In this regard, India is proving itself to be a nation of paradoxes. It has one of the most dynamic cryptocurrency industries in the world, but the Indian government is fighting to ban Bitcoin. The Modi government’s attitude towards Bitcoin is important as the struggles in India are reflected elsewhere, and could be a sign of things to come.
Bitcoin Threatens to Undo Efforts to Quash Tax Evasion
Setting aside complicated ideological concerns surrounding Bitcoin, the elephant in the room is tax evasion. The Modi government took a massive gamble in 2016 when it enacted a secret bill that took 86% of India's cash out of circulation. The controversial move caused widespread economic damage in the short term. And much of the hidden cash found its way back into the economic system eventually.
One area where the gamble did pay off was banking. Millions of Indians opened bank accounts and this has made it at least a little easier for the government to track payments. Unfortunately for the government, Bitcoin threatens to undo all of that.
For Indians looking for a way to protect their assets, Bitcoin has proven popular. In the wake of the Indian supreme court lifting a previous ban on Bitcoin, trading surged by anywhere from ₹2 crore per day to about ₹10-11 crore. This has also helped to create a cryptocurrency industry in India that even banks are jumping in on.
Despite this apparent economic boon, the Indian government has decided to look the gift horse in the mouth. In September, there were rumblings that the Indian parliament was considering another attempt to ban cryptocurrency outright.
Their concern? That cryptocurrency will create another vehicle for tax evasion and erode what success has come from India's painful attempt to crack down on it. India isn’t alone.
Governments Across the World Are Worried About Crypto and Tax
The US Internal Revenue Service (IRS) and Canadian Revenue Agency (CRA) have both made headlines with high profile demands for documentation about crypto holders. In the case of the CRA, the request was large. It demanded data on all users of the Toronto based exchange Coinsquare. In both cases, the authorities were concerned about crypto’s utility as a tax evasion vehicle.
These concerns can be felt in cryptocurrency legislation around the world. They point to an uncomfortable truth for crypto evangelists: decentralization is the goal, but we still live in a centralized world. If cryptocurrency is to see mainstream adoption, and big price rises, we need governments to get on board. This will require regulations and compromises that crypto purists are uncomfortable with. But in the long term, it will provide a net benefit.
On the other side, governments need to understand that pushing Bitcoin into the wilderness will make their problems worse. If Bitcoin investors and traders are forced to use unregulated exchanges, they are more likely to be involved in laundering illicit funds, willingly or not. As a result, it will become significantly harder to track BTC holders.
Sensible pro-cryptocurrency legislation could prove to be a net benefit for governments. One of the key features of blockchain is that transactions are difficult to impossible to forge, and the ledger cannot be altered after the fact. It would be possible for governments to leverage this feature to trace funds and ensure that they are not being used illicitly. It would also make it easier to track hidden assets and identify their owners.
This is something that the cryptocurrency industry has already identified. In India, the cryptocurrency sector has gone as far as requesting the government implement sensible crypto legislation. Governments need to find ways to live with, and benefit from, the crypto revolution.