Cryptocurrency Ban in India — Is It a Seeming Reality?
In the year 1994, the richest man in the world at the time, Bill Gates, said,
“Banking is essential, banks are not.”
In the year 2021, the richest man in the world currently, Elon Musk, said,
“It would be the most entertaining and ironic outcome if Dogecoin becomes the currency of the Earth in the future!”
Both these quotes are a corollary to each other, because as physical brick and mortar formats of banks are becoming obsolete, more peer-to-peer financial systems will become prevalent.
It is a long way from evolution to global acceptance of a trend that is privy to concerns such as security, privacy, fraud, money laundering, terror-financing etc. That would explain the natural skepticism of world governments (including India’s) to accept cryptocurrencies as tangible instruments of finance.
But over time, governments have realised the futility of banning an idea whose time has come, rather preferring to adopt strategies to tailor them within their framework of what is acceptable and what isn’t. Case in point being the recent recommendation of an Indian Government Committee to ban private cryptocurrencies and allow a “state-sponsored” one instead.
Let’s see what are the possible implications if this recommendation turns into policy.
A Low-Down on Cryptocurrency Regulation in India
During 2012–17, India saw a massive surge of cryptocurrency trading and exchanges. The RBI took notice in 2013 and warned the public against the outcomes of dealing in virtual currencies, marking the first instance of regulatory distrust.
Since then, a number of circulars and notifications have been issued, including the decoupling of cryptocurrency exchanges from the traditional banking system. This led to industry backlash and an appeal in the Supreme Court which quashed the prohibitions imposed.
What is the Latest Development?
A high-level Inter-Ministerial Panel chaired by the Cabinet Secretary of Economic Affairs has proposed a blanket ban on all “private cryptocurrencies” except those issued by the state. Consultations are still underway and a new piece of legislation, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, will be presented in the ongoing Budget Session of the Parliament.
As of now, India is estimated to be the second biggest Bitcoin nation in Asia and the sixth biggest in the world. According to research conducted by global cryptocurrency exchange Paxful, Indian investors traded close to $74.92m in Bitcoins, which is a 347% YoY increase, not to forget in the midst of an economic downturn.
So, the question is, how does the Government plan on imposing a sweeping ban on all private cryptocurrencies in an environment where their business is booming? Also, what exactly is going to be banned, because cryptocurrency can have varied utility. Bitcoin is often used as a means of payment but it also behaves like a financial instrument and is traded for potential returns on investment.
State-Issued Cryptocurrency
The idea of sovereign digital currencies has been floated for a while. There has been popular momentum towards the creation of a Central Bank Digital Currency (CBDC), which is expected to be a hybrid between blockchain technology and government currency (aka permissioned blockchain).
CBDC employs the same Distributed Ledger Technology (DLT) that Bitcoin uses with one deviation. Instead of a completely decentralised financial province that Bitcoin creates allowing anyone to run the software and participate in transactions on the network, CBDC designates the decentralisation to a select group of entities, and not everybody under the Sun. So, it’s different from a centralised database of a bank but not as liberated as Bitcoin either. 66 central banks around the world are experimenting with CBDC currently.
In any case, it is still unclear if the Indian Government’s musings over a state-issued digital currency is on the same lines as CBDC or through creation of a Digital Rupee through digital wallets, instead of blockchain technology.
Again, the idea behind evolution of cryptocurrency was to delink it from the predatory and institutional influence of fiat currencies. A state-issued currency would render this feature immaterial because they will be ultimately linking to sovereign pegging structures (at least to fix the nominal value from the looks of it).
Another possible concern with state-issued cryptocurrency is that it could be used as a tool by rogue nations to circumvent sanctions. Venezuela launched its own cryptocurrency, Petro, in 2018. As it turns out, it was used by Venezuelans to evade US sanctions, mandate payment of sovereign taxes through the currency and to keep building up foreign exchange reserves by moving money internationally through Petro.
Possibilities Galore for Gain in Crypto-World
Bitcoins created by mining are self-generated capital assets. Imagine the magnitude of capital gains that can arise if we were to standardise the infrastructure and regulation for their transaction.
Plus, validating them as legal tenders would confer upon them a status akin to money, making their incomes fall under the disclosure requirements of the IT Act.
But, let’s hold on! No country has recognised private cryptocurrencies as legal tenders yet, so let’s not get ahead of ourselves. However, banning citizens from holding and trading in them altogether also seems like an unnecessary overreach. If it is legally tenable to exchange property for property, why not Bitcoin? It doesn’t have to be currency, just consideration.
Interestingly, retail trading in Government securities has been operationalised recently. At a time when so many countries are religiously dedicating resources into research and experimentation with creating their own national digital currencies, India could follow along similar lines by launching pilot schemes into an interest-bearing digital currency.
This could ease trading in Government bonds and democratise finance at the macro-level. Public debt could be brought to the masses who could be interested in investing if the modus operandi of doing so involves digitally-savvy cryptocurrencies.
In any case, creating a legal framework to govern crypto assets is the top priority right now, preferably with a code and regulating agency to monitor the crypto industry.
(Originally published February 11th 2021 in transfin.in)
