Explainer: Why spot bitcoin ETF approval by US SEC matters to Indian crypto investors

Can Indians invest in spot bitcoin ETFs?

Indian investors can purchase US ETFs directly via a domestic or international broker just like they invest in US stocks. Even, many new-age stock brokers offer easy access to US stocks and ETFs.

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It is to be noted that overseas investing in stocks and ETFs is governed by the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), under which Indian investors can invest up to $250,000, which applies to US ETFs as well.

However, remittance for trading in the US stock market or any foreign market is prohibited, as per the LRS guidelines.

“Spot bitcoin ETF gives an easy and regulated alternative to add crypto exposure to long-term crypto investors’ portfolios, but not for traders, as trading is not allowed in US stocks and ETFs,” said Viram Shah, Co-Founder and Chief Executive Officer of Vested Finance, a US-based investment platform.

How do spot bitcoin ETFs work?

Just like ETFs in India, which track indices such as Sensex or Nifty or commodities like silver or gold, spot bitcoin ETFs will trade on conventional exchanges in the US, mirroring the value of bitcoin.

Existing investors won’t have to make separate accounts on cryptocurrency exchanges and they also don’t have to invest in bitcoin directly to be able to benefit from the appreciation in the price of the digital asset.

An Indian investor taking exposure to Bitcoin ETF will get easy exposure through regulated entities without worrying about the storage of the cryptocurrency.

The assets of spot bitcoin ETFs will involve bitcoin bought from crypto exchanges and stored through custodians. Some ETFs may also track certain bitcoin-based indices.

What are the tax advantages of bitcoin ETFs?

There are different Indian taxation provisions for capital gains when it comes to equity funds, debt funds (including overseas mutual funds), crypto assets and overseas investments via LRS.

In India, capital gains arising out of crypto assets are taxed at a flat rate of 30 percent. Further, the losses from one crypto can’t be adjusted against gains from another and no carry forward of losses to future years is allowed.

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This is opposite to taxation provisions of equities and equity funds, where tax levels are much lower and set-off of losses is allowed.

In addition, a 1 percent tax deducted at source (TDS) is applicable on each transfer of digital assets on domestic crypto exchanges.

These taxation rules were implemented with the Finance Act 2022, which introduced Section 115BBH.

“The 1 percent TDS on crypto transactions will not be applicable for bitcoin ETFs in the US since there is no actual crypto being purchased and capital gains tax will also be lower,” said Shah.

Under the LRS route, for the short-term (less than 36 months), the tax rate on capital gains arising out of spot bitcoin ETF will depend on your tax slab, and the long-term capital gains rate will be 20 percent with indexation benefits. This would be against the flat 30 percent tax rate for Bitcoin or crypto investments in India.

Notably, overseas mutual funds in India are also now taxed at the marginal tax rate across tenures as opposed to the earlier benefit of LTCG with indexation of more than three years.

What are the cost implications of investing in spot bitcoin ETFs?

The government had introduced a 20 percent Tax Collected at Source (TCS) in 2023 on deposits above Rs 7 lakh via LRS, which would also be applicable to investments in spot bitcoin ETFs.

Although 20 percent TCS may lead to liquidity getting stuck, unlike 1 percent TDS on Indian crypto investments, the TCS can be used to offset other tax liabilities.

However, apart from TCS, direct investing in overseas markets involves additional charges such as bank charges, brokerage fees and foreign exchange rates.

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Then there would be management fees, or expense ratio, for investing in spot bitcoin ETF. For example, BlackRock plans to charge 0.3 percent, while ARK has announced a fee of 0.25 percent.

“Another point of friction could be that remittance under LRS, which Indian investors are still getting used to, is not a straightforward process like UPI where credit and debit are very easy,” said Shah.

What would be the impact on Indian policy?

In India, the crypto ecosystem is still waiting for digital assets regulations, which have been in the process of getting framed by the government for many years now.

The government had listed the Cryptocurrency and Regulation of Official Digital Currency Bill in November 2021, but it never came up for discussion. However, in 2022, the Centre introduced taxation rules for virtual digital assets (VDAs).

Nischal Shetty, Co-Founder, Shardeum, thinks that the acceptance of bitcoin ETF in the US paves the way for similar ETFs launching in traditional financial markets around the world, including India.

Meanwhile, Ajeet Khurana, Founder, Reflexible Pte Ltd, says that the US has set a precedent in making an instrument-specific regulation. “If in future we find that the Indian government is okay for Indians to take a financial exposure to bitcoin but not explore the other qualities of bitcoin, then we could have an instrument which is similar to the spot bitcoin ETF,” he said.

On the other hand, experts also believe that the Indian financial market ecosystem is different from the US in many ways, which may come in the way of getting approval for products like a spot bitcoin ETF.

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"All regulators in India, and globally, will be closely eyeing the activity within the ETFs in the coming days. The structural differences between Indian and the US ETF markets will matter – India still has a heavily retail-driven market and in our approvals for ETFs, consumer protection issues are more predominant. These are issues the RBI has raised repeatedly, which has implications for how our regulators will view the asset class."

Would Indians be interested in spot bitcoin ETF?

Crypto experts unanimously believe that the introduction of a spot bitcoin ETF marks a significant milestone, bridging the traditional financial markets with the innovative realm of digital assets.

Shivam Thakral, CEO of BuyUcoin, a digital asset exchange, said, "A regulated bitcoin financial product approved by a major global financial regulatory like the SEC will add a lot of credibility to digital assets which will create trust among institutional investors and encourage more traditional financial institutions to enter the space."

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However, ETFs based on futures of bitcoin were approved by the US SEC in 2021, but they failed to pick up among Indian investors as they couldn’t track the price of bitcoin precisely and rolling over futures contracts eroded returns, diminishing their attractiveness.

Crypto experts believe that it is yet to be seen whether spot bitcoin ETF will draw a substantial demand from Indian investors.