The Breakdown - India Heading Toward Crypto Legalization?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, February 2nd, and today we are discussing whether India is heading towards crypto-legalization. First, though, if you are enjoying The Breakdown, go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation with some really interesting thinkers, join the Breakers Discord. You can find the link to the Breakers Discord in the show notes or go to bit.ly slash breakdown pod. So the Indian crypto story has been an absolute saga.

Starting point is 00:00:57 In 2018, the Reserve Bank of India effectively outlawed cryptocurrency. by making it so that financial institutions in the country, banks, etc., could not interact with cryptocurrencies or crypto-related businesses in any meaningful way. In early 2020, however, the country's Supreme Court overturned that ban, creating much more space for native crypto companies to grow and flourish. Since then, however, it has basically been an endless string of back-and-forths and rumors and innuendo and reports on whether or not crypto is going to be banned in the country. And of course, this has pretty big implications.

Starting point is 00:01:35 India is a huge market. It has a tremendous number of people who could participate in, get the benefits from, as well as contribute to the development of the crypto space. I mean, we are talking 17.7% of the world's population, the third largest economy in Asia behind just China and Japan. And to be clear, the lack of clarity hasn't really stopped Indians from participating. India was one of crypto's biggest.

Starting point is 00:02:01 adopters last year, ranking number two on the Chainalysis' 2021 Global Crypto Adoption Index, behind only Vietnam and just ahead of Pakistan. That indexes benchmarked to three factors. One, on-chain cryptocurrency value received, weighted by purchasing power parity per capita. Two, on-chain retail value transferred, weighted again by purchasing power parity per capita. And three, peer-to-peer exchange trade volume weighted by PPP per capita and the number of internet users. Within the wider crypto space, some prominent voices like Balaji Shrinivasan have been really focused on the question of India. Last year, he wrote a series of great pieces on exactly this. One argued that India should indeed launch a digital rupee, but it should be

Starting point is 00:02:42 backed, he thought, by Bitcoin. He argued that Bitcoin backing would help prevent de-platforming, which makes it relevant for India's national security. He made the argument in terms of foreign investment, arguing that crypto would bring capital to India. And of course, he pointed out benefits to remittances in the remote economy. In addition to arguing for Bitcoin and crypto, he also argued pretty strenuously that India couldn't really ban Bitcoin if it wanted to, saying, quote, it's not technically feasible, math and computer science get in the way, it's not socially feasible, brilliant engineers, billionaire financiers, and tens of millions of crypto holders globally prevent formidable obstacles. It's not politically feasible. Other states will be launching

Starting point is 00:03:20 their own national digital currencies, and India will not be able to prevent them from doing so, nor stop them from internationalizing their offerings. Despite all of this, there has been a lot to think that India was headed in the opposite direction. As recently as November, the Prime Minister Narendra Modi had given comments that painted their crypto stance in a challenging light, talking about the concern that cryptos posed for the nation's youth. And then just weeks later, we saw proposals for prohibiting private cryptos. But when it comes to actual facts, actual policy, it has remained murky. Earlier this week, however, we got a little more actual factual information.

Starting point is 00:03:57 Indian finance minister Nurmala Sitharaman gave the annual budget speech to Parliament. This was more than two hours, and among them numerous topics, one was her announcing a 30% tax on crypto. This new tax regime would come into effect on April 1st of this year and would be relevant for any income generated by the transfer of digital assets. In the same speech, the finance minister also discussed. the launch of the digital rupee to be issued during 2022 to 2023. This is the first time that a timeline has been actively discussed by the Indian government. Sitha Raman said in her speech, quote, there has been a phenomenal increase in transaction in virtual digital assets.

Starting point is 00:04:38 The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Now, when asked about taxing citizens before the country's crypto regulations are finalized, she said, in, public stakeholders are coming in, so regulation goes through that process. Now, although taxes are pretty unfun as things go, to many in India, they are equating this speech, they are equating taxation, with legalization. Nichol Shetty, the co-founder and CEO of Wazir X, which is a major Indian crypto exchange, said, quote, India is finally on the path to legitimizing the crypto sector in India. He also called the digital rupee rollout, quote, phenomenal, saying that it will, quote, pave the way for

Starting point is 00:05:19 crypto adoption. Still, he said that the biggest development was, quote, the clarity on crypto taxation, which will add much-needed recognition to the crypto ecosystem of India. Sumic Gupta, who's the co-founder and CEO of Coin DCX, said the budget was, quote, forward-looking and inspirational, and that taxing crypto transfers was a, quote, step in the right direction. Sidarth Sugani, the founder and CEO of the crypto research organization, Krabako, said, quote, you can't tax something which is illegal. Hence, this is a very positive move by the government and is very good for the industry. If there tax clarity's in this space, more money is likely to come in. Nexto is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch

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Starting point is 00:07:39 Download the FTX app today and use referral code breakdown to support the show. Now, of course, not everyone in the country loved this speech. A former PM and congressional leader said, Today's budget speech was the most capitalist speech ever to be read by a finance minister. The word poor occurs only twice in paragraph 6, and we thank the finance minister for remembering that there are poor people in this country. people will reject this capitalist budget. Vivick Kahl, an Indian economic writer, said India's budget is high on vision, but what do the numbers tell us? Nirmalus, that the Raman's budget speech reads like a

