WEBVTT - Regulation Through Taxation in India

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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<v Speaker 1>and this is Bloomberg Crypto, a daily Bloomberg I heart podcast.

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<v Speaker 1>It's Friday, July eighth. It feels like every country in

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<v Speaker 1>the world is figuring out how they want to regulate

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<v Speaker 1>crypto right now, or even if they will allow the

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<v Speaker 1>asset class to exist at all. India has seen as

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<v Speaker 1>one of the fastest growing markets for crypto trading, something

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<v Speaker 1>which its government isn't too keen on Bloomberg reports. Sadartha

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<v Speaker 1>Schokla joins me today to discuss India's complicated history of

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<v Speaker 1>crypto regulation, why they're turning to taxes to curb speculation,

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<v Speaker 1>and the potential lessons for other countries. I'm so happy

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<v Speaker 1>today to have Saddhartha, who was my colleague based in Mumbai,

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<v Speaker 1>joining us on the podcast. Hi, Hi Stasen, Thank you

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<v Speaker 1>for having me up. Pleasure. So let's get started with

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<v Speaker 1>a little bit of contacts about crypto in India. Can

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<v Speaker 1>you say a little bit more about the size of

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<v Speaker 1>the market and why this is a big deal as

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<v Speaker 1>far as the asset class goes. Sure so in India

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<v Speaker 1>when it comes to crypto things actually picked up in

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<v Speaker 1>twenties seventeen because still then Indian users had access only

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<v Speaker 1>to purchasing bedcoin or ethereum, but on very few platforms.

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<v Speaker 1>In TV exchanges started having more tokens onto their platform.

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<v Speaker 1>But just a year after that, the Central Bank of

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<v Speaker 1>India the r b I, they issued a circle which

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<v Speaker 1>basically cut off all crypto startups from the country's payment

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<v Speaker 1>and banking network, post which there was a pretty long

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<v Speaker 1>winter in the Indian market. It was much harsh than

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<v Speaker 1>what we saw in the grouble market, but that happened,

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<v Speaker 1>and then in two thousand and twenty two, the new

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<v Speaker 1>crypto exchangers were fighting this in the Supreme Court of

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<v Speaker 1>India and they were able to overturn this circular. So

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<v Speaker 1>the headline story really caught my attention. Earlier, India to

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<v Speaker 1>propose prohibiting all private cryptocurrencies, that was the headline story.

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<v Speaker 1>A little bit later on the story crept outside India

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<v Speaker 1>too is said to consider allowing cryptoi trating for some investors.

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<v Speaker 1>What we saw in India was that there was a

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<v Speaker 1>lot of pent up demand for these assets, and we

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<v Speaker 1>also saw that a lot of VC money started flowing

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<v Speaker 1>in the exactly and in in that short time frame

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<v Speaker 1>from twenty twenty two, I would say mid of twenty

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<v Speaker 1>twenty one, India so its first two crypto unicorns, right,

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<v Speaker 1>so in exchange called coin dc x and another called

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<v Speaker 1>coins tored. Both of them got a billion dollar worth

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<v Speaker 1>of bad valuation in a very short period of time.

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<v Speaker 1>We also saw that with this venture capital money came

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<v Speaker 1>a lot of marketing and publicity. So we've seen that

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<v Speaker 1>happened globally, right with all crypto exchanges, whether it's crypto

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<v Speaker 1>dot com or for that matter, binnance. So that attracted

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<v Speaker 1>a huge crowd in this small and you know, decent

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<v Speaker 1>asset class. We saw that from twenty onwards many Indians

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<v Speaker 1>belonging from Tier to three, Tier three cities as well

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<v Speaker 1>started getting onto these platforms. They started buying crypto tokens.

