Many are bemoaning a 1% tax that India plans to introduce on all cryptocurrency transactions. The fear is that for speculators who profit off of rapid microtransactions, this transaction tax will threaten the liquidity and volumes.
The flaw in this thinking is the incredibly high transaction fees already inherent in the inefficiency of any blockchain network.
Unlike a traditional bank transaction in which every transaction is recorded in the ledger of the sender, receiver, and potentially backups, on a blockchain, every single transaction must be recorded on every single ledger kept across the world, and the ledger must be fully refreshed to be updated unless it is broken up, itself a contentious topic.
This amounts to an almost insurmountably high transaction cost and time for most of the major cryptocurrencies. If the offer made for a ledger update is too low, some transactions will simply never even be processed, something unthinkable in a traditional transaction.
For major cryptocurrencies like ethereum and bitcoin, transaction fees can range from between 1.50 to 70 USD for a single transaction, even for fractional coins.
This does not even consider that higher offers may be required for timely processing, as low-fee transactions can take hours to days to clear, which already predicates against high-frequency trading.
The flaws in blockchains make them infeasible for everyday transactions, where the costs just to record the exchange in the public ledger may often cost more than the purchase itself, especially in developing countries who have been experimentally adopting it as a means of exchange, where the fees are more than the average workers daily salary.
Most exchanges will also levy egregious withdrawal fees, between 3 and 5 percent for bank transfers, and as high as between 7 and 20 percent for ATM transactions.
With such gratuitous exploitation in most exchanges, an additional 1% tax on OTC traders will go virtually unnoticed. The question is whether it will affect those largescale traders who may also have a direct connection to the blockchain.
If they are affected, the suggestion is that they will leave India, but with India’s power costs, there are likely few left anyways. Many have fled to central Asia to capitalize off of low energy costs.
Thus, it increasingly appears like there is much ado about nothing in support of speculative microtrading, a practice that fundamentally undermines the price stability and inflation in all markets.