Private crypto stirs a hornet's nest

After years of dilly-dallying on how to treat cryptocurrencies, the introduction of taxation has effectively removed some uncertainty about the legal status of crypto transactions in the country. Union Finance Secretary T V Somanathan's statement immediately after the Budget presentation that, "They are in a grey area. It's not illegal to buy and sell crypto," had given credence to the view about the legal status of crypto transactions

In the Union Budget for the financial year 2022-23, Union Finance Minister Nirmala Sitharaman had made the all important proposal of a 30 per cent tax on income from transfer of virtual digital assets like cryptocurrencies. Of course, it was a big relief to the investors and traders of cryptocurrencies as some clarity on taxation about cryptocurrencies was a long pending demand of cryptocurrency investors and traders in the country.

After years of dilly-dallying on how to treat cryptocurrencies, the introduction of taxation has effectively removed some uncertainty about the legal status of crypto transactions in the country. Union Finance Secretary T V Somanathan's statement immediately after the Budget presentation that, "They are in a grey area. It's not illegal to buy and sell crypto," had given credence to the view about the legal status of crypto transactions. "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," he had stated.

But, what is baffling the crypto community in the country is the term 'private cryptocurrency' in the proposed Cryptocurrency Bill which is being finalized by the Central government to introduce in the country.

Even though the Union Finance Ministry is yet to come out with the nitty gritties of the proposed 'The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021', reports have been doing the rounds that the Bill seeks to prohibit all private cryptocurrencies in India. The Bill, which was to be introduced in Parliament in the last two sessions of Parliament, seeks to prohibit all "private cryptos" in India, with certain exceptions to promote the underlying technology.

Though the government has introduced taxation on crypto transactions, the term 'private cryptocurrency' in the proposed Bill is stirring a hornet's nest as experts are divided on the interpretation of 'private cryptocurrency' and it has been left open to many interpretations creating a stir in the crypto world. These are a class of cryptocurrencies that power private and anonymous blockchain transactions by obscuring their origin and destination. But exactly what constitutes 'private' is still unclear and adds to the confusion among the crypto investors and traders.

As arguments and counter-arguments fly thick and fast, some of the experts say that it means that all cryptocurrencies other than Central Bank Digital Currency (CBDC) will be banned. But, others say it means that cryptos that do not have a public ledger to track transactions will be banned.

In technical terms, public and private cryptocurrencies are distinguished on the basis of privacy that they offer. All cryptocurrencies are based on distributed ledgers, one of their biggest advantages over other forms of currencies. While there is one ledger in the case of bank or other financial institutions, cryptocurrencies use blockchain technology to have multiple ledgers, all of them connected over the network. Any transaction on the network is recorded and cross-checked across all these ledgers, leaving no chance for a miscalculation or a bogus entry. Quite simply, anything on a ledger that does not match with other ledgers gets cancelled. This means there is no need for third-party monitoring of the network or its ledgers. Hence, there is no central institution monitoring the transactions. This is also why, in the traditional sense, all cryptocurrencies are private in nature, as there is no single body controlling them.

Meanwhile, some experts argue that prominent cryptocurrencies like Bitcoin and Ethereum are public cryptocurrencies and do not fall under the definition of private cryptocurrencies. They argue that since Bitcoin, Ethereum, and other popular cryptocurrencies are not controlled or managed by any private entities, as the transactions are on the public ledger, they are recognised as public cryptocurrencies by major countries in the world.

Whatever the merits or otherwise of these arguments, it is a fact that different interpretations about the definition of 'private cryptocurrencies' have created an environment of fear among crypto investors in the country. That is because of the general notion that all cryptocurrencies are private in nature, since they are not authorised or regulated by a government body. As the confusion lingers on, the only way out for the crypto community is to wait for the government to make the contents of the proposed Bill public. Till then, the billion dollar question about the term 'private cryptocurrency' will prevail.

(The author is freelance journalist with varied experience in different fields)