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<v Speaker 1>And the most conservative estimate that we have of the

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<v Speaker 1>total market size is around close to twenty million users

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<v Speaker 1>in India, which is a lot compares into a lot

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<v Speaker 1>of markets out that's right. So a couple of things

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<v Speaker 1>it sounds like you're saying. So there was this winter

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<v Speaker 1>for several years, partly as a function of the government's

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<v Speaker 1>ban on crypto partly as a function of what was

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<v Speaker 1>happening in global markets, and then from when that ban

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<v Speaker 1>was overturned, we started going through the same boom bust

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<v Speaker 1>cycle as everywhere else, which was sort of it sounds

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<v Speaker 1>from what you're saying like more boom than bust with

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<v Speaker 1>a pretty significant markets in India. My big question is

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<v Speaker 1>is that market you know, I know you mentioned people

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<v Speaker 1>were interested in defy, but is it largely trading in

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<v Speaker 1>bitcoin and ether or are there other elements that you

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<v Speaker 1>think are specific to what's happening in India that makes

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<v Speaker 1>the government really concerned about risk and speculations of the

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<v Speaker 1>government has always been that cryptocurrencies can lead to a

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<v Speaker 1>flight of capital outside of India. They can be used

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<v Speaker 1>for money laundering and for terrorists financing, and those have

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<v Speaker 1>been the major reasons why crypto trading firms in India

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<v Speaker 1>have had an uneasy relationship with banks, the central Bank,

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<v Speaker 1>and the Indian government as well. Because of that, we've

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<v Speaker 1>seen a couple of kneja reactions as well from the

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<v Speaker 1>government side, Like for example, I had mentioned what happened

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<v Speaker 1>in eighteen So the Central back of India has always

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<v Speaker 1>held an opinion that they want cryptocurrencies to be banned

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<v Speaker 1>in India, completely banned, but you know, they never went

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<v Speaker 1>ahead and you know, you know, no law was made

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<v Speaker 1>around that. But what happened in twenty eighteen was sort

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<v Speaker 1>of like an indirect bank because they had not outlawed

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<v Speaker 1>crypto assets, but what they had done they had basically

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<v Speaker 1>removed crypto platforms exchanges from the Trees backing system, which

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<v Speaker 1>in a way made it impossible for users new users

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<v Speaker 1>to use the Indian repeat and buy some crypto token

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<v Speaker 1>so on ramping on to the crypto universe became impossible.

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<v Speaker 1>So the idea was, oh, yeah, you can trade it,

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<v Speaker 1>you just can't actually buy any exactly. But the lack

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<v Speaker 1>of regulatory clarity had always kept Indians at being from

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<v Speaker 1>cryptocurrencies and still now, we never had any regulation on

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<v Speaker 1>how to formulate this industry or whether we need to

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<v Speaker 1>like clamp down on it. Right, But something interesting happened

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<v Speaker 1>earlier this year in February, so the Indian government announced

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<v Speaker 1>how crypto transactions and income from crypto assets will be

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<v Speaker 1>taxed in the country. So this was actually seen as

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<v Speaker 1>the first step towards regulation. People had welcomed the move

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<v Speaker 1>right because taxing any asset or any product for that matter,

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<v Speaker 1>is always seen as a sign of legitimization. Right. But

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<v Speaker 1>once people started digging deeper into the finer details of

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<v Speaker 1>this new tax regime, that's when they understood that already

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<v Speaker 1>this might do more harm than good. So I want

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<v Speaker 1>to ask you some questions about that, because on the

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<v Speaker 1>one hand, you say, rightly, I think that you know

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<v Speaker 1>the there's this perception that taxation is a form of legitimization, right,

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<v Speaker 1>like the government's like, okay, this thing is going to

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<v Speaker 1>stick around. We may as well make sure that we're

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<v Speaker 1>getting our cut of whatever that thing is. But you

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<v Speaker 1>also note that actually, if you dig down into the details,

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<v Speaker 1>it looks like this might really put a damper on

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<v Speaker 1>the crypto industry. What is it about the Indian tax

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<v Speaker 1>that might have that effect? So I would say there

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<v Speaker 1>are three key highlights of the tax route. First is

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<v Speaker 1>that there will be a flatty tax on income from

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<v Speaker 1>crypto assets, so regardless of what income bracket you fall

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<v Speaker 1>into or how much money you made in a year.

