India Takes Lead on Global Crypto Policy as G-20 President

An unprecedented event has given India an opportunity to shape global policy on all things crypto – its presidency of the Group of 20 (G-20). Its term, which began in December, puts the country in the driver’s seat as the developed world looks to define the future of money.

The presidency comes after India announced high crypto taxes on February 1, 2022, which was blasted by crypto companies operating in the country. As a result, Indians moved more than $3.8 billion in trading volume from local to international crypto exchanges between February, when the taxes were announced, and October 2022, after the new fees were implemented, according to the Esya Centre, a New Delhi-based technology policy think tank .

There is a lot that can happen for the crypto industry in India and how the nation regulates it. What India is doing during its G-20 presidency may provide some clues.

This feature is part of CoinDesk Politics week, a comprehensive look at the outlook for crypto regulation and legislation. Amitoj Singh is a CoinDesk regulatory reporter based in India.

India’s year-long G-20 presidency gives the nation the power to set the crypto agenda for the intergovernmental forum. India can now bring together various stakeholders – the 19 countries and the European Union that make up the G-20, which together represent over 85% of global GDP – with invited international institutions, including the United Nations, the International Monetary Fund (IMF) and the Financial Stability Board (FSB). .

Indian Prime Minister Narendra Modi has stated that the G-20 presidency is an opportunity for the nation. Finance Minister Nirmala Sitharaman has said that “how to regulate crypto-assets” will be one of the priorities of the presidency.

The crypto-related discussions will take place as part of the G-20 finance track. Crypto has been included as part of the working group titled “Financial Sector Issues.” This is the only working group where discussions directly involve G-20 finance and central bank representatives, meaning that crypto-related discussions have been prioritized. (The seven other working groups have leading employees in finance ministries and central banks who lead the discussions.)

The first meeting of the economic task force was held in mid-December, when “each member presented their position on the global crypto regulation,” a senior official familiar with the discussions told CoinDesk. The second meeting will be held on 24-25 February.

So far, the FSB’s “comprehensive” international crypto rules have served as the world’s blueprint. The discussion papers have facilitated multilateral discussions. But India made a big change by giving the IMF a bigger role in crypto negotiations for the duration of its presidency. Under India’s presidency, discussions will focus on contentious issues such as risk assessments of cryptoassets.

It hasn’t taken long for two broad camps to emerge, according to two people familiar with the discussions.

“Growing economies are wary of the proliferation of crypto assets due to concerns about dollarization,” a person familiar with India’s crypto-related discussions told CoinDesk, referring to the widespread use of dollar-denominated crypto instead of government-regulated money. “Developed economies have capital controls, emerging markets do not. And the developed nations have no answer to this concern.”

By September, when India hosts the G-20 summit in New Delhi, officials hope for a collectively agreed position guided by the IMF.

Meanwhile, the Indian central bank has not changed its stance that cryptocurrencies should be banned. The government, through the Ministry of Finance, has said global coordination is needed for a regulatory framework for crypto. Without that coordination, no jurisdiction’s individual crypto legislation will be successful.

“The finance ministry and the government have to think about the political economy while the central bank looks at the economy,” said another person familiar with the thinking of both the government and the central bank. Both want to avoid what they see as the systemic risk of a parallel economy – one without government oversight, which crypto would encourage.

This is why the Indian central bank has repeatedly advocated a complete ban on crypto, while the government has stopped short of a ban, instead of imposing strict taxes.

The thinking of those in power in India has evolved on crypto. Publicly, opposition politicians have criticized the government for introducing stiff taxes. But privately, tasked with protecting India’s investors as part of a parliamentary committee on finance, the government has slammed the crypto industry for doing too little to reduce the risks associated with the industry such as terrorism financing.

In short, where a powerful person stands on crypto depends on where he or she sits.

A minister tasked with skills development, entrepreneurship, electronics and information technology has backed the technology, saying: “There is nothing to ban crypto as long as you follow the legal process.” It is not entirely clear what he means by that because India has not laid out a clear legal process for crypto.

What India has done is create a precarious status quo.

“I’m not waiting for regulation to come in to tax people who make money,” the Indian finance minister said when asked how a nation could tax something it doesn’t recognize as legal.

