The Aakhya Weekly #28 | Bringing crypto back home
The Aakhya Weekly #28 | Bringing crypto back home
The Aakhya Weekly will be taking a week off. Regular programming resumes on January 5. Until then, here’s wishing you a Merry Christmas and a Happy New Year!
In Focus: Crypto after its annus horribilis
The year 2022 has turned out to be the crypto industry’s annus horribilis for a myriad reasons. What began as the promise of a financial revolution, endorsed by big names in industry, has within a few months seen an existential crisis of sorts. In India, crypto exchanges like CoinDCX, WazirX, and Coinswitch Kuber gained a lot of steam in 2021. In 2022, however, they took an unexpected hit, thanks to a slew of crypto tax measures announced by the Finance Ministry in the 2022 Budget. With the decentralised nature of blockchain and crypto trading making it impossible to regulate without international co-operation, the Government of India saw fit to introduce this tax as a stopgap measure. A capital gains tax of 30% was imposed on gains from crypto asset transfers. Any losses made cannot be set off against these gains. Controversially, a 1% tax deducted at source (TDS) has been imposed on every transaction.
The 1% TDS was introduced by the Finance Ministry to track transactions and weed out the possibility of tax evasion. The Government has also consistently taken a cautious line on crypto, warning investors about the risks of tangoing with unregulated asset classes. The tax measures appear to have been introduced with similar long-term objectives in mind. And ostensibly, it has worked. Trading volumes on Indian stock exchanges dropped by over 72% since the capital gains tax kicked in on 1 April, which dropped further by over 90% after the 1% TDS on transactions came into effect on 30 June. They have not revived since. However, this does not appear to be the end of cryptocurrencies in India - Indian investors have instead chosen to divert their funds to offshore exchanges, including Binance, the world’s largest exchange, and the (now disgraced) FTX, which was based in the Bahamas and was, until its fall, was a close competitor of Binance.
The catastrophic fall of FTX has been described as crypto’s ‘Enron moment’ (read here). The collapse came as a shock, not only to FTX customers (including Indian customers) who saw US$10 billion worth of their deposits vanish overnight, but also to the entire crypto industry, which now has to deal with a massive trust deficit – particularly from institutional investors. Before its collapse, Indian customers formed FTX’s eighth largest market worldwide, with over 8 lakh downloads in India – likely having been drawn in by the cult personality of FTX’s owner Sam Bankman-Fried.
Now, Indian investors who had parked their money at FTX have been left completely in the lurch, with no feasible legal recourse available save for filing a lawsuit in the Bahamas - an action that precious few can afford and even fewer would consider viable. While Sam Bankman-Fried has been arrested and extradited to the United States for trial, this does not guarantee that investors in India will get their money back.
From a policy perspective, as much of a good idea as it might be for the Government of India to introduce cumbersome taxes as a deterrent to curb unbridled investing by citizens into ‘Wild West’ asset classes, one can now see that it hasn’t quite had its desired effect. In such a scenario, it might be useful to consider the merits of making the crypto taxes less cumbersome. With the capital gains tax already having a curbing effect, it might be an overkill to have a 1% TDS on all transactions on top of this. On the other hand, reducing or removing the TDS might have the effect of luring Indian investors back to the local exchanges, where at least they will be assured of viable remedies.
For more, see Max Read’s excellent reading list on the FTX saga.
Tracking the G20
In this past week, the first meeting of the Development Working Group (DWG) under the G20 Sherpa Track commenced. Key priorities of the working group - harnessing data for development (watch the deliberations here and here), mainstreaming Lifestyle for Environment (LiFE) globally, and accelerating progress on SDGs through the levers of women-led development, digital transformation, and just green transitions - were at the forefront of discussions. Lines of Credit are widely used instruments in development cooperation, as explained excellently by Abhijit Mukhopadhyay in his piece on India’s Lines of Credit, Development Cooperation, and G20 Presidency.