Starting point is 00:08:15 pitch made to a VC by a startup looking to become a unicorn, who is high on vision but low on numbers. It's numbers that make up any budget. On the crypto side, many had concerns around how high the tax was. Tony Linklet writes, maybe it's a win for wealthy individuals and corporations, not a win for average Indian. Tax rate is predatory and makes crypto investing punitive. It's specifically designed to keep them poor. He also points to a business insider article that says that this would put crypto on par with the highest income tax bracket. Bologi discussed it as well, saying India is legalizing crypto assets. There's significant fine print, especially around tax, but overall, this is a win. The speech is bigger than crypto, however. If you read it, you get the unmistakable

Starting point is 00:08:56 impression that India is more tech-savvy than many realize. Digital universities, drone farms, telemedicine, open source, embraced and understood at the highest level. It's a bizarre experience to see a national politician who is conversant with technology and can calmly describe its benefits to the public as part of a dry budget speech. It shouldn't be bizarre, but it is. Ultimately, the main sentiment that I saw was summed up by Crypto India on Twitter, from 10-year jail imprisonment to 30% crypto tax. That's progressive. So what are some wrap-up thoughts here? Well, one, it's a win for the Indian crypto community. At least it certainly appears so. While there were some who in the immediate term were saying that this doesn't amount to legalization,

Starting point is 00:09:36 the Indian government has seemed to confirm that it does. In a clarifying interview with Bloomberg, the finance secretary said, cryptos are in a gray area. It is not illegal to buy and sell crypto. We have now put in a taxation framework that treats crypto assets the same way we treat winnings from horse races or from bets and other speculative transactions. Two, I think this is a win for the broader crypto community in terms of having the talent in that 17.7% of the world's population be able to contribute actively to the space. Three, I do agree that this tax rate is really high, and I hope that the community in India can dig in and fight for crypto to be treated more like any other asset.

Starting point is 00:10:15 Four, there is some seriously interesting non-alignment game theory here. If China and the U.S. are pushing the world into a choice of monetary and financial affiliation, what do you do? What's the value in that circumstance of a neutral currency regime? Right now, that may be a mostly theoretical question, but it could get a lot more interesting in the decade to come. Speaking of that, I wanted to close this episode today, giving a little more color to a situation I've mentioned but not gone deep on that relates to another country with a big stake in how

Starting point is 00:10:46 the global currency order shakes out. So we talked last month about the Russian central bank arguing for a full ban on crypto. And I also shared that pretty soon thereafter, news was that the Putin camp was not for that position. Well, last week, a Russian news agency, RBK, reported that the government plans to have regulations for crypto in place by the end of the year. They have seen a roadmap that's signed by the deputy chair of the government that includes KYC AML, defining exchange regulatory status, creating a supervisory body to oversee, and penalties for noncompliance. And apparently this has lots of buy-in. The plan was drafted by a working group that included the Ministry of Finance, the Ministry of Economic

Starting point is 00:11:24 Development, the General Prosecutor's Office, the Federal Tax Service, the Ministry for digital development, the Federal Security Service and the Ministry of the Interior, and the only dissenting voice was the Bank of Russia. Another report leaked from the Kremlin also had an estimate of how much crypto-Russians hold. That report puts it at 16.5 trillion rubles, or 214 billion, which would be about 12% of all crypto. It would also make it one-third the market cap of Russia's benchmark stock exchange. They say this is held by 17 million Russians, and that 500K developers in the country are working in related industries. If all of that's true, it makes sense why they would want to tax the thing not ban it. Namsimios, a reporter at Bitcoin Magazine, says Bitcoin game theory is

Starting point is 00:12:07 playing out. The network's incentives are doing their work. Putin knows that he can't afford to ban Bitcoin or Bitcoin mining. No one can. Welcome it or be left behind. Charles Edwards says Russia is now actively supporting the adoption of crypto. U.S. threats of banning Russia from Swift and other centralized payment infrastructure drives this. Not saying this is right or wrong, but the game theory dictates massive upside for Bitcoin. Some other commenters are skeptical of that number, that 214 billion number, that 12% of all crypto adoption. Alex Gladstein writes, 11% of the entire world cryptocurrency market cap would be a shockingly high number for a country with barely 2% of the world population. Either way, it admission, just like the Cuban statement in

Starting point is 00:12:48 September, that they are taking this seriously. Nicole Dobro followed up saying Russia bluffing about their Bitcoin holding is kind of a big deal. Game theory just got exponentially more interesting. So there you have it some really interesting developments in what I think is, and I've said a couple times now, is going to be one of the key themes of this year, the relationship between governments and crypto. I'm certainly excited to see this progress in India and I hope that they can keep this momentum through the rest of the process of defining crypto regulations in the country. For now, I want to say thanks again to my sponsors, nexus.io, Arculus and FTX. And thanks to you guys

Starting point is 00:13:24 for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - India Heading Toward Crypto Legalization?

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