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The Indian government’s “blockchain over crypto” stance underscores the lack of understanding

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Indian crypto companies are struggling with the new tax policy as trading volumes have dried up and many established crypto firms are looking to relocate to more crypto-friendly jurisdictions.

While many developed countries and even some of their Asian counterparts are actively exploring and formulating better crypto regulations, the Indian government has maintained a “blockchain, not crypto” stance.

It may seem like the government is taking a cautious step to focus on the underlying technology while keeping its distance from the volatile and risky crypto market. However, judging from recent policies and statements by the finance minister and incumbent MPs, the problem appears to be a lack of understanding.

The newly introduced crypto tax laws, for example, are heavily motivated by the country’s gambling laws and were rushed in and passed without any input from ecosystem stakeholders. As many crypto experts have warned, harsh tax policies have driven traders off Indian exchanges.

Many ministers in the ruling government have circulated false narratives against crypto without offering any evidence to support their claims. Sushil Kumar Modi, an MP from the ruling party, has likened crypto to “pure gambling” and called for “taxing it more so the government can generate revenue and discourage people from investing in this volatile asset.”

The statement is a clear example of not only a lack of understanding but also a contradiction as he talks about discouraging people from investing in crypto while believing it would bring more revenue to the government.

Sathvik Vishwanath, co-founder and CEO of Indian crypto exchange Unocoin told Cointelegraph:

“The government continues to see crypto as a betting and gambling alternative, which is why they are only willing to support their technology, but not tokens beyond that.”

It is important to understand that crypto and blockchain are in some ways inseparable. Crypto tokens play a central role in the functioning of blockchain projects and blockchain-based rewards.

BuyUcoin CEO Shivam Thakral stated that a fundamental lack of understanding is one of the main reasons for such flawed policies and advocated dialogue with specialized groups. He told Cointelegraph:

“Any attempt to create an isolated country policy will defeat the entire purpose of blockchain technology, which aims to liberate the world’s financial systems. The Indian government needs to form specialized groups to discuss and debate how to find a more precise way to regulate the booming crypto sector in India. The time is ripe for India to take the lead and become the blockchain capital of the world.”

While many blame the government’s lack of understanding of the emerging technology as a key reason for their “blockchain, not crypto” stance, others believe that India’s fintech and payments network is mature enough and that a crypto layer wouldn’t really bring much benefit. Therefore, the government focuses more on core technology.

Trevor Goott, director for Africa and India at Unlimitt — a provider of digital finance interfaces — told Cointelegraph:

“India’s fintech and payments sector is mature and well served, and crypto would be just another layer above it, so the net benefit for India would be less compared to another country with a less developed payments sector. Crypto will have its place in India in the medium term, but the short-term benefits of the other blockchain products must be realized first when making a choice between crypto or blockchain.”

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The Indian government sees crypto as a threat

The Indian government clearly sees crypto as a threat to its current financial system. The Central Bank of India recently warned against crypto adoption, saying it could lead to dollarization of the economy.

The Reserve Bank of India said, “Crypto will seriously undermine the RBI’s ability to set monetary policy and regulate the country’s monetary system.”

In the early days of crypto, most countries thought that digital assets posed an inherent risk to their fiat ecosystem; However, as the industry has matured, it has been proven that cryptocurrencies can coexist with traditional financial markets.

Siddhartha, founder of Intain — a blockchain solutions company — told Cointelegraph:

“Having spoken to several government officials, they understand blockchain, but are responding in the short term to a spate of marketing dollars and campaigns that have been making a lot of noise on behalf of some crypto exchanges. These campaigns are worrying because they attract widespread public attention. In our view, government officials generally support blockchain working in a way that brings trust and transparency to the funding of non-bank financial firms.”

By allowing the use of blockchain, India can use it to create its own centralized cryptocurrency without competition from other cryptos if it successfully bans other coins. Sukhi Jutla, co-founder of MarketOrders — a blockchain-based online jewelry marketplace — told Cointelegraph:

“I think it’s more that the Indian government wants to impose stronger controls over how this new technology can be used and they are clearly concerned about how it will affect their current financial system. As more governments control cryptocurrencies, they fear the impact it will have on their current financial systems.”

Governments can either take a supportive and collaborative approach that enables innovation, or they can stifle and stop progress and innovation when they are too scared of this technology, and it seems like the Indian government is taking the latter approach.

Popular crypto influencer and trader Scott Melker, who goes by his Twitter handle The Wolf Of All Streets, told Cointelegraph:

“To date, crypto and blockchain are legal and encouraged in the country, but a 30 percent tax on all cryptocurrency trades is hampering growth. Following this disastrous tax policy, some exchanges have reported a drop in trading activity of up to 70%. Right now it really seems like India only has an interest in what blockchain can do for the country and not what bitcoin can do for its citizens.”

India’s struggle with crypto regulations

India’s Ministry of Finance was first tasked with drafting a crypto law in 2018, and the first draft was presented in 2019, calling for a total ban on all cryptocurrency-related activities. Since then, the government has changed its stance on crypto several times, from a blanket ban to regulating the crypto market as an asset class. However, none of the proposals were finalized or submitted to Parliament for discussion.

The crypto ecosystem in India has managed to self-regulate for quite some time. However, the hesitant stance of the Central Bank of India alongside regulatory uncertainty has caused many crypto firms to reconsider their future in the country.

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Nitin Agarwal, founder and chief revenue officer of FV Bank – an international digital bank – told Cointelegraph:

“Regulators’ job is difficult and even more complex in the crypto space as they are censorship resistant and grapple with the rapid pace of innovation. Regulators around the world are working hard to create a regulatory framework that can be applied to digital assets and crypto. The Indian government’s approach is pragmatic in that they do not want to over-regulate and want to see all users and businesses move to an unregulated or less regulated jurisdiction.”

He added: “The government is waiting for the United States and the European Union to see a regulatory framework that they can absorb and use best practices to apply to the people of India.”

While a majority of ruling party ministers have followed the Treasury Department’s line, many opposition leaders have called for a review of flawed tax policies. They have also opposed the idea of ​​banning crypto, claiming that it would be akin to banning the internet.