During her announcements, the finance minister laid one lingering doubt to rest — that of the validity of crypto currencies. Rapidly proliferating digital currencies — hitherto neither legal nor illegal — were finally recognised as “digital assets” in the budget speech. The FM also said the Reserve Bank of India is going ahead with its stated objective to launch its own digital currency — a central bank digital currency (CBDC). What does this mean?

The road to CBDC

A few nations — China the most prominent of them — are now experimenting with sovereign digital currencies. Others are in the process. Just like cryptocurrencies, the RBI’s digital rupee will be implemented via blockchain technology.

Central banks around the world are warming to the idea of CBDCs — partly in response to the proliferation of private and unregulated cryptocurrencies that carry several risks, anonymity, lack of regulation and investor safety nets, and the potential for financing crime.

Impact on banking

A blockchain is a decentralised, digital, public ledger. It cannot be hacked or manipulated. The most famous use-case of this technology is Bitcoin, through which billions of dollars change hands everyday.

The key thing here is the decentralisation. No single person, company, or government controls such blockchains. Central banks stand for centralisation; cryptocurrencies for decentralisation. Here, the RBI will adopt an instrument of decentralisation for the development of its coin. The arrival of CBDCs may also impact the relationship between central and commercial banks. For centuries, central banks have needed commercial banks to store, move, and distribute paper currency. These are time-consuming and costly activities. These problems disappear with digitisation. The arrival of a CBDC, therefore, may have a transformational effect on the movement of money. But these effects remain to be seen.

Validity through taxation

By applying taxes to crypto trades, they were given legal validity. It signalled the government will not ban them. However, the taxes imposed are tough and not at par with how other asset classes are taxed. For starters, all crypto income will be taxed at a 30 per cent rate, just like winnings from lottery and gambling-even if the investor is in a no-tax bracket. Crypto payments will require the payer to deposit 1 per cent TDS on the payee’s behalf.

This compliance burden may deter users from transacting with crypto. Lastly, no deductions can be claimed against this income. Losses, if any,cannot be offset against gains or carried forward to the next fiscal. So while it's legal to trade crypto, there is now this strict compliance requirement.

A way forward

The FM also clarified that the CBDC will be legal currency and cryptocurrencies, even non-fungible tokens (cryptocurrencies in the form of art), are “digital assets”. The two shouldn't be confused as one.

While the taxation may seem almost punitive, the government has shown the way forward. It has kept the door open to crypto innovations in India. The announcements are likely to calm crypto traders and enthuse blockchain developers about the possibilities that lie ahead. The tax rules are a starting point. Regulations still need to be developed to provide safety nets to investors and to nations.

Adhil Shetty is CEO of BankBazaar.com