This itself may be a good beginning, as it may set a benchmark standard for inclusion (or exclusion) of a crypto asset.
Depending on how the bill defines crypto and how its treatment follows from that in terms of taxation and regulation, the cryptoverse may choose their play. If they find the definition and ensuing rules etc favourable to their businesses, they may want to position their products as valid cryptos. Should the definitions etc be non-conducive, they may choose not to identify them as cryptos at all.
There is a lot of innovation yet to happen in the industry, and therefore notwithstanding the level of clarity in the definition, there will be an expected grey area for a few years to come – something that may even be good for innovation to prosper.
Classification of Cryptos
One thing that the government and RBI have been clear and consistent about is that they would not accept any crypto as part of the payment and settlement framework. So, we are definitely not going to see cryptocurrency coming up as a valid tender for payments. Instead, the bill itself may enable RBI to create a crypto equivalent of the country’s fiat currency, also called as Central Bank Digital Currency (CBDC). RBI has been working on its CBDC project and its rollout is expected by the end of the year. This, however, will depend on the crypto bill being passed by Parliament before that.
The cryptoverse has been seeking to settle for the next best thing – being accepted as a Digital Asset or a Commodity. As
The Economic Times reported, the government definition of an asset itself is in question, as there is no hard and fast definition of an asset so far. That said, the Income-Tax department does define what is a capital asset. In simple terms, it essentially defines a capital asset as one, whose future value may not be ascertained at present. The cryptoverse may itself need to define what constitutes an ‘asset’ before further defining a ‘Digital Asset’. All this clarity may spur innovation at every level and also determine the choice of classification based on end-use.
Are all Cryptos Not One Class?
The bill may classify the cryptos as commodity or digital asset. Even after they get their class recognition, cryptos will need to be regulated (or not) based on the end use of the product or the platform. It has also been debated whether the cryptos must be regulated uniformly under one set of regulations. This, however, may not be possible.
The most known cryptos are Bitcoin and Ether – owing to the interest in their trading and ever-increasing values. While these cryptos have been the torch-bearers of the technology, most of them were originally created to become functional payment vehicles and, therefore, the name cryptocurrency. While they could not become acceptable cryptocurrencies, the world has adapted to use them as new trading vehicles and slowly they have become ‘digital assets’ whose value keeps on changing based on demand and supply. These cryptocurrency tokens inherently do not represent anything specific.
On the other hand, there are more specific purpose cryptos that represent an underlying value or ownership of something. As an example, my own company RealX has been waiting on these regulations to explore if there can be a legitimate case for tokenizing real estate – essentially creating a digital asset (crypto) — that represents ownership of a certain property. There is a new craze for something called NFTs (non-fungible tokens). An NFT essentially is another example of a ‘digital asset’ and represents the ownership of any item – it may be physical items like a real painting or even digital items like a song or copyright to an intellectual property. Similarly, there can be tokenisation of revenue streams coming from investment in solar installations or trade receivables.
The cryptoverse is only going to expand its horizons with more legitimacy and clarity in regulations. While the underlying technology behind them may be conceptually similar, the implementations and their end use may be vastly different. Therefore, it is simply not possible to regulate all of these under one umbrella law.
The crypto bill must, however, set some common benchmarks on what may be a valid crypto and what may be a valid crypto transaction. Such common minimum compliance must apply to all crypto tokens and may be looked at as an extension of the Information Technology Act, specifically applicable to ‘digital assets’.
It may be possible to categorise the generic cryptos (originally called cryptocurrencies) as commodities, while many specific application cryptos that represent something of value may be classified as digital assets.
The cryptocurrency bill may be a gamechanger for the country. It may spur large-scale innovation and application of cryptos as a technology into multiple applications where ‘digital assets’ can be created. The pandemic has left the government looking at more sources of revenues and it may expect some of it to be filled in through the direct and indirect revenues generated through regularisation of cryptos. It will also leapfrog India from being a nation reluctant in crypto adoption to an innovation powerhouse in digital assets.
(Manish Kumar is Co-Founder of investment platforms RealX and GREX and Co-Leads the South Asia Chapter of Global Impact Fintech (GIFT), a global Fintech thinktank.)