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<v Speaker 1>The other is, one cannot offset any loss in crypto

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<v Speaker 1>assets against any other income, even from income from a

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<v Speaker 1>different crypto token, so there is no benefit of tax

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<v Speaker 1>harvesting for Indian investors. The third point is that the

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<v Speaker 1>government has also introduced a one person tedious or a

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<v Speaker 1>tax which will be deducted at source on all digital

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<v Speaker 1>assets transfer above a certain size. So those are the

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<v Speaker 1>three key highlights. That all sounds like the Indian government

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<v Speaker 1>saying we really don't want you in this asset class.

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<v Speaker 1>That's true. Like I said, we are still waiting for

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<v Speaker 1>formal regulations around crypto assets in India, even though a

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<v Speaker 1>tax regime has been announced. The government has said that

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<v Speaker 1>that this does not mean that crypto assets are legalized

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<v Speaker 1>in India. They're just saying that as a government, we

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<v Speaker 1>have the right, you know, tax you on this kind

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<v Speaker 1>of an income. So that's what we're doing, right. So,

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<v Speaker 1>like what happened back in this is pretty similar to

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<v Speaker 1>that that this is somewhat like an indirect way to

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<v Speaker 1>reduce crypto trading activity in the country. We'll be right

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<v Speaker 1>back with more up the ata's take on India's approach

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<v Speaker 1>to regulating crypto. If you want to treat crypto as

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<v Speaker 1>a sin and you want to have a high tax

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<v Speaker 1>on it and you want to eventually ban it, that

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<v Speaker 1>be specific and have that bro but keep bear in

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<v Speaker 1>mind that a lot of people would indulge in crypto

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<v Speaker 1>and indulge in these operations and in the dark net,

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<v Speaker 1>and a lot of these operations will go under the

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<v Speaker 1>supporting crypto. I'm thinking after I'm asking the government to

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<v Speaker 1>be clear. One of the things that I am always

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<v Speaker 1>interested in as it relates to crypto is the sort

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<v Speaker 1>of the clever ways in which people regulate without regulating,

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<v Speaker 1>right so, you know, in the in the in the US,

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<v Speaker 1>for instance, the security is in Exchange Commission is pretty

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<v Speaker 1>fun of what is sometimes known as regulation through litigation,

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<v Speaker 1>which is like we're you're we're going to make you

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<v Speaker 1>pay a hundred million dollars in fines until you stop

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<v Speaker 1>doing this thing that we don't like. But we're not

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<v Speaker 1>going to issue specific guidance about the thing we're seeing

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<v Speaker 1>in India sort of regulation through taxation. And are you

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<v Speaker 1>hereing from folks locally or elsewhere in Asia that other

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<v Speaker 1>governments or other bodies are looking to how India is

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<v Speaker 1>approaching this as a potential model for their own, you know,

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<v Speaker 1>attempts to keep crypto under control. So anya specific among

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<v Speaker 1>the major economies, China has already outlawed crypto cnncies. Right.

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<v Speaker 1>Apart from that, if you look at Singapore, they have

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<v Speaker 1>some what of an accommodative but strict regulatory regime, right,

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<v Speaker 1>and they haven't been any other country in the region

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<v Speaker 1>which has come out with very strict guidelines, I would say,

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<v Speaker 1>other than the tax structure, which as you describe it

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<v Speaker 1>is very, very punitive. Are there any other unique elements

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<v Speaker 1>of the Indian crypto market that you think folks should

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<v Speaker 1>know about. In India, we have mostly centralized exchanges which

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<v Speaker 1>have been the most dominent players, right, and they have

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<v Speaker 1>been the only place where people would majority of the

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<v Speaker 1>Indian users will go to get some exposure on crypto assets. Right.