The first Joint Finance and Health Task Force Meeting also took place this week. On a related note, Ritu Priya, Professor, Centre of Social Medicine and Community Health, JNU made a case for India to use its presidency to draft a model policy for Universal Health Coverage (UHC), committing to a universal, affordable, inclusive, and just healthcare system.
Top Stories of the Week
Indian Navy commissions INS Mormugao
On December 18, 2022 at the Naval Dockyard in Mumbai, Indian Naval Ship (INS) Mormugao (D67), second warship of the P15B class of stealth guided-missile destroyers, was commissioned in the presence of Defence Minister, Shri Rajnath Singh. The ship, which bears the name Mormugao after the historic Goan port city, has been indigenously designed by the Indian Navy and constructed by Mazagon Dock Shipbuilders Limited (MDL). Propelled by four strong gas engines and a top speed of more than 30 knots, the INS Mormugao is 163 meters long, 17 meters wide, and has a displacement of 7,400 tonnes. It is equipped with a variety of highly advanced sensors, cutting-edge radar, and armament systems such as surface-to-surface missiles and surface-to-air missiles. It is one of the most powerful warships ever built in India, a tremendous feat towards strengthening the country’s military prowess.
SEBI working on new payment system for secondary market
The Securities and Exchange Board of India (SEBI) is currently working on a new payment system for the secondary market, which is the market for trading securities that have already been issued to the public. This new system is intended to prevent brokers from accessing their client's funds without authorization.
The new payment system being developed by SEBI will be similar to the Application Supported by Blocked Amount (ASBA) process, which is currently used for subscribing to initial public offerings (IPOs). The ASBA process requires investors to block the required amount in their bank account, which is released only after the allotment of shares is confirmed. The new payment system being developed by SEBI for the secondary market will work in a similar way, only allowing funds to be transferred out of an investor's bank account once the trade has been confirmed.
This new payment system is being introduced in response to concerns about the misuse of client funds by brokers. By preventing brokers from accessing their client's funds without authorization, SEBI hopes to improve investor protection and increase confidence in the securities market. It is expected that the new payment system will be introduced by end of March 2023.
This Week in Policy
Economy and Taxation
India’s wholesale inflation fell to a 21 month-low of 5.85% in the month of November, declining from 8.39% in the month of October. The precipitous fall owes itself to an enormous base effect, given a monumental WPI inflation of 14.87% in November 2021, as well as a decline in prices of food and manufactured goods.
India is looking to increase import duties on “non-essential goods” in order to address its widening trade deficit. Officials are reportedly looking for products where India has sufficient manufacturing capacity to impose such hikes.
Labour
India is looking to collaborate with the G20 to create a consensus on issues related to gig work. Key areas of focus include ensuring equality and safety, addressing ethical concerns, improving worker experience and safeguarding social security.
Assam’s legislative assembly has introduced bills to amend 10 labour laws, aiming to reduce the punitive burden they impose - particularly the risk of imprisonment.
Agriculture and FMCG
In a bid to rein in prices, SEBI extends the suspension of futures and options trading in seven agricultural commodities, including wheat and moong, for one more year till December 2023.
Fodder inflation continues to rise as the country remains in a state of deficit for fodder. Prices have increased 27.66% in November over the same month last year.
Healthcare
The National Health Authority of India has proposed the creation of a ‘Unified Health Interface’, which shall form the foundational layer of the Ayushman Bharat Digital Mission. The network will bridge the various silos in which healthcare services currently exist, and permit easy exchange and monitoring of patient-related data.
The Central Government reportedly intends to open ‘Ayush’ units in all Government hospitals, in a bid to meet demand for traditional medicine.
Foreign affairs
A parliamentary panel has asked the Ministry of External Affairs to set up a task force for to look into issues relating to extradition requests.
Technology, Media and Telecommunications
MeitY Minister Ashwini Vaishnaw has said that the proposed telecom bill and data protection bill will likely be passed in the 2023 Monsoon Session of Parliament.
MeitY urges government employees to use only BharatVC, a platform developed by the National Informatics Centre, to ensure encrypted and safe video communication.
