Cryptocurrency, like many other emerging technologies, was first ignored in India. It seemed as if Indians were hesitant to even acknowledge the industry existed. Lately, the government’s attitude on VDAs (virtual digital assets) has changed significantly due to widespread usage both internationally and in India. In 2022, this was formalized with a large statutory mandate in the form of direct taxes at a rate of 30% and a TDS of 1%.
The Indian government collected decent figure last year from crypto taxes. If not for exchanges on international markets who don’t have to comply with Indian regulations, this number would be substantially higher. This concern has also been recently addressed. The PMLA, passed by the Indian government earlier this year towards the sector, requires all cryptocurrency buyers and sellers to report their activities to the government for tax and disclosure purposes. As a result, the crypto industry is now required, like banks and other major financial organizations, to implement know-your-customer (KYC) and enhanced due diligence (EDD) practices.
Unfortunately, financial institutions have not yet begun teaming up with cryptocurrency exchanges to facilitate INR conversions. The National Payments Corporation of India (NPCI) issued a circular on April 7, 2022, stating that they were unaware of any cryptocurrency payments being made using the Unified Payments Interface (UPI).
As a result, UPI platform providers cut off service to all cryptocurrency exchanges, and UPI payments could no longer be used by crypto investors. As a result, several cryptocurrency exchanges shut down their banking integrations, making it impossible for consumers to make financial transactions on such platforms.
After Coinbase discontinued support for UPI payments in April 2022, Indian cryptocurrency exchanges also stopped accepting deposits in rupees around the same time. However, a few are now again taking deposits in rupees.
Highlighting Significant Problems
Karti P. Chidambaram, an Indian MP from the Sivaganga seat, recently sent a letter to Indian Finance Minister Nirmala Sitharaman, which he tweeted about. The legislator highlighted problems with Web3 banking services as a consequence of the difficulty of integrating payment rails in his brief letter.
There are certain challenges concerning payment rails’ integration&resultant banking services in the Web3 sector.The denial of use of UPI for VDAs has led users to foreign platforms The GoI must permit the resumption of UPI/payment services @FinMinIndia @nsitharaman pic.twitter.com/Uzjm9RWmK4
— Karti P Chidambaram (@KartiPC) September 22, 2023
He said blockchain and VDA are going to be the driving force behind the Web3 explosion, thus they are very important. He added further stating that strong payment mechanisms, especially the Unified Payments Interface (UPI), are crucial to the growth and success of the VDA ecosystem.
The member of the Parliament stated that the lack of consistency in user payments has caused operational difficulties for numerous Virtual Asset Service Providers (VASPS). It has been a major challenge to get Merchant Category Codes (MCCs) and conduct VDA-related transactions without using methods like UPI. In addition, the VDA ecosystem lacks access to widespread payment mechanisms like credit and debit cards because of inadequate connectivity with payment aggregators and gateways.
Karti added that as a result, local KYC-enabled and compliance-focused crypto platforms have seen a significant loss of consumers to international alternatives. In addition, fully compliant Indian VDA investors may have suffered financial losses as a result of the disruption in payment rails. They are hampered in both their capacity to do business and access to capital because of inadequate banking infrastructure.
The legislator emphasized that the trust between users is greatly aided by payment rails like UPI. Without these safeguards, users may lose faith in the token and NFT system as a whole due to security and trust issues around transactions. He urged the Union government to expedite the restoration of UPI and payment services and strongly encouraged them to address these issues in order to provide continuous and smooth services for the VDA industry.
All eyes are now on the Indian Finance Ministry to make the required changes on the key points highlighted by the legislator that are obstructing India’s growth in the Web3 domain.
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