Govt weighs NFT nod to legalise digital assets
The government is considering legally allowing some blockchain-based uses such as NFTs as it could legalise some virtual digital assets (VDAs) , while possibly outlawing the use of the more popular blockchain tech that is cryptocurrencies, people aware of the matter said, citing a risk to financial stability from the latter that can be used as an illegitimate payment system.
The plans are part of what is eventually likely to be codified in a new law once detailed discussions with various stakeholders culminate, these people added. At present, cryptocurrencies such as Bitcoin and Ether and digital assets like non-fungible tokens (NFTs) exist in a legal grey area, although gains on selling of these are taxed at a flat 30% rate. “A final view is still awaited as the consultation process is not yet over, but there is near consensus that all VDAs cannot be treated as cryptocurrencies. VDAs may also include NFTs. Hence, the definition of VDA is wide, and it is not limited to those assets generated through cryptographic means alone,” one person said.
The classification of VDAs came into being when Union finance minister Nirmala Sitharaman announced the tax in her Budget speech on February 1. To be sure, the only broad umbrella that can be applied to cryptocurrencies as well as digital assets is the blockchain technology on which these are based.
A blockchain is a distributed ledger of records that enables the creation of digital money, art collections and virtual land owning. Almost all of these are considered crucial constituents for the vision of the so-called Metaverse, a virtual reality construct accessed via more immersive hardware like special goggles.
India and several other nations have resisted the concept of digital money and cryptocurrencies because they lack a sovereign fiat, are unregulated and thought to be inherently volatile. “RBI is open for the use of blockchain technology for NFTs etc, but it is not in favour of allowing private cryptocurrencies to disrupt the regulated financial system, which has been well articulated by RBI deputy governor T Rabi Sankar’s recent address,” the person quoted above added. There are also fears that cryptocurrencies can be used in the drug trade or to finance terror.
In his keynote address at the Indian Banks Association on February 14, Sankar argued at length why cryptocurrencies should be banned. “Cryptocurrencies have specifically been developed to bypass the regulated financial system. These should be reason enough to treat them with caution. We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to Ponzi schemes, and may even be worse. These should be reason enough to keep them away from the formal financial system,” he said. The RBI official added that letting people use these for financial transactions would also diminish the protections that have been created through KYC (know your customer), AML (anti-money laundering) and CFT (combating financing of terrorism) protocol. Finance minister Sitharaman, after presenting the Budget on February 1, articulated the concerns in other words too: “Every individual cannot be minting currency. Is it not illicit?
When illicit currency is coming in this country, don’t we catch then? So, currency cannot be issued by everybody… It has to be driven by the central bank of the country.”
RBI will separately launch a digital rupee, a step that the central banks of several other countries are considering or have already taken. These, technically called a Central Bank Digital Currency (CBDC), unlike cryptocurrencies, are regulated by the issuing central bank.
Industry estimates peg the value of Indians’ crypto holdings at around ₹40,000 crore with 15 million to 20 million investors, who have mostly bought cryptocurrencies such as Bitcoin and Ether. There are no estimates available for NFT holdings.
A legal recognition of digital assets such as NFTs will likely be crucial for allowing the Metaverse plans of multiple tech giants, including Meta (formerly Facebook). Experts have mixed views on the steps the government is considering.
“Crypto assets have several inherent and unique characteristics that pose challenges for policymakers. These challenges arise due to their lack of centralised control, pseudo-anonymity, valuation difficulties, hybrid characteristics including both aspects of financial instruments and intangible assets, and the rapid evolution of the underpinning technology and the form of these assets,” said Naveen Wadhwa, deputy general manager at Taxmann, a tax research and advisory firm, which has recently published a book on this matter.
Abhay Aggarwal, founder and CEO of NFT marketplace Colexion, said: “VDA’s are intangible and digitally created with an inherent value and as per our FM, not issued by the RBI and is inclusive of cryptocurrencies and NFTs along with other digital tokens, codes or numbers. Any move to regulate the entire circulation of these virtual assets is welcomed, however it should factor in the number of people involved in the trade, its potential contribution in the Indian economy and aligning us with the digitally advancing global world.”