The power of nation-states inherently comes from the ability to print, regulate, and control money. The state feels threatened when its currency gets challenged, thus, the status quo’s dislike for a cryptocurrency (crypto) like Bitcoin is understandable at some level. Bitcoin, however, is much more than a currency. It is a disruptive idea with the potential to create global financial integration never seen in human history. So, what cryptos need right now is not hate but smart regulations from the government.
Christine Lagarde, European Central Bank President, recently said that cryptos are worth nothing due to the lack of underlying assets to act as an anchor of safety. Around the same time, Shanktikanta Das, the governor of the Reserve Bank of India (RBI), also said that cryptos’ underlying value is nothing and that RBI still firmly believes cryptos will seriously undermine the monetary, financial, and macroeconomic stability of India, even leading to the dollarization of the Indian economy. Likewise, Kristalina Georgieva, the Chief of the International Monetary Fund (IMF), recently reasoned that anything that is not backed by a sovereign guarantee could not be a currency, but only an asset class, therefore, Bitcoin cannot be considered money. It seems Lagarde, Das, and Georgieva fail to recognize the fact that Bitcoin is a disruptive innovation, with currency being the first of the many applications.
Crypto cases elsewhere
On the brighter side, the biggest economy in the world, the United States, is becoming crypto-native. President Joe Biden signed an Executive Order last March signaling an openness to the crypto’s positive impacts on the world. It is encouraging news for an asset class that recently surpassed three trillion US dollars in market capitalization before last May’s crypto meltdown. After months of preparation, US Senators Kirsten Gillibrand and Cynthia Lummis also finally revealed the highly anticipated bipartisan crypto bill titled ‘The Responsible Financial Innovation Bill.’
The bill is the first comprehensive digital assets framework to make it to Capitol Hill. The bill grants the Commodity and Futures Trading Commission (CFTC) regulatory authority over the crypto asset space and also clarifies that cryptos are not securities unless they are being offered to fund companies with initial coin offerings. Also, the State of New York has passed a bill cracking down on crypto mining operations running on carbon-based power sources. Once the bill is signed by the governor, New York would become the first US state to do so.
Countries like South Korea, the United Kingdom, Portugal, Paraguay, and other G7 countries have also started taking progressive steps to regulate cryptos. South Korea is taking a liberal approach toward crypto after electing a crypto-friendly president. The South Koreans were not happy with the government’s 2021 announcement of imposing a 20 percent tax on crypto income $ 2100 and higher. One of the pledges made by the country’s newly elected President Yoon Suk-yeol to the voters before the election was to implement a set of crypto-friendly policies. President Suk-yeol had promised to raise the capital tax threshold on Bitcoin and other cryptocurrencies from $ 2100 to $ 40,000. Now the new President-elect wants to suspend the proposed tax till 2025 to allow concerned authorities a substantial amount of time needed for meaningful research before enacting the crypto regulation. The regulation is set to be out by 2024 which also means the South Koreans will not be taxed on their crypto-asset income till then.
The Portuguese Parliament, during the 2022 budget voting session, voted against two separate proposals to tax crypto assets that were forwarded by two minority left-wing political parties. One proposal was about taxing gains above 5,000 Euro which would have damaged Portugal’s image as a crypto tax haven. The proceeds from individual sales of cryptos have been tax-exempt since 2018 and also crypto digital assets are not considered investment income, making Portugal one of the most attractive destinations in Europe for crypto startups and investors. The businesses accepting cryptos, however, are required to pay income tax.
Paraguay’s House of Representatives has approved the bill regulating crypto mining and trading. The bill will be returned to the Senate for approval after which it will move to the executive branch. Once the bill becomes law, individual and corporate crypto miners can request authorization for industrial electricity consumption and then apply for a mining license. The legislation is designed to attract international crypto miners to the country which has one of the lowest electricity prices in Latin America. Nepal could also benefit from attracting crypto miners from around the world as the country will soon boast surplus electricity.
The UK is also preparing regulations to establish itself as a global hub for crypto-asset technology to boost the country’s economy with crypto innovation. Earlier this year in April, the UK’s Economic and Finance Ministry announced its intention to bring stablecoins under the country’s payments regulation. The UK’s seriousness toward crypto was reflected in this year’s Queen’s Speech to the UK Parliament which was delivered by Prince Charles. During the speech, Prince Charles informed the Parliament about two bills that will support “the safe adoption of cryptocurrencies” and “create powers to more quickly seize and recover crypto assets.”
The G7 countries have also called for a swift and comprehensive regulation of crypto assets. The Financial Stability Board was urged to expedite the work on a comprehensive regulation of cryptos during the meeting of the G7 finance ministers and central bank governors recently held in Germany. India, however, has passed a stiff crypto tax law. Capital gains tax of 30 percent plus one percent TDS are imposed on income from cryptos. The GST Council is considering imposing an additional 28 percent GST Tax on cryptos. India’s approach to legitimizing cryptos is extremely discouraging to the sector as the cryptos are subject to high taxes similar to those of lotteries, and gambling.
Cryptos are here to stay because the internet is the world’s largest and first transnational economy needing a native transnational currency. If governments cannot come up with a better solution quickly, cryptos will end up becoming the money of the Internet.
Countries like Germany, El Salvador, Singapore, Switzerland, and Malaysia are already crypto-friendly. Germany isn’t a totally crypto tax-free jurisdiction. Only the crypto assets held for more than a year and only gains higher than 600 Euro on cryptos held for less than a year are not taxed, but the income paid in cryptos and cryptos earned by mining are taxed. El Salvador was the first country to make Bitcoin a legal tender where even foreign investors are not subject to taxation for Bitcoin gains. Singapore does not have capital gains tax on cryptos, but businesses accepting crypto payments are required to pay income tax. Individual investors are exempt from capital gains tax on crypto profits in Switzerland. Malaysia is also a crypto tax-free country but individuals and businesses trading cryptos frequently like day traders are required to pay tax.
Ban or regulate?
Many democratic countries have decided to regulate cryptos to promote innovation in the crypto sector and also to compete for crypto startups, talents, and miners. Cryptos are banned in Nepal, but the republic will eventually have to come up with smart regulations to protect long-term investors, prevent fraudulent activities within the crypto ecosystem, and provide clear guidance to allow businesses to innovate in the crypto economy. The Government of Nepal should also legalize cryptos and also refrain from putting capital gains tax on income less than five million rupees.
The Internet will soon exert economic freedom in a post-nationalist way ignoring borders to make the nation-states simply less relevant, if not obsolete. Cryptos cannot be banned forever. Cryptos are here to stay because the internet is the world’s largest and first transnational economy needing a native transnational currency. The internet’s economic strength will require a native currency. If governments cannot come up with a better solution quickly, cryptos will end up becoming the money of the Internet.
Bitcoin is a currency, a network, a technology, and a disruptive idea. If you separate them, Bitcoin will stop making sense.
Bimal Pratap Shah is a policy wonk.