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India’s Crypto Regulation Stunting Sector Growth

India’s crypto tax policies have forced crypto businesses and hopefuls to redirect their efforts to more crypto-friendly countries.

Since coming into effect on April 1, India’s first crypto law requires its citizens to pay 30% tax on unrealised crypto gains. On July 8, India introduced a second crypto law where every transaction is subject to 1% tax deduction at source (TDS). 

Major Indian crypto exchanges have reported a 72.5% drop in trading volume since the additional regulatory law was enforced.

India’s TDS of 1% can be compared to a capital lock-in – a method used by entities to prevent investors from taking away funds. TDS can be a good first step in setting boundaries in India’s crypto industry, however many active traders in the region have been heavily affected by it.

These harsh taxes as a result of crypto regulation can be seen as a move in establishing crypto as a legitimate currency to be used throughout the country – however, it creates a high barrier for any aspiring trader, and deters investors from continuing to invest in digital assets.

Meanwhile, Vice president of India-based crypto exchange WazirX Rajagopal Menon has laid out ways to stay afloat amidst the decline in trades. In 2021, WazirX experienced over 700% growth in its user base. WazirX will continue to focus on complying with the new regulations, and states that “The TDS will not affect the serious crypto investors, a.k.a, hodlers, as they have a long-term horizon in mind.”

Om Malviya, president of Tezos India, forsees these regulations as a temporary measure – expecting friendlier, pro-crypto reforms within the next three to five years. Malviya says that this time can be a great opportunity for investors to learn more about blockchain technology to make more effective investments or trading decisions. 

In the meantime, Anshul Dhir, chief operations officer and co-founder of the layer-2 DeFi lending protocol EasyFi Network, notes that investors may feel deterred from continued entrepreneurship in India unless its government introduces friendlier crypto laws with prolonged exposure to taxes sooner.

Although a bull market can be effectively utilised to secure profitable trades, such laws have unfortunately come into place during a time of economic crisis. Indian investors have anticipated using bull markets to sell their holdings, but with these new laws comes higher risk with investments. Investors should be advised not to find loopholes in the law, as signs of regulation  may be increased.

However, India is planning on launching its own central bank digital currency (CBDC) – the digital rupee, within 2022 to 2023. The announcement made earlier this year by finance minister Nirmala Sitharaman wants the CBDC to not only boost the country’s economic growth, but also encourage India’s inclusion in the world’s digital economy.

CBDCs can be used to complement the crypto ecosystem, as they are fiat-backed currencies that can be used alongside crypto. Despite these huge setbacks, Indian crypto investors remain  hopeful and committed to build solutions and conversations to encourage friendlier regulations from the Indian government.

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