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<v Speaker 1>What we've seen that in the last couple of months,

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<v Speaker 1>especially after the implementation of the new tax regime, volumes

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<v Speaker 1>have really plummeted on these platforms. Take for example, was eRx,

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<v Speaker 1>which is India's largest exchange by volume and its owned

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<v Speaker 1>by Binance. Last year, at its peak, it was doing

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<v Speaker 1>volumes of around half a billion dollars city right currently

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<v Speaker 1>that has dropped to I would say last I head checked,

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<v Speaker 1>it was at around fourteen million dollars. Right. So, while

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<v Speaker 1>the world is struggling and facing a bare market, and

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<v Speaker 1>we are seeing marquee crypto projects collapse in India. It's

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<v Speaker 1>just a bit more worse, I would say. So we

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<v Speaker 1>have about one more minutes left, and I guess my

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<v Speaker 1>main question is do you see crypto being able to

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<v Speaker 1>survive in India given this extremely hostile governments and regulatory

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<v Speaker 1>environments that is in existence right now. I think by

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<v Speaker 1>its very nature, crypto assets are built to be like

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<v Speaker 1>censorship resistant, So India is actually a great testing ground

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<v Speaker 1>for that thesis. And I feel that crypto as an

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<v Speaker 1>asset class as a technology will still continue to thrive

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<v Speaker 1>in India. But the risks are that a lot of

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<v Speaker 1>the trading and the purchase might actually go underground, or

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<v Speaker 1>people might just transact on peer to peer unregulated platforms,

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<v Speaker 1>or dy me just try to get some tokens via

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<v Speaker 1>D five platforms. Right, So, how do you regulate that

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<v Speaker 1>No later in the world has been able to figure

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<v Speaker 1>out how do we, you know, implement key S norms

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<v Speaker 1>on a DE five platform and k I S norms

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<v Speaker 1>are like no your customers, So the ability to make

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<v Speaker 1>sure that somebody has who they say they are on

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<v Speaker 1>the DE five platforms actually is actually who they are yeah,

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<v Speaker 1>I I completely agree. I do think that there's a

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<v Speaker 1>bit of an arms race right now with certain parts

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<v Speaker 1>of the crypto markets and what regulators are trying to do.

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<v Speaker 1>But it does sound from what you've told us that

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<v Speaker 1>India has figured out some very clever ways to get

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<v Speaker 1>what they want or at least stop what they don't

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<v Speaker 1>want in the meantime. True, one of the consequence of

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<v Speaker 1>this has been that a lot of Indian businesses and

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<v Speaker 1>entrepreneurs have moved to jurisdictions which have more favorable and

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<v Speaker 1>accommodating the literary environment. So a lot of them have

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<v Speaker 1>actually moved to the Way. Some of the biggest names

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<v Speaker 1>in India, like for example, Polygon, which is a scaling

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<v Speaker 1>solution built on top of ethium. The entire team, the founders,

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<v Speaker 1>they have moved to Dubai. And as we see in

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<v Speaker 1>this space, which is very community driven, wherever the best

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<v Speaker 1>projects land up, that jurisdiction ends up attracting the best

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<v Speaker 1>stand as well. Right. So that's why in India there's

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<v Speaker 1>this running joe, especially in the crypto community, where people

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<v Speaker 1>say that the Way is the best city in India

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<v Speaker 1>because a lot of people move to the Way, and

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<v Speaker 1>also because of its proximity to the country, right, Like,

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<v Speaker 1>for example, one crypto startup entrepreneur was telling me that

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<v Speaker 1>it costs less to travel from the way to Delhi

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<v Speaker 1>than what it costs from traveling from Delhi to Bangalore.

