Crypto coordination
Crypto assets, including private crypto currencies and non-fungible tokens, pose a unique challenge to regulators with their issuance as well as the transactions taking place beyond traditional channels involving banks, other financial intermediaries or central banks. With users able to transact on platforms located in other countries and transfer funds easily across borders, ability to tax these transactions and to halt the misuse of these channels for illicit purposes also becomes difficult through unilateral action. Therefore, India and some other countries have been calling for concerted action by all nations and a standardised regulatory framework to regulate these assets. The Crypto-Asset Reporting Framework (CARF), drafted by the OECD, is in response to this. It primarily seeks to enable exchange of information between countries so that all crypto asset related transactions or money transfer done by the residents of a country are available with the government and regulators.
Indian regulators were extremely concerned about the surge in trading in crypto assets during the pandemic; about 9 to 11 crore users were estimated to be indulging in speculative trading in these assets. But the Centre’s move to tax gains made in trading crypto assets at punitively high rate in the Union Budget of 2022 and mandating crypto trading platforms to deduct TDS of 1 per cent on sale of these assets have helped restrain this speculative fervour effectively. Trading volume on Indian crypto trading platforms is down over 75 per cent over the last one year. But India, as well as other countries are yet to decide whether holding and trading in crypto assets is a legal activity or not. Also, it is currently not possible to acquire information regarding crypto trading transactions by Indian residents on overseas platforms. The CARF regulation outlines a way in which information can be collected from crypto asset trading platforms and service providers and shared with the countries where the traders or users reside. The framework addresses four areas – one, the scope of crypto currencies covered by the rules, two, the entities and individuals mandated to collect the data and the reporting requirement, three, the kind of transactions which have to be reported and four, the due diligence needed to identify the crypto asset users and to identify the tax jurisdiction to which they belong so that information can be exchanged. The model rules contained in the CARF can be included in the domestic laws and the OECD is planning to work with all jurisdictions over the coming months to implement the framework.
The OECD has met decent success with the Common Reporting Standard which has resulted in over 100 countries exchanging information regarding 111 million financial accounts in 2021, helping check tax evasion. Replicating this with crypto transactions may be the way forward to bring all countries onboard in adopting similar rules for regulating crypto assets. Though regulatory scrutiny could result in reducing the speculative activity in this segment, users will be pleased as adoption of these rules will make trading and use of crypto assets a legal activity. This will ensure that those who wish to mine and trade in these assets can continue doing so, but under full regulatory glare.