Web3 anxious about announcement of regulations, impact on investors

The bear market, the decline of trading volumes by as much as 85-90 percent, and the heavily favorable position of the Indian tech industry in matters like blockchain and Web3 development beg the question, “What favours will be revealed in the Union budget for 2023?”

While the industry titans demand that the Reserve Bank of India (RBI) and the government ensure that any taxation regime does not hamper the development of India’s talent in Web3 and the supercharged innovative environment India has been experiencing recently, the investors’ expectations are more micro-focused on things like Long Term Capital Gains (LTCG) tax reduction. While the purchase of an equity share is settled through delivery or transfer of the share, the Securities Transaction Tax (STT) is 0.1 percent, which is not true of digital asset investments, and investors are hoping to have this molded into one.

Digital asset investors challenged by setbacks

Although digital asset investors have been challenged by a series of setbacks, including bankruptcies, frauds, and crashes of asset prices amid increased surveillance by governments around the world, including locally, there is little in terms of a turnaround from the taxation regime. The consensus is that Indian investors will remain on the sidelines, waiting for signs of a revival in the prices of their digital assets. The universal consensus is headed for a tough ride, at least in the first half of 2023.

After witnessing robust and exponential growth in 2020-21, the digital asset has come to a standstill in 2022, with many of the aforementioned events bringing attention to the industry’s flaws. The market capitalization went from an all-time high of $3 trillion on November 10, 2021, to a 2022 low of $727.58 billion.

Although Web3 and other tech innovations have remained a bright spot for the entire Blockchain factor, it has left some people wondering how the governmental regulations will impact investors.

Innovative fintech solutions such as DeFi, and Peer-to-Peer lending have emerged as an alternative financing business model recognized by RBI. DeFi, or Decentralized Finance, defined as any product or service offered by the Web3 world that helps users conduct financial activities such as payments, borrowing, lending, investing, trading, and staking, is a strong contender that can both utilize Web3 innovation and can add zeros to investment backings of the Web3 engine.

Clarity sought on taxation by reducing TDS, Capital Gains taxes

Several Web3 use cases emerged through the last bullish cycle, including DeFi, GameFi, SocialFi, and nonfungible tokens (NFTs). DeFi has been the largest market cap activity within Web3, with a peak total value locked (TVL) of over $175 billion at the peak of the 2021 bull market.

Along with the democratized access to financial services, DeFi, which does not need a centralized organization to onboard users, has also opened new models like automated market making.

Most of the VDA industry is seeking to either lower the taxes installed or how they are collected. For example, while many VDA investment firms see the government taking a step towards regulating VDAs, in the upcoming Budget, most of them are looking to the government to create a progressive regulatory framework and offer clarity on taxation by reducing TDS and Capital Gains Taxes and leveling them with other asset classes such as stocks and bonds.

Clear governance, regulatory framework will help investors, sector

It is expected that a more unified taxation treatment with other investment classes will address the ongoing concerns and uncertainty about the industry and help create transparency through the industry players to protect users from any exchange fraud like the FTX collapse.

The appeal hopes that a clear governance and regulatory framework will enable more people to invest in VDAs and attain financial freedom. It will also encourage innovation to transform existing businesses through blockchain technology as well as build newer solutions for the industry to thrive further.

Web3 education and sustainability

Up until now, Blockchains—also known as distributed ledger technologies have provided a general-purpose information infrastructure that can drive radical innovation in a wide range of industries. However, unlike Web2 technologies and apps, especially mobile apps, blockchain thus far has lacked a slick user interface and interaction, allowing benefits like writing, and sharing content. With the arrival of Web3 technologies, all of this will change in a hurry.

According to a report published by industry body NASSCOM last September, the crypto tech industry already employs 50,000 individuals in India and has registered a growth of 39 percent in the past five years. India’s rapid adoption of new-age technologies, its growing startup ecosystem, and large-scale digitally skilled talent potential is cementing the country’s position in the global Web3 landscape.

To continue our dominance in the crypto tech and Web3 space, India needs to invest heavily in Web3 education and training to ascertain the enviable position and the ability of India’s skill development. Projects such as the Atal Innovation Mission (AIM) by the Government of India, an initiative to create and promote a culture of innovation and entrepreneurship across India, are an important investment.

AIM’s goal is to develop new programs and policies for fostering innovation in different sectors of the economy, provide platforms and collaboration opportunities for different stakeholders, and create an umbrella structure to oversee the innovation and entrepreneurship ecosystem of the country.

With the programs under the aegis of the Atal Innovation Mission, 10,000+ schools across India have been established with Atal Tinkering Labs. This scheme aims to foster curiosity, creativity, and imagination in young minds; and teach skills such as design mindset, computational thinking, adaptive learning, physical computing, etc.

The writer is Co–Founder and CEO, 5ireChain, a blockchain unicorn. He tweets @pratikgauri @5ireChain

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