Cryptogram-15JUL2022

Embrace crypto, dear India

July 15, 2022

15 July 2022

In this issue

Hello, A bunch of us crypto enthusiasts met the other day and got talking about how the ecosystem was doing. The initial talk was all about how the industry is facing issues globally, you know the usual laments. But guys who work in the Indian crypto industry pointed out that more than the global turmoil, it has been policies of the Union government which have and continue to hurt the Indian crypto ecosystem. The numbers speak for themselves. Trades are further down the past few days, thanks to TDS rules and that has been the trend for a while due to the establishment’s general attitude to crypto.Look, governments are right in being cautious. If anything, the recent crypto crash has only taught us that we need more regulation and accountability. However, government policies should not be counter-productive, which is what we think is happening in India. But it isn’t too late yet, and here’s what we think India should do to embrace crypto and Web 3.0 instead of shunning them.

The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. You can read all the previous issues of Cryptogram here.

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THE BIG STORY

What India must do to embrace crypto and Web 3.0

When the new TDS rules took effect on July 1, there was a steep decline in trading volumes across crypto exchanges in the country. Sure, there is a lack of faith globally in crypto right now, but it is becoming increasingly clear that Indian investors would be better off if not for the extent of taxation and kind of government regulations sweeping through the industry. The starting point of what our policymakers need to understand is not what’s happening with the crypto market, but out there in the global economy. Markets all over the world are currently in a state of disarray. Big tech is laying off thousands of employees, VC firms are encountering insolvency issues, assets are losing value by the day. Not long ago, everyone was cheerful about a post-pandemic economy. We were confident that employment was going to spike, with billions of dollars pouring into companies and assets. Clearly, that isn’t happening. Now, this isn’t entirely bad. In some sense, bearish environments remove the excess leverage found in the system and level the playing field for players who can actually make a difference in the long run. Like Warren Buffet once said, only when the tide goes out do you discover who's been swimming naked. And apparently, there are quite a few out there who didn’t care for a swimsuit, including a lot of people in the crypto ecosystem. Many firms and protocols that were fundamentally flawed and that didn’t add value are running for cover.

Image: ethereum.org

But it is such trying times that nations must take advantage of and offer a conducive environment to build and innovate new technologies, to become leaders in newer fields. If today was 1995 and the internet is being built right now, wouldn’t we have wanted the government to embrace it and allow for uninhibited growth?In fact, now is the time to understand crypto in a holistic way without the noise and the sentiment. During times of market frenzy, fundamentals are often overlooked as sentiments drive value of assets. Most crypto assets surge in value and, often, without valid reason. Investors get pampered with irrational expectations. Now is the time to dig deep into the crypto world, understand the potential ramifications of letting millions of Indians dabble in new technologies like blockchain and crypto, and the revenue and jobs it can generate.

  Five things India must do  

1. Rationalize taxes and reduce TDS The 30% tax is just too high. Early-stage investors drive growth of new technologies. Turning them away by enforcing high taxes will hurt the ecosystem in the long run. When crypto markets revive, investors elsewhere would have made trillions of dollars. India should offer a fair chance for Indians also to make wealth out of new and emerging tech. For day traders, even a 1% TDS can drain their capital because of the volume of trades they make. Most exchanges in India have reported a 60-80% reduction in trade volume after July 1. This means that either investors are staying away from the asset class, or rerouting trades through international exchanges - something the government won't be able to track. If the purpose of TDS is to track spends, any percentage should work, so the government must reduce the rate significantly, and it will only be helping itself. 2. Develop business laws for crypto startupsBlockchain is a trillion-dollar economy. World leaders and leading institutions have openly expressed their support for Bitcoin. If entrepreneurs believe in the value of Bitcoin, then it is more likely that products and services will emerge in accordance with the philosophy and utility of Bitcoin. If India offers no attractive packages for crypto entrepreneurs, then India will lag while nations conducive to innovation will thrive. Instant UPI payments are a huge success here because the government allowed it to flourish. Would it have been fair on the payments ecosystem if heavy taxes were levied due to the ever-increasing amount of payment frauds in India? India should nurture crypto and Web 3.0 technologies by letting builders build freely, make global funding accessible and allow job creation. 3. Recognize Bitcoin as a way to strengthen tradeGlobal trade is currently pegged to the US Dollar - a currency controlled by one state. The US has printed 40% of its circulating currency in the past 3 years and yet its value (DXY index) is at a 2-decade high. This is unsustainable. Sanctions are a reality of geopolitics. Disruptions in trade can also happen if economies of major countries fall - the need for an alternative means to value trade has never been higher.Bitcoin has potential to be one such medium. India can be a leader and allow for a decentralized medium of exchange helping its companies do business with certainty even in times of political conflict. 4. Use public blockchains for bookkeeping and to eliminate fraudCrypto is often misunderstood by authorities as it is claimed to be completely untraceable. While there are some blockchains that are private, most like Bitcoin are public - every transaction that has happened in the last 13 years has been recorded and is open to all to see. Equipped with reasonable KYC and AML strategies, India can navigate crypto quite confidently.Banks can use blockchains for recording key transactions including loans which can prevent scenarios such as the Vijay Mallya episode, where false evidence of reserves was allegedly presented to gain access to loans. A blockchain-based loan platform would never get fooled by such a trick, because it requires cryptographically provable on-chain collateral.5. Include the the topic of money and blockchain education in school and college curriculum Understanding technologies start from the young. India should make it a point to educate children about the evolution of money and the need for financial independence. This allows for the leaders of tomorrow to innovate and provide comprehensive business solutions, and gain a foothold in emerging technologies early. 

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  THE TOP FIVE 

Stories from this week you cannot miss

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

We have already explained Proof-of-Work (PoW) and Proof-of-Stake (PoS) a couple of times already at Cryptogram. This week, we go one tiny step ahead and explain STAKING. Like we have explained earlier, PoS is a “consensus mechanism” which works by distributing the consensus process. There is no PoW-type competition in PoS to verify transactions, but allocation in an orderly fashion. For this to work, currency holders have to act as validators (instead of being miners like in PoW). Validators get to do that by “staking” some cryptocurrency as collateral. A simple understanding of staking is this: it is a way of earning rewards for letting the cryptocurrencies you are holding to be used to process transactions in its blockchain. It is a bit like having a savings account in a bank. You deposit money with the bank, which loans that money out and earns interest from that, and gives you a cut. Similarly, when you “stake” some currency with a blockchain, it puts those coins to use for validating transactions on the chain and rewards you for that. 

So, that’s it for this week’s newsletter, see you next week!If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.

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