Date : 25/12/2023

Relevance: GS Paper 3 – Indian Economy – Cryptocurrency

Keywords: LMI, Cryptocurrency Ecosystem, Inflation, Russia-Ukraine war

Context-

The global landscape of cryptocurrency adoption is witnessing a remarkable trend, with India leading the way in grassroots engagement. While the global pattern indicates a decline in grassroots crypto adoption, lower-middle-income (LMI) countries, particularly India, present a noteworthy exception. The country's embrace of cryptocurrencies, especially among the youth, is significant given its status as the home to the world's largest population of young people. Despite regulatory uncertainties and hurdles to investments in the cryptocurrency ecosystem, India, fueled by a thriving startup environment and growing smartphone and internet penetration, has the potential to position itself as a future crypto hub.

Cryptocurrency Rise in Asia

Asia stands at the forefront of cryptocurrency adoption, with countries like India, Vietnam, the Philippines, Indonesia, Pakistan, and Thailand securing top positions in crypto adoption. Rather than focusing on raw transaction volumes, the emphasis is on highlighting countries where crypto is embraced by average, everyday people. Unique economic conditions play a crucial role in the growth of crypto in each nation. For instance, in Pakistan, economic challenges and limited investment options drive the populace towards cryptocurrency as a viable alternative.

Vietnam, on the other hand, experiences crypto growth due to limited legislation for citizens and historical skepticism towards the national currency. The absence of formal regulation, while advantageous, poses challenges without legal recourse. Vietnam's large unbanked population, constituting nearly 69 percent, contributes to making decentralized finance (DeFi) usage one of the highest in the world.

In the case of India, its diverse economic landscape, developed equities market, and strong regulations contribute to the unique dynamics of crypto adoption. The demographic dividend, along with rising rates of internet and smartphone penetration, plays a crucial role in fostering crypto growth.

India's Crypto Landscape

In India, Generation Z dominates the crypto landscape with a 45 percent user share, followed by the 26-35 age group at 35 percent, and surprisingly, nearly 8 percent of crypto users belong to the baby boomer generation. Delhi leads in crypto adoption in terms of investment value, followed by tech hubs Bangalore and Hyderabad. Among tier-2 and tier-3 cities, Jaipur emerges as the top contender for crypto adoption, with Lucknow and Pune following suit. It's important to note that these insights are drawn from data provided by CoinSwitch users, offering valuable anecdotal perspectives for understanding the Indian crypto landscape.

Despite impressive growth figures in crypto in 2021, the trajectory took a turn in 2022 amid a global economic landscape shaped by the Russia-Ukraine war, inflation, and regulatory uncertainties. This period, dubbed the "funding winter," posed challenges for startups, including a sharp decline in cryptocurrency prices, controversies at major exchanges, and regulatory ambiguities. However, India remains the top global adopter of cryptocurrency despite these challenges.

Regulatory Crossroads in India

India's emergence as a prominent cryptocurrency market is notable, given the complex regulatory and tax environment. In the past year, regulatory bodies have provided clarity on various issues, including the application of anti-money laundering rules to cryptocurrency transactions. India imposes a significantly higher tax rate on cryptocurrency activities compared to most countries, with a 30 percent tax on gains, surpassing rates for other investments like equities. Additionally, there's a 1 percent tax on all transactions, known as tax deducted at source (TDS), requiring crypto platforms to deduct this amount for every trade.

The uneven implementation of TDS, particularly by international exchanges, might impact the competitiveness of homegrown Indian exchanges. Millions of Indian users shifted to offshore platforms following the introduction of TDS, with a single offshore platform reporting over 450,000 user signups in the month following its implementation. The inconsistency in collecting TDS taxes could be attracting Indian users to international platforms, evident in the surge of web traffic to these exchanges after the introduction of TDS in July 2022.

Horizons of Crypto in India

India's adoption of cryptocurrencies, particularly among the youth, stands out as noteworthy. This becomes even more intriguing considering India boasts the largest youth and adolescent population globally. Despite recent challenges in terms of regulations and investments within the cryptocurrency ecosystem, India, with its robust startup environment and increasing smartphone and internet penetration, holds the potential to emerge as a future crypto hub.

Several pertinent questions arise in examining this growth: How will this growth align with India's central bank digital currency (CBDC)? What long-term effects might India's crypto tax policy have on the ecosystem? Is it plausible to envision a crypto-native population, given the scale and early adoption of these technologies?

India's Demographic Dividend

Examining these elements will offer an in-depth comprehension of India's dynamic role in the global cryptocurrency landscape. India's demographic dividend appears pivotal not only in shaping the nation's global and domestic aspirations but also in influencing the constantly evolving landscape of cryptocurrency. The youth-driven adoption, combined with the country's economic conditions and technological advancements, positions India as a key player in the future of cryptocurrencies.

Conclusion

India's leading position in grassroots cryptocurrency adoption signals a significant departure from the global trend. Despite regulatory challenges and economic uncertainties, the country's unique blend of a thriving startup ecosystem, demographic dividend, and increasing technological penetration positions it as a potential future crypto hub. The nuances of crypto adoption in India, influenced by economic conditions, regulatory frameworks, and demographic factors, underscore the complexity of the landscape. As the global crypto ecosystem continues to evolve, India's role in shaping the narrative remains a crucial element, demanding continuous analysis and exploration.

Source- Indian Express