Regulation Through Taxation in India

which its government isn't too keen on Bloomberg reports. Sadartha Schokla joins me today to discuss India's complicated history of crypto regulation, why they're turning to taxes to curb speculation, and the potential lessons for other countries. I'm so happy today to have Saddhartha, who was my colleague based in Mumbai, joining us on the podcast. Hi, Hi Stasen, Thank you for having me up. Pleasure. So let's get started with

a little bit of contacts about crypto in India. Can you say a little bit more about the size of the market and why this is a big deal as far as the asset class goes. Sure so in India when it comes to crypto things actually picked up in twenties seventeen because still then Indian users had access only to purchasing bedcoin or ethereum, but on very few platforms. In TV exchanges started having more tokens onto their platform.

But just a year after that, the Central Bank of India the r b I, they issued a circle which basically cut off all crypto startups from the country's payment and banking network, post which there was a pretty long winter in the Indian market. It was much harsh than what we saw in the grouble market, but that happened, and then in two thousand and twenty two, the new crypto exchangers were fighting this in the Supreme Court of India and they were able to overturn this circular. So

the headline story really caught my attention. Earlier, India to propose prohibiting all private cryptocurrencies, that was the headline story. A little bit later on the story crept outside India too is said to consider allowing cryptoi trating for some investors.

What we saw in India was that there was a lot of pent up demand for these assets, and we also saw that a lot of VC money started flowing in the exactly and in in that short time frame from twenty twenty two, I would say mid of twenty twenty one, India so its first two crypto unicorns, right, so in exchange called coin dc x and another called coins tored. Both of them got a billion dollar worth of bad valuation in a very short period of time. We also saw that with this venture capital money came

a lot of marketing and publicity. So we've seen that happened globally, right with all crypto exchanges, whether it's crypto dot com or for that matter, binnance. So that attracted a huge crowd in this small and you know, decent asset class. We saw that from twenty onwards many Indians belonging from Tier to three, Tier three cities as well started getting onto these platforms. They started buying crypto tokens.

And the most conservative estimate that we have of the total market size is around close to twenty million users in India, which is a lot compares into a lot of markets out that's right. So a couple of things

it sounds like you're saying. So there was this winter for several years, partly as a function of the government's ban on crypto partly as a function of what was happening in global markets, and then from when that ban was overturned, we started going through the same boom bust cycle as everywhere else, which was sort of it sounds from what you're saying like more boom than bust with

a pretty significant markets in India. My big question is is that market you know, I know you mentioned people were interested in defy, but is it largely trading in bitcoin and ether or are there other elements that you think are specific to what's happening in India that makes the government really concerned about risk and speculations of the government has always been that cryptocurrencies can lead to a

flight of capital outside of India. They can be used for money laundering and for terrorists financing, and those have been the major reasons why crypto trading firms in India have had an uneasy relationship with banks, the central Bank,

and the Indian government as well. Because of that, we've seen a couple of kneja reactions as well from the government side, Like for example, I had mentioned what happened in eighteen So the Central back of India has always held an opinion that they want cryptocurrencies to be banned in India, completely banned, but you know, they never went ahead and you know, you know, no law was made

around that. But what happened in twenty eighteen was sort of like an indirect bank because they had not outlawed crypto assets, but what they had done they had basically removed crypto platforms exchanges from the Trees backing system, which in a way made it impossible for users new users to use the Indian repeat and buy some crypto token so on ramping on to the crypto universe became impossible. So the idea was, oh, yeah, you can trade it,

you just can't actually buy any exactly. But the lack of regulatory clarity had always kept Indians at being from cryptocurrencies and still now, we never had any regulation on how to formulate this industry or whether we need to like clamp down on it. Right, But something interesting happened earlier this year in February, so the Indian government announced how crypto transactions and income from crypto assets will be taxed in the country. So this was actually seen as

the first step towards regulation. People had welcomed the move right because taxing any asset or any product for that matter, is always seen as a sign of legitimization. Right. But once people started digging deeper into the finer details of this new tax regime, that's when they understood that already

this might do more harm than good. So I want to ask you some questions about that, because on the one hand, you say, rightly, I think that you know the there's this perception that taxation is a form of legitimization, right, like the government's like, okay, this thing is going to stick around. We may as well make sure that we're getting our cut of whatever that thing is. But you also note that actually, if you dig down into the details, it looks like this might really put a damper on

the crypto industry. What is it about the Indian tax that might have that effect? So I would say there are three key highlights of the tax route. First is that there will be a flatty tax on income from crypto assets, so regardless of what income bracket you fall into or how much money you made in a year. The other is, one cannot offset any loss in crypto assets against any other income, even from income from a different crypto token, so there is no benefit of tax

harvesting for Indian investors. The third point is that the government has also introduced a one person tedious or a tax which will be deducted at source on all digital assets transfer above a certain size. So those are the three key highlights. That all sounds like the Indian government saying we really don't want you in this asset class. That's true. Like I said, we are still waiting for formal regulations around crypto assets in India, even though a

tax regime has been announced. The government has said that that this does not mean that crypto assets are legalized in India. They're just saying that as a government, we have the right, you know, tax you on this kind of an income. So that's what we're doing, right. So, like what happened back in this is pretty similar to that that this is somewhat like an indirect way to reduce crypto trading activity in the country. We'll be right back with more up the ata's take on India's approach

