Need a Regulatory Framework for Virtual Digital Assets

Syllabus: GS3/Economy

Context

• The Parliamentary Standing Committee on Finance, in its report on the Securities Market Code (SMC), has called for an “appropriate regulatory framework” for Virtual Digital Assets (VDAs) such as cryptocurrencies.

Key Recommendations

• The committee noted that VDAs and crypto-assets were presently unregulated in India, except for the limited purpose of taxation.
• It recommended introducing an interim regulatory mechanism through recognised Self-Regulatory Organisations (SROs) operating under the oversight of the designated regulator. 
  • Such a framework should prescribe minimum standards of governance, transparency, disclosure, investor protection, grievance redressal, compliance with prescribed codes of conduct and appropriate regulatory oversight.
• It pushed for specific definitions for VDAs under securities and derivatives and other categories as not all crypto assets qualify under particular segments.

Digital and Virtual Digital Assets

• The term ‘Asset’ is a resource having economic value and the same may be owned by an individual, entity, or country. 
  • Assets are classified based on: convertibility, physical existence, and usage. 
• A ‘digital asset’ should be a digital file owned by an individual or company, be of value (economic benefit) to the individual or company, and be searchable, discoverable, and available for use.
• Virtual Digital Assets (VDA) are subsets of all digital assets transacted on a blockchain, such as non-fungible tokens (NFTs), cryptocurrencies and other virtual assets.

Taxation of VDAs

• In India, the term VDA is legally defined under Section 2(47A) of the Income Tax Act, 1961 (inserted by the Finance Act, 2022).
• The Union Budget for 2022-23 included provision for taxation of VDAs. It included cryptocurrencies and non-fungible tokens (‘NFTs’). 
  • They are subject to a 30% income tax and 1 % TDS on transfers, with no set-off for losses.
• Expenses related to mining, transaction fees, and platform commissions cannot be deducted when calculating taxable income.

Way Ahead

• India’s decision to treat VDAs as property and capital assets is a step towards aligning with international legal standards. 
  • The United States SEC classifies many crypto assets as securities, bringing them under financial market regulations. 
  • This shift is critical for ensuring that VDAs do not exist in a legal grey area. 
• By defining them as property, India gains the ability to tax, regulate, and seize crypto assets when necessary, preventing their misuse for illicit financial activities. 
• This requires a cohesive policy framework that integrates financial regulations, consumer rights, and technological advancements to ensure a balanced and secure digital asset ecosystem.

Source: TH