What Makes a Digital Asset Different from a Digital Currency?
Cryptocurrencies, digital assets, digital currencies; the very recent trend topics online, all thanks to a certain tax intervention placed on digital assets by one of the largest economies in the world, India. So, in this write-up, we will recap the crypto milestones in the country, followed by a much-needed fact correction involving digital assets and digital currencies.
India’s Crypto Origin & RBI ‘Ban’
If memory serves everyone right, crypto’s emergence in India dates back to 2013 and it started gaining prominence in 2015. Several Indian crypto exchanges popped up during that period and the trading of Bitcoin (BTC), Tether (USDT), and Ethereum (ETH) grew significantly.
The crypto industry flourished through 2017, soon to be hammered down by its ban imposed by the Reserve Bank of India in 2018. After almost two years of lull, the cryptocurrency industry was revived when the Indian Supreme Court lifted its ban calling RBI’s move ‘unconstitutional’.
Post-Ban Crypto Growth
Since then, crypto transactions have increased notably, with the crypto-tech industry looking to capture a market share of $241 million by 2030 at a 14% CAGR. Although there is no official data, industry reports suggest that there are 15 – 20 million crypto investors in the country, with total holdings of $5.37 billion.
While people were busy dabbling and making investments in these digital assets, governing bodies in India were making their calculations and moves to regulate them, like other major economies around the world. However, the government stance has evolved over the years, the FUD (fear, uncertainty, and doubt), as they say, has diluted considerably.
Crypto Regulations on the Way
Although the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 are yet to be tabled; India’s objective of regulating the trading and use of digital assets or cryptocurrencies were loud and clear in the recent Budget Session, when the Finance Minister announced a 30% tax on any income from digital assets. Why the sudden tax imposition? To that, the government explained that the significant increase in crypto investments and transactions made it imperative for them to put it under the tax slab.
This announcement of taxing the gains from digital assets brings us to the central theme of this write-up. The Indian Finance Minister was very specific that the tax would be imposed on cryptocurrencies or digital assets, not digital currencies. That’s what led to confusion for many because, here many of us were thinking that digital currencies, digital assets, cryptocurrencies were synonymous. Well, they are not! It is a common misconception that people have regarding virtual assets and currencies.
So, what are digital assets? What are digital currencies? How are they different from each other? Now, we are past the premise and the journey of crypto in the Indian market, let’s fact correct on some basics.
Digital Asset VS Digital Currency
Cryptocurrencies and NFTs (non-fungible tokens) are digital assets, while CBDC’s or Central Bank Digital Currencies are digital currencies. Now, let’s understand how they are different from each other.
A digital asset like cryptocurrency and NFT is the store of a value secured by cryptography, making it immutable, impossible to counterfeit or double spend.
Digital currency, on the other, the hand is the virtual form of your fiat currency released by the Central Bank for contactless transactions.
Points of Difference:
- Built on blockchain technology, a distributed ledger facilitated by a network of computers. It is decentralized and unregulated.
- Since they are mostly unregulated and not pegged by any other form of asset, the rates are highly volatile and depend on the trading volume.
- They are not widely accepted across geographies.
- All transactions of digital assets are transparent and are publicly accessible on the decentralized ledger. Each participant on the particular network can track the transactions.
- Digital assets are secured by advanced cryptographic encryption. The wallets in which they are stored are also secured by an encryption key.
- Although managed on a digital ledger, a digital currency like CBDC need not be built over a blockchain network. It is centralized and regulated by a governing body.
- Digital currencies just like fiat currencies have stable rates.
- They are widely accepted across the world, in native versions.
- Digital currency transactions are can be traced and they are known to only the sender, recipient, and the bank that is facilitating the transaction, like in normal fiat transactions
- Digital currencies require passwords for protecting the wallets, credit/debit cards, or banking apps through which they are managed and transferred.
That’s the basic distinction between digital assets or crypto and digital currency.
Why did the Indian government feel it best to define the distinction when imposing the taxation? It’s because they are planning to launch their very own CBDC, the digital rupee, which will be centralized and regulated by the Reserve Bank of India. So, the new tax laws would be imposed solely on cryptocurrencies and NFT’s, the decentralized assets.
China was the first country to initiate its CBDC project. Its digital Yuan is being tested as a viable alternative to fiat all over the country, across multiple industry-based use cases; even allowing its use by foreign nationals. 14 other countries, including Sweden and South Korea, are running their pilot projects, while 5 Caribbean nations including Saint Lucia, Bahamas, and Antigua and Barbuda have implemented CBDC on a full scale.
On a concluding note, before the Crypto Law comes into action, and the new CBDC is launched, the 30% tax imposed on all crypto gains, would be a milestone regulation proposed by the Indian government that would set the rules for Crypto’s adoption in the country by the masses.