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Union Budget 2022 acknowledges cryptocurrency by making it taxable asset


Union Budget 2022 acknowledges cryptocurrency by making it taxable asset

“I think it is my duty to tell investors that what they are investing in cryptocurrencies, they should keep in mind that they are investing at their own risk. They should keep in mind that these cryptocurrencies have no underlying (asset). Not even a tulip,” RBI Governor, Shaktikanta Das said.

Union Budget 2022 acknowledge cryptocurrency by making it taxable asset

This is the first statement coming from the country’s top banker after the government acknowledged the existence of cryptocurrency by making it a taxable asset in the Union Budget 2022. Investors be warned Das cautioned crypto investors and said there was immense risk involved.

However, it has raised certain pertinent questions among the growing investors and the public at large. Is financial regulation a matter of opinion? It is the duty of the State to mitigate market failure in finance and to plan State intervention on the problems of systemic risk, resolution, prudential regulation, and consumer protection. Addressing the four key issues leads to the optimal financial regulatory framework whenever facing any new situation.

Steps taken by the state to curb natural freedom must be backed by sound logic, evidence, and justification for enforcement of State power in the public domain. The Indian investor and the public are largely curious to know if it is the job of the regulators to ensure that users make profits and prevent people from making losses.

When we apply them into the ownership and use of cryptocurrency, there are some concerns about consumer protection, and there is a reasonably simple strategy which can be applied when Indian financial service providers engage with Indian residents. There must be a structured and disciplined approach through which we can analyse and address the situation, and discover the useful role, if any for financial regulation.

  • Inherent Systemic Risk

Does the market present inherent systemic risk to the soundness of the overall financial system in the country? If so, there can be market failure in the form of a negative externality imposed upon common investors. This can be a reason for the government to get involved, either through rules that reduce the failure probability, or rules that make resolution more orderly. In the case of cryptocurrency, the volumes involved in India are small and there is hardly hint of systemic risk.

  • Resolution

Is the state facing grave and hazardous financial activities so as to present significant cause for resolution through the route of Insolvency and Bankruptcy Code (IBC)?

It makes sense to resolve defaulted financial firms who do not have retail depositors, through the IBC process of handing power to the committee of creditors. But when faced with retail depositors of a bank, we require the specialised Financial Resolution Corporation.

Only in the event of the Indian financial service providers accepting cryptocurrency deposits in ways that are akin to a bank, then the need for coverage in the Financial Resolution Corporation would be mandated. But the simple process of owning and trading cryptocurrency does not induce questions about resolution.

  • Prudential regulation

When financial institutions like a bank promises assured returns on investment, or an insurance company makes promises about payouts in the future, then common investors worry about the extent to which these promises will be upheld. To reduce the risk faced by such investors, governments can engage in 'prudential regulation', to bring failure probabilities down to low values. These concerns do not arise when dealing with the process of buying, owning or transferring cryptocurrency assets.

  • Consumer protection

In recent times, we have witnessed the Ponzi scheme failures across various states in India duping the micro investors. The state and the financial regulatory bodies have failed to protect the interests of the investors. Several Commissions have been set up at the cost to the state exchequer without tangible outcomes to the investors. Financial firms often treat consumers unfairly. This leads to consumer retreat from formal finance to the informal sector, such as investment in gold or overseas assets. Therefore, regulators intervene in the working of the financial system in order to improve the larger interest of the investors.

With thousands of cryptocurrency assets, including some scamsters, there seems to be a problem in terms of gullible investors making blunders and then retreating from cryptocurrencies as a whole. This would be a retreat from an entire sector in response to some bad apples.

Indian regulators can help matters through a reasonably simple strategy, akin to that used with money management. This approach can be useful in the world of cryptocurrency. Access to the field would be for participants with knowledge. Making losses is normal in finance. When anyone buys a share on the stock market, there is 50 per cent chance of the share price going down the next day.

This approach can be useful in the world of cryptocurrency. The task of financial economic policy is limited to addressing the four key issues of systemic risk, resolution, prudential regulation, and consumer protection. There is a large distinction between financial regulation (using state power to force people to behave in certain ways) versus financial advice (your views of what is optimal for me).

The top banker’s duty to safeguard the interests of the common investors is certainly welcome. But the problem is when he decides to be your investment banker too. We may think it is not useful for a class or section of our population to own cryptocurrency assets. This is in the zone of ‘advice.’ But one can also question investments in stocks, commodities, gold and real estate too.


 

 

 

  

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