International trade and commerce
Union Minister Anupriya Patel on Wednesday confirmed in Parliament that India has signed 13 FTAs (including with the UAE and Australia) and is actively engaged in negotiations with other trading partners including the EU, Canada and the UK.
The Government of India is working on ways to boost exports and reduce the trade deficit in order to contain the surge in imports of non-essential goods.
Banking, Finance and Insurance
SEBI approves amendment to share buyback regulations to gradually phase out buybacks through stock exchanges. Minimum utilisation factor for stock exchange buybacks has been increased to 75% from 50% currently, and a separate window will be created on stock exchanges to conduct such repurchases during the phase out period.
New guidelines from SEBI disallow portfolio managers from disclosing any model portfolio returns or the performance of one or more cherry-picked portfolios in any communication to their clients. Managers will also be required to disclose the relative performance of their investment approach in all the marketing material relative to the selected benchmark; and relative to other portfolio managers within the selected strategy.
Manufacturing
With an aim to boost domestic production of vaccines and enhance self-reliance, the government is likely to unveil a Rs 2,500-crore financial assistance program which would be similar in design to the existing production-linked incentive (PLI) schemes.
The government plans to transform a 355 square miles wide marshland in Gujarat into a semiconductor manufacturing hub by 2025.
Logistics and Infrastructure
India launches its first-ever surety bond insurance product which would reduce the dependence of infrastructure developers on bank guarantees.
India is in discussions with Japan and Bangladesh to attract infrastructural investment in its NE states by adjusting tariffs, boosting connectivity and jointly courting investment.
India and Indonesia hold dialogue on boosting infrastructure at Sabang Port, an important region of trade for the two countries.
National Highway Authority of India will award three multimodal logistics parks (MMLPs) in Indore, Nagpur, and Bangalore this fiscal year.
India will roll out its first indigenously designed and built hydrogen-fueled train in December 2023.
Sustainability
In an attempt to prevent ‘green-washing’, SEBI has strengthened the framework for green bonds. Blue bonds (pertaining to water management and marine life) and yellow bonds (for solar energy) have been introduced as new sub-categories green debt securities.
To bolster the newly envisaged carbon trading market, a stabilisation fund will be created to keep prices of credits above a certain threshold. The fund would be used by a market regulator to buy carbon credits if prices fell too low.
Upcoming Events
Women Economic Forum, 2022
December 27-31 | JW Marriott, Delhi Aerocity
The Women Economic Forum, 2022, is being held from 27th to 31st December, 2022 at the JW Marriott, Delhi Aerocity. This year’s theme is to “Bridge the Gap: Agenda for G20” in light of India’s G20 presidency. The forum will cover a wide array of plenaries, including ‘Sustainable Banking & Finance’, ‘Circular Economy’, and ‘Communication & Advocacy/AI (Artificial Intelligence) & Data’, among others. Keynote address for day 1 will be delivered by Nitin Gadkari, Minister for Roads, Transportation, and Highways, GoI. More Information
A Few Good Reads
To understand China’s external assertiveness, one must understand its internal worldview, believes former Foreign Secretary Shivshankar Menon.
See Nathan Ruser and Baani Grewal’s fascinating (and beautifully presented) analysis on the border clashes between India and China.
The Russia-Ukraine war has rudely interrupted a period of unprecedented global tranquility, the ‘New Peace’. Reclaiming the New Peace will require a restoration of global cooperation, writes Yuval Noah Harari.
Centralised social media has failed. The internet is destined for fragmentation, argues Noah Smith.
How can one tread the fine line between patriotism and chest-thumping nationalism? India’s budding chess community may provide answers, Arvind Subramaniam writes.
Tweets of the Week
Joel Scott-Halkes provides some nuance to the organic farming debate:
Visuals from India’s largest drone show:
Joy Bhattacharya spotlights some of the unsung heroes of the Indian sporting ecosystem:
Key Notifications
CERC revises fees & charges on Renewable Energy Certificates (RECs) upwards.
The Energy Conservation (Amendment) Act, 2022 approved by the Rajya Sabha last week, is now notified by the Ministry of Law and Justice.