IT'S EVERYTHING OR NOTHING
Outlook Money|July 2021
Cryptocurrencies are no longer illegal in India but they’re still out of the regulatory ambit. Extreme volatility and lack of government support make it a tightrope walk for investors
Jyotika Sood, Vishav & Yagnesh Kansara

“The ascent of money has been essential to the ascent of man.” - Niall Ferguson in The Ascent of Money: A Financial History of the World

As human civilisation progressed from barter deals to paper tenders and then to online transactions, we moved towards binary wealth. We evolved in sync with the evolution of money and reached the age of cryptocurrencies.

The death of a young chief executive of a Canadian cryptocurrency exchange cost his clients $250 million simply because his password could not be cracked. Gerald W Cotten did not share with anyone the access to his offline folder where he had stashed the investors’ money to fend offpirates. At the end of a long fight to recover their money, the investors had to accept the loss. There was none to redress their grievance.

Welcome to the unbound and unregulated wild world of cryptocurrency where fate hangs in a fine balance and fortune is encrypted.

From buying a Bentley to losing it all – investors in the crypto space have had myriad experiences along the course of their journey. Traders booked a record loss of $4.53 billion on May 19 alone and $14.2 billion for the week when the market crashed nearly 50 per cent amid a frenetic sell-offby investors, who had pumped $17 billion into the industry in the last six months. The untamed volatility of cryptocurrencies resembles that of a wild stallion – more unpredictable than the charging bulls or the biting bears of the stock market. And, there’s no watchdog to control the $1.33-trillion market.

Despite a rapidly increasing demand across the world, most governments loathe cryptos because of this regulatory uncertainty of the instrument. Investors run the risk of being pulled up by various authorities for their transactions and, the biggest concern is the lack of a monitoring agency to resolve their issues.

Crypto is not a crime in India now but is still out of the legal ambit and the government is yet to reveal its stand on the virtual asset. Cryptocurrencies and crypto assets were banned in India from April 2018. “The government does not recognise cryptocurrency as a legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payments system,” then finance minister Arun Jaitley had said.

In March 2020, the Supreme Court announced culmination to the Reserve Bank of India’s April 6, 2018 decision that restricted financial entities from providing services to cryptocurrency players. While lifting the ban, the apex court said that the RBI was unable to provide evidence on the potential harm to banks from cryptocurrency players.

SHAKTIK ANTA DAS

Governor, Reserve Bank of India

“There is no change in RBI’s position. We have major concerns around cryptocurrencies, which we have conveyed to the government. and, about investors, it is for each investor to do his/her due diligence and take a very careful and prudent call.”

This was a turnaround time for cryptocurrency in India. The long lockdowns form March 25, 2020 took cryptos to an inflection point as mobile phones became the lifeline for most of us through the nation’s battle with the Covid-19 pandemic. In the sweeping wave of digital disruption, cryptos became an instrument of choice for their three fundamental properties – they are electronic, they are not liability of anyone, and they allow peer-to-peer exchange.

Cryptocurrencies are bought and sold like stocks in stock exchanges. The main difference is that there is no physical feature to the instrument. There are several exchanges to buy and sell cryptos and the investor needs to pay a fee for trading. The charges vary across exchanges and across currencies being traded.

In the absence of any regulatory mechanism, there is no circuit breaker or warning system, for crypto trade. The inherent volatility of the instrument stems from the fact that the assets can be traded in minute fractions. Cryptos can be divided up to several decimal places and an investor can buy even a fraction of a currency. Selling cryptos is classified as a business and one has to pay taxes according to business and professional tax slabs and, as an investor, profits would fall in the ambit of capital gains tax.

ANURAG THAKUR

Minister of State for Finance, Government of India

“The gains resulting from the transfer of cryptocurrencies/assets are subject to tax under a head of income, depending upon the nature of holding the same.”

The pandemic has brought a change in consumer behaviour. Investors are now exploring new-age options and going for assets like cryptos such as Bitcoin, Ripple and REIT while holding some liquid cash as emergency funds. “Most crypto assets have grown and users investing systematically tend to benefit over time. A Bitcoin SIP has outperformed other forms of investing by 10 times over the last five years,” says Gaurav Dhake, Founder and CEO of Bitbns.

Cryptocurrencies are bought and sold like stocks in stock exchanges. The main difference is that there is no physical feature to the instrument. There are several exchanges to buy and sell cryptos and the investor needs to pay a fee for trading. But there is no redressal mechanism yet for investor grievance

While Bitcoin, Etherium, Litecoin or Dogecoin have made substantial inroads into our minds, there are over 10,000 types of cryptocurrencies in the market and most of them are unlikely to survive for long. The top 10 together account for almost 90 per cent of the market share. Bitcoin and Etherium make up for almost 65 per cent of the pie. This shows that all cryptocurrencies are not the same and it is imperative to understand the specific coin before one decides to invest in it.

NANDAN NILEKANI

Co-Founder and Chairman of Infosys

‘‘ Just like you have some of your assets in gold or real estate, you can have some of your assets in crypto… I think there’s a role for crypto as a stored value but certainly not in a transactional sense.”

In the post-Covid world, investors have focused their efforts on passive income investments, instead of speculative assets that only offer capital appreciation opportunity. Staking has come up as a tool to earn passive income out of cryptocurrencies. It lets the investor make money from holding cryptos and lend her assets in a secure and easy way while fetching interests on them. The average return an individual can earn is around 12.78 per cent per year, though the rate of return varies across currencies.

CoinSwitch Kuber CEO Ashish Singhal says there are various factors that differentiate the currencies from one another. These factors could be circulating supply and upper limit, cryptocurrency mining, and release rates. Other factors include reputation, decentralised applications, transaction speed, and scalability.

A Bubble Waiting to Burst?

Four things to know before you invest in cryptocurrencies

Rajeev Yadav

MD & CEO, Fincare Small Finance Bank

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