That’s why the G-20 presidency is forcing India to crystallize its position on crypto. Two recent events have put the spotlight on this.

The first was a closed-door focus group meeting involving officials from more than 10 emerging market economies earlier this month in New Delhi, where the consensus was that crypto assets are “risky” and not “worth it.” This is expected to represent the view of the Reserve Bank of India. The IMF is expected to include the observations on crypto in an upcoming discussion paper, potentially offering to replace the FSB’s plan for the G-20 talks, a person familiar with the discussions told CoinDesk.

The second was a discussion held at the National Institute of Public Finance and Policy (NIPFP), an autonomous research institute based in New Delhi. It was the first to bring political think tanks and industry players together. The government wanted to learn about the latest developments in crypto. Three different people confirmed to CoinDesk the development of this meeting.

“I think [these discussions have] all triggered by India’s G-20 presidency,” said a senior industry representative. “The [India] want to lead. They cannot be in a position where the majority of the G-20 nations are more informed [crypto]. And they were keen to understand the industry.”

Another person who attended said government representatives asked questions and “listened without engaging much.”

A government official asked, “Is the risk of investing in crypto for an Indian equivalent to the risk of an American investing in crypto?” said a person from a research organization.

All these discussions have resulted in the Indian government hardening its position: If there is to be a globally coordinated cryptoregulatory framework, as many nations want, it should be optional.

“It shouldn’t be the case that if one nation follows crypto regulation, so must the other,” said a senior official party to the discussions.

The IMF and NIPFP did not immediately respond to requests for comment.

On February 1, 2022, as part of the annual budget unveiling, the government announced a 30% tax on crypto profits and a 1% withholding tax (TDS) on all transactions. Within 10 days, crypto trading volume fell, in some cases more than 70%.

The 30% tax came into effect on April 1, while the more controversial 1% TDS came into force on July 1.

The taxes became effective at a time when macroeconomic factors exacerbated the dire outlook facing the industry. Crypto trading had slowed dramatically even before the taxes took effect.

According to Chainalysis’ 2022 Global Crypto Adoption Index Top 20, India ranked first in four of the five methods of measuring a nation’s crypto adoption. The poor ranking of P2P exchange trading volume (82) placed it in fourth place behind Vietnam, the Philippines and Ukraine, but ahead of the United States in fifth place.

In the meeting with the Ministry of Finance, the industry and the think tanks referred to this unappealing data and said that they now hope that the government has noticed and will adjust the tax regime. The Bharat Web 3 Associationrepresenting the Indian crypto industry, has called for a change in the tax structure as part of the new budget to be announced on February 1, 2023.

In order of priority, the association wants a reduction in TDS ideally to 0.01%, or at least to 0.1%, on par with the Securities Transactions Act, or establish progressive taxes on gains instead of the flat tax of 30% and allow losses to offset gains. The Securities Transaction Tax is a direct tax levied on every purchase and sale of securities listed on Indian stock exchanges.

“We have done everything we could and so we hope we will see a positive response from the government,” said Kiran Vivekananda, head of public policy at Indian crypto exchange CoinDCX. “It is still too early for us to expect that a licensing regime for crypto exchanges will be promoted by the authorities.”

But several industry and think tank experts in close contact with the government told CoinDesk that they realistically “did not expect any change to the law.”

Despite crypto uncertainty, India is all for launching its digital central bank currency by the end of 2023, multiple people told CoinDesk.

India launched wholesale and retail CBDC pilots last year. The retail pilot is intended for the private sector and residents. The wholesale pilot is limited to financial institutions. India wants to launch its digital central bank currency across the country by the end of 2023, several people familiar with the matter told CoinDesk.

The focus has been on the retail pilot. While more banks and cities are involved, a true picture of the results will emerge in the coming months.

Meanwhile, India is grappling with two big questions regarding CBDC: how will the central bank ensure citizens’ privacy, and what is the public policy use of CBDC when you already have a successful digital payment system through its Unified Payments Interface (UPI).

“While India’s digital rupee will work to complement the payments system, the pilots are ongoing and will give us a better understanding of all the best public use cases,” said a senior official familiar with India’s CBDC pilots.

In short, there is a lot that can happen in Indian crypto regulation and development in the months ahead. How the nation governs the G-20 presidency may provide a blueprint.