Digital assets also colloquially referred to as digi assets is a digital currency which is designed to work as medium of exchange and payment. Most of the Digital assets are decentralised networks which makes use of the blockchain technology. The ownership records and other details are stored in a virtual public ledger using cryptography. This type of encryption helps in ensuring the integrity of transactional data, which is an essential component of digital assets.

Blockchain is nothing but a database of information and records, which are called blocks. Each block of information or record contains a cryptographic hash (unique ID) of the previous block and a timestamp. Each block contains information about the previous block while forming a chain of blocks reinforcing and validating new blocks that form a part of the blockchain. Blockchains are typically managed by a peer-to-peer network for use as a publicly distributed ledger, where nodes collectively adhere to a protocol to communicate and validate new blocks. The below representation referenced from Deloitte and Assocham’s report on “Blockchain Technology in India – Opportunities & Challenges” should give you a better idea of how the blockchain technology works –

Blockchain is widely explored across industries and multiple use cases are being experimented in India. Financial services players are emerging as the leaders in identifying Blockchain use cases, other industries are also catching up. The below diagrams referenced from Deloitte and Assocham’s report on “Blockchain Technology in India – Opportunities & Challenges” shows us various use cases across industry lines.

Use case in Financial Services

Use cases across Non-Financial Service Industries

Cross Industry use cases

So let us get straight to the answer, No, it is NOT ILLEGAL to trade, invest or hold Digital assets (any virtual/digital currency) in India. This means you can freely trade, invest and hold Bitcoin, Ethereum and other coins/tokens without having to worry about any legal hurdles for now. However, at present, India does not have the regulatory framework to govern digital assets. An Inter-ministerial Committee (IMC) was constituted in November, 2017 under the Chairmanship of Secretary, DEA to study the issues related to Virtual Currencies and propose specific action to be taken in this matter. In the committee’s 2019 report, they did acknowledge the importance of Distributed Ledger Transaction (DLT) and the blockchain technology in ushering a digital evolution in India but was of the opinion to ban private cryptocurrencies/tokens/coins. The recommendations of this committee never saw the light of the day. In May 2021, it was claimed by a national daily that sources privy to information in the Government had confirmed that the recommendations previously made by the IMC were outdated and a new committee was to be formed to regulate and streamline Digital asset rather than banning it completely. The Finance Minister has also indicated at various forums that the Government shall not bring about a blanket ban on digital assets rather it will have a more calibrated approach when framing the laws and regulations.

India has not recognized digital assets (virtual/digital currency) as a medium of exchange. Also, it is unclear whether to treat cryptocurrency as asset or commodity. We are expecting the Government to come up with robust laws and regulations which will certainly provide great deal of clarity to all the stakeholders in the crypto space. We opine that the Government should refer countries such as United States, United Kingdom, Japan, South Korea, Hong Kong, Germany, Australia and Canada who already have a few regulations and laws surrounding cryptocurrency. It is expected that a regulatory body such as SEBI (Securities and Exchange Board of India) or AMFI (Association of Mutual Funds of India) be formed which will have the exclusive power to govern and regulate various stake holders in the crypto space such as exchanges, wallet companies, dealers, miners, advisors and investment managers.

The central bank, in its circular on April 6, 2018, had prohibited banks from dealing in cryptocurrencies or offering any service to customers on them. The circular was challenged in the Supreme Court, which set aside the rules on March 4, 2020. The RBI governor has clarified that while it is not illegal to trade and invest in cryptocurrencies, every investor/trader should exercise sufficient caution and diligence before doing so.

RBI Circular: View

Link of Honorable Supreme Court Order setting aside the above RBI circular: View

Firstly, the investor/trader needs to create an account with any of the available crypto exchanges. Due KYC onboarding process is followed by all exchanges. These exchanges work similar to the stock market where any investor/trader can buy, sell or hold the cryptocurrencies. The investor/trader also has the option to link his bank account through which he can deposit and withdraw INR from the wallet maintained in the exchange. Various other banking and payment options are also available for the trader/investor. Some of the largest crypto exchanges in India are WazirX, CoinDCX, Zebpay and CoinSwitch. All of these exchanges perform the role of the custodian of your cryptocurrency too. These exchanges also provide a mobile application to the investors and traders. There is also an option to store your cryptocurrencies in digital wallets which provide you with enhanced security.

Most exchanges have tied up with banks, payment platforms and various other channels which allows investors/traders to deposit and withdraw money seamlessly. These channels charge a nominal amount as transaction fees. Also, some exchanges allow a peer-to-peer (P2P) platform where the investor/trader can convert his money to crypto or vice-versa and the money is directly debited or credited in the person’s account as the case may be.

Investors/traders have the option of holding their digital assets in a hot wallet, cold wallet or in the exchange itself. A digital asset wallet is a tool that allows the owner of the digital assets to store, send and receive tokens/coins. Hot wallet is a tool or platform which is connected to the internet and the cold wallet is one which is not connected to the internet (offline). In an exchange, a unique ID generated for every investor/trader in the backend holds the transaction details for the particular investor/trader and the digital assets are held in the form of a pool assets. In case of fraud/hack caused on the part of the exchange results in loss to the investor/trader, he is liable to be compensated by the exchange fully.

An investor/trader can view all his digital asset holdings and a list of all trades executed and orders punched on the exchange itself. All historical trades are also visible to the investor/trader. Exchanges also share summary reports for trades executed and as well as a holdings/portfolio report to all their users on their email.