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<v Speaker 1>So it's pretty nearby as well. So that flight of

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<v Speaker 1>talent as well as you know, capital as well is

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<v Speaker 1>something which is a major negative for the economy as well,

0:15:55.360 --> 0:15:58.520
<v Speaker 1>because at the end of the day, if Indian investors

0:15:58.520 --> 0:16:02.960
<v Speaker 1>and traders start moving their games in capitals onto foreign exchanges, right,

0:16:03.320 --> 0:16:07.680
<v Speaker 1>that means that there's a loss of revenue prospective tax

0:16:07.760 --> 0:16:11.120
<v Speaker 1>revenue for the Indian government as well. Yeah, a tricky,

0:16:11.240 --> 0:16:14.600
<v Speaker 1>a tricky balance. Well, thank you very much for that said.

0:16:14.600 --> 0:16:19.000
<v Speaker 1>I really appreciate you taking the time. Thanks. You can

0:16:19.000 --> 0:16:21.480
<v Speaker 1>find more of thez Darthur Schuklas reporting on the Bloomberg

0:16:21.560 --> 0:16:25.120
<v Speaker 1>terminal on Bloomberg dot com and you'll find him on Twitter.

0:16:25.400 --> 0:16:29.400
<v Speaker 1>He's at sid coins. That's s I D C O

0:16:29.560 --> 0:16:36.680
<v Speaker 1>I N S. On the next episode of Bloomberg Crypto.

0:16:37.000 --> 0:16:39.880
<v Speaker 1>John Crypto burst onto the crypto scene less than a

0:16:39.960 --> 0:16:42.840
<v Speaker 1>year ago with the appointments of a former intern named

0:16:42.840 --> 0:16:46.840
<v Speaker 1>Canal Korea as its founding president. Within just a few months,

0:16:47.240 --> 0:16:50.680
<v Speaker 1>John Crypto has found itself spending hundreds of millions of dollars,

0:16:51.040 --> 0:16:54.680
<v Speaker 1>bailing out market participants because of a major hack and

0:16:54.720 --> 0:16:57.920
<v Speaker 1>having to navigate the collapse of the terra USD stable coin.

0:16:58.640 --> 0:17:02.040
<v Speaker 1>Undeterred by his critics, Karia believes that the market's current

0:17:02.120 --> 0:17:05.639
<v Speaker 1>volatility is the perfect time to double down. You'll hear

0:17:05.680 --> 0:17:09.080
<v Speaker 1>from Bloomberg reporters Katherine Doherty and Uh Eyang. They went

0:17:09.119 --> 0:17:11.639
<v Speaker 1>to Chicago to visit Jump's headquarters, and they'll tell us

0:17:11.640 --> 0:17:19.959
<v Speaker 1>all about what's next for the firm. I'm Stacy Marie Ishmael,

0:17:20.160 --> 0:17:23.520
<v Speaker 1>and this is Bloomberg Crypto, a daily podcast from Bloomberg

0:17:23.520 --> 0:17:26.440
<v Speaker 1>and I Heart Radio. For more shows from I Heart Radio,

0:17:26.680 --> 0:17:29.760
<v Speaker 1>visit the I Heart Radio app, Apple Podcasts, or wherever

0:17:29.800 --> 0:17:33.399
<v Speaker 1>you get your podcasts. Email your questions, comments or suggestions

0:17:33.400 --> 0:17:36.280
<v Speaker 1>for the show to Crypto at Bloomberg dot net and

0:17:36.320 --> 0:17:41.320
<v Speaker 1>you'll find us on Twitter at Crypto. The supervising producer

0:17:41.359 --> 0:17:45.199
<v Speaker 1>of this episode is Vicky Vergalina. Our producer is Mohammed Farouk.

0:17:45.400 --> 0:17:49.000
<v Speaker 1>Associate producer is Thy Butler. Associate producer is zan Ab

0:17:49.000 --> 0:17:52.639
<v Speaker 1>Sudiki Desta wonder At is our engineer. Original music by

0:17:52.720 --> 0:18:04.520
<v Speaker 1>Leo Sidrin. The other four above had impressed anything bad