to regulating crypto. If you want to treat crypto as a sin and you want to have a high tax on it and you want to eventually ban it, that be specific and have that bro but keep bear in mind that a lot of people would indulge in crypto and indulge in these operations and in the dark net, and a lot of these operations will go under the supporting crypto. I'm thinking after I'm asking the government to

be clear. One of the things that I am always interested in as it relates to crypto is the sort of the clever ways in which people regulate without regulating, right so, you know, in the in the in the US, for instance, the security is in Exchange Commission is pretty fun of what is sometimes known as regulation through litigation, which is like we're you're we're going to make you pay a hundred million dollars in fines until you stop

doing this thing that we don't like. But we're not going to issue specific guidance about the thing we're seeing in India sort of regulation through taxation. And are you hereing from folks locally or elsewhere in Asia that other governments or other bodies are looking to how India is approaching this as a potential model for their own, you know, attempts to keep crypto under control. So anya specific among the major economies, China has already outlawed crypto cnncies. Right.

Apart from that, if you look at Singapore, they have some what of an accommodative but strict regulatory regime, right, and they haven't been any other country in the region which has come out with very strict guidelines, I would say, other than the tax structure, which as you describe it is very, very punitive. Are there any other unique elements of the Indian crypto market that you think folks should

know about. In India, we have mostly centralized exchanges which have been the most dominent players, right, and they have been the only place where people would majority of the Indian users will go to get some exposure on crypto assets. Right. What we've seen that in the last couple of months, especially after the implementation of the new tax regime, volumes have really plummeted on these platforms. Take for example, was eRx, which is India's largest exchange by volume and its owned

by Binance. Last year, at its peak, it was doing volumes of around half a billion dollars city right currently that has dropped to I would say last I head checked, it was at around fourteen million dollars. Right. So, while the world is struggling and facing a bare market, and we are seeing marquee crypto projects collapse in India. It's

just a bit more worse, I would say. So we have about one more minutes left, and I guess my main question is do you see crypto being able to survive in India given this extremely hostile governments and regulatory environments that is in existence right now. I think by its very nature, crypto assets are built to be like censorship resistant, So India is actually a great testing ground for that thesis. And I feel that crypto as an asset class as a technology will still continue to thrive

in India. But the risks are that a lot of the trading and the purchase might actually go underground, or people might just transact on peer to peer unregulated platforms, or dy me just try to get some tokens via

D five platforms. Right, So, how do you regulate that No later in the world has been able to figure out how do we, you know, implement key S norms on a DE five platform and k I S norms are like no your customers, So the ability to make sure that somebody has who they say they are on the DE five platforms actually is actually who they are yeah,

I I completely agree. I do think that there's a bit of an arms race right now with certain parts of the crypto markets and what regulators are trying to do. But it does sound from what you've told us that India has figured out some very clever ways to get what they want or at least stop what they don't want in the meantime. True, one of the consequence of this has been that a lot of Indian businesses and entrepreneurs have moved to jurisdictions which have more favorable and

accommodating the literary environment. So a lot of them have actually moved to the Way. Some of the biggest names in India, like for example, Polygon, which is a scaling solution built on top of ethium. The entire team, the founders, they have moved to Dubai. And as we see in this space, which is very community driven, wherever the best projects land up, that jurisdiction ends up attracting the best

stand as well. Right. So that's why in India there's this running joe, especially in the crypto community, where people say that the Way is the best city in India because a lot of people move to the Way, and also because of its proximity to the country, right, Like, for example, one crypto startup entrepreneur was telling me that it costs less to travel from the way to Delhi than what it costs from traveling from Delhi to Bangalore.

So it's pretty nearby as well. So that flight of talent as well as you know, capital as well is something which is a major negative for the economy as well, because at the end of the day, if Indian investors and traders start moving their games in capitals onto foreign exchanges, right, that means that there's a loss of revenue prospective tax revenue for the Indian government as well. Yeah, a tricky, a tricky balance. Well, thank you very much for that said.

I really appreciate you taking the time. Thanks. You can find more of thez Darthur Schuklas reporting on the Bloomberg terminal on Bloomberg dot com and you'll find him on Twitter. He's at sid coins. That's s I D C O I N S. On the next episode of Bloomberg Crypto. John Crypto burst onto the crypto scene less than a year ago with the appointments of a former intern named

Canal Korea as its founding president. Within just a few months, John Crypto has found itself spending hundreds of millions of dollars, bailing out market participants because of a major hack and having to navigate the collapse of the terra USD stable coin. Undeterred by his critics, Karia believes that the market's current volatility is the perfect time to double down. You'll hear

from Bloomberg reporters Katherine Doherty and Uh Eyang. They went to Chicago to visit Jump's headquarters, and they'll tell us all about what's next for the firm. I'm Stacy Marie Ishmael, and this is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Email your questions, comments or suggestions for the show to Crypto at Bloomberg dot net and

you'll find us on Twitter at Crypto. The supervising producer of this episode is Vicky Vergalina. Our producer is Mohammed Farouk. Associate producer is Thy Butler. Associate producer is zan Ab Sudiki Desta wonder At is our engineer. Original music by Leo Sidrin. The other four above had impressed anything bad