The junior Finance Minister, Mr. Anurag Thakur has clarified in the Parliament that all digital assets gains will be taxed but the Government is yet to come out with clear regulations and guidelines for taxation of gains from trading/investing of digital assets. We are only suggesting possible avenues through which the individual can offer his gains for taxation. This is our personal opinion and every investor/trader should consult with his tax advisor on this matter. Let us discus 4 situations for taxation of cryptocurrency gains –

A) Mining of Digital assets
Since digital assets mined will be self-generated assets, there is uncertainty as to how they will be taxed, whether the provisions of capital gains will apply, or if it will be categorised under the head of income from other sources. If the Government does classify digital assets/digital currency as a capital asset and the cost of acquisition can be determined, then it will be taxed as capital gains else the onus is on the taxpayer to offer it to income under other sources.

B) Digital assets held as investments
If the Government classifies digital assets as capital assets, then depending on the holding duration of these assets, they would be subject to taxation under long-term capital gains (20 percent post indexation) or short-term capital gains (taxed as per individual slab rate). But in-case crypto is not classified as capital asset, then gains will be taxed under income from other sources and the tax rate will be equivalent to the taxation slab the person falls under.

C) Digital assets held as Stock-in trade (For active traders)
As the government notification mentioned, trading in bitcoins would result in the generation of business income, which is taxable as per the tax slab category the concerned individual falls into.

D) Digital assets received as consideration
In such a case, its treatment will be similar to receiving money, i.e. it will be income in the hands of the recipient, taxed depending on the profits it generates from business or profession.

Most of the of the critiques of Digital assets opine that it does not have any intrinsic value because it is digital in nature and not backed by anyone or anything. These critiques also believe that digital asset prices are driven purely by speculation and it is a bubble that should burst soon. But these critiques fail to understand that intangible assets such as brand value, goodwill, software licenses and copyrights hold significant value today and are also tradable. People need to understand that fiat currencies too have no backing. The legal and economic laws of a country ensure the integrity and trust of a fiat currency which is then used in the payments system today.

Cryptocurrencies do no rely on any legal framework rather operate in a decentralized manner outside the control of a central authority where computer ‘nodes’ all around the world maintain a shared state of a distributed ledger, the ‘blockchain’, which records all transactions in the system. Transactions are verified by the underlying network of nodes and only included in the blockchain if found legitimate. Although Bitcoin and cryptocurrencies may not be accepted as a medium of exchange globally it is important to evaluate them as commodities for now. Over time, cryptocurrencies will derive their value both from their use as medium of exchange and as store of value. For an asset to be used as store of value it needs to have its intrinsic value derived from a practical utility and this will happen sooner than later when countries recognize the true value of digital currencies. Today gold is certainly a better store of value than cryptocurrencies are only because gold has matured a great deal and cryptocurrencies are at its infancy. El Salvador become the first country in the world to grant legal tender status to bitcoin in June 2021 and we believe many more countries will follow suit.

Cryptocurrencies derive their value based on the scale of community involvement (demand-supply, scarcity or coin’s utility). Most of the digital coins are issued by private blockchain-related corporations, some factors of crypto value will stem from the image and efficiency of these companies (like project’s viability, scalability and perceived value of the project).

This is probably the most common question we come across on a daily basis. Investing/trading in cryptocurrencies is not similar to gambling. Firstly, gambling is illegal but trading/investing in digital asset is not. Volatility is a major feature of digital assets which makes it a high risk and high return investment tool. Hence it is unfair to term digital asset trading/investing similar to gambling only because there is a high degree of risk involved. Gambling (like roulette or dice game) on the other hand involves a high degree of chance and requires no great skill or experience. Also, gambling is an individual choice, any person can gamble away his money on the stocks, commodities market or the currency market. MintingM mitigates the risk and volatility by deploying system driven quantitative strategies that help in long term wealth creation.

Bitcoin is more than a decade old but most of the other cryptocurrencies are derivatives of new blockchain projects that have started a few years back. The crypto space is at nascent stage and the world is only discovering digital currencies as a new asset class. Volatile price swings are expected when a new asset class is in its price discovery phase but as the markets matures, the volatility is also bound to reduce over time.

At a time when one country has already accepted Bitcoin as a legal tender, it his HIGHLY UNLIKELY AND REMOTE that a scenario as stated in the question would arise. In India, there are about 7-8 Million active crypto traders/investors holding more than $1Bn. in digital assets. Mr. Subash Chandra Garg, Former Finance Secretary of India under whose chairmanship the Inter-ministerial Committee (IMC) which first recommended that cryptocurrency should be banned has taken a more accommodative stance in a recently held virtual event saying that the Government needs to probably regulate it rather than ban it. Hypothetically In a worst-case scenario, if the Government does decide to ban Digital assets, they would certainly provide stakeholders a 6–12-month window to liquidate their holdings in the market. Since India is still a minor player in the crypto space, this will have no-to-very minimum impact on the price of the Digital assets being traded. Also, since these Digital assets are highly liquid and traded across all major exchanges in the world, Indian investors/traders will not face issues when liquidating their holdings.

MintingM thoroughly evaluates every project fundamentally and technically. Firstly, our team’s cumulative experience in this industry is more than 20 years which makes it easier for us to identify and exclude fraud coins and tokens from our portfolio. Secondly, our approach to investments is highly disciplined, system driven and automated. Our investment calls are derived from complex quantitative models and proprietary algo systems that we have developed after years of testing and research. We also fundamentally evaluate each project or token/coin based on its whitepaper (similar to a prospectus/annual report of a Company), tokenomics (token economics and crypto economics), projects feasibility and scalability, project team’s credentials and experience and various public and private information and data available to us.