Cryptocurrencies in India: Ban or Regulation? – Explained, pointwise

Introduction

The contentious topic of cryptocurrency ban or regulation is garnering headlines as the Government announced that it’s planning to move a Bill regulating private cryptocurrencies in India during the upcoming winter session of the Parliament.

While the details of the bill are still awaited, the topic merits a discussion.

What are private cryptocurrencies?

Whatever cryptocurrency is not issued by the government, can be considered private, though there is no clear definition of private cryptocurrency.

The Ministry of Finance in its 2019 report, Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, recommended that

– ‘All private cryptocurrencies, except any cryptocurrency which may be issued by the government, be banned in India’.

Going by this recommendation, the government may categorise any cryptocurrency that is not issued by the government as a private cryptocurrency’

What are some benefits of Cryptocurrencies?

Cryptocurrencies are getting popular because of their underlying technology of Blockchain, and due to some of their inherent advantages over fiat currencies, like

– Transactions in Cryptocurrencies are faster and require less or no additional transaction fees.

– Crypto also doesn’t require any middleman like traditional fiat currency transactions do in the form of the banks.

– Each cryptocurrency transaction is a unique exchange between two parties, which protects users from issues like identity theft. Privacy is maintained.

– Financial inclusion: More people now have access to the internet than banks or other currency exchange systems. This opens the opportunity for reaching out to the unbanked populations of the world.

– International transactions usually have to be done with currency exchanges that involve third parties. Cryptocurrency allows two parties to transact without requiring any third party and the added fees.

What are the various concerns against Cryptocurrencies?

The concerns over money laundering and financing of terrorism have been repeatedly flagged. Certain other concerns have also been routinely raised, such as:

Concerns by the Central banks

– Cryptocurrencies can render the Monetary policy ineffective and cause massive macroeconomic instability. For more: Read here

Unsuitable to be used a currency: Their volatility makes them unsuitable as a medium of exchange. It also makes them an erratic unit of account and unreliable as a store of value.

No fundamental value: They are a kind of asset with no fundamental value or source of dividends. The only return comes from other peoples’ willingness to hold them that raises their value. This can fall as fast as it rises.

Concerns expressed by SC Garg committee (2019):

– Risks to consumers (speculative nature, no sovereign guarantee, loss of access if private key is lost, cyber risk)

– Criminal activity and money laundering

– Anonymity provided to user/holder

– Concerns on supply of currency outside the purview of the central bank, and

– Adverse impact on energy use.

Also, the primary issuance of cryptos (so-called mining) is in the hands of anonymous people within a very opaque structure.

Is a ban on cryptocurrencies a pragmatic policy approach?

Even though there are many genuine concerns regarding Cryptocurrencies, an outright ban would not be the prudent way forward.

A ban will not only be difficult to enforce but may result in draconian currency control measures.

Also, cryptocurrencies issued beyond the reach of India’s jurisdiction cannot be extinguished, and outlawing them is likely to disrupt related crypto businesses.

A ban can also drive cryptos into the dark net, increasing their use in criminal activities.

Is a blanket ban possible to implement?

A blanket ban would force crypto exchanges to stop operations in India, but banning cryptocurrencies may be technologically impossible.

While the government can stop the use of the local currency to buy crypto, there’s virtually no way to ban crypto wallets, which exist online and aren’t under the purview of banks and governments.

Peer-to-peer networks are also difficult to police, as people can simply transfer money to each other through bank accounts and transfer the equivalent crypto among each other through wallets.

What has been the global response to Cryptocurrencies?

In September 2021, China imposed a complete ban on crypto transactions.

Countries including Japan and the UK have created space for their operation.

Canada: It has been one of the early adopters of Crypto. Canada Revenue Authority (CRA) generally treats cryptocurrency like a commodity for purposes of the country’s Income Tax Act.

Israel, includes virtual currencies in the definition of financial assets.

Germany categorizes virtual currencies as financial instruments.

United States: While the federal government does not recognize cryptocurrencies as legal tender, definitions issued by the states recognize the decentralized nature of virtual currencies.

Although most of these countries do not recognize cryptocurrencies as legal tender, they do recognize the value these digital units represent – as a medium of exchange, unit of account, or a store of value.

What is the general opinion on regulating vs banning cryptocurrencies?

Strong differences of opinion exist even among the policymakers.

Against Cryptocurrencies/In favor of a ban

– RBI governor, Shaktikanta Das- He has repeatedly cautioned against cryptocurrencies, arguing that there are serious concerns on macroeconomic and financial stability. The Reserve Bank has, hence, consistently maintained the need to ban private digital currency.

In favor of regulation

– An earlier meeting chaired by the Prime Minister was in favor of “progressive and forward-looking” steps in the field of cryptocurrency.

– Similarly, members of the standing committee on finance, chaired by Jayant Sinha, are reportedly more in favour of regulating, not banning cryptocurrencies.

– The Supreme Court of India, in the case of Internet & Mobile Association of India vs. RBI, revoked RBI’s ban on virtual currencies. It had observed that in the absence of any legislation, the central bank could not impose disproportionate restrictions on crypto trading. The Court held that in the absence of any legislative prohibition, the business of dealing in virtual currencies constituted a protected right of occupation under Article 19 (1) (g) of the Constitution. This can be seen as SC’s push authorities towards regulations instead of a ban.

– Blockchain index fund by SEBI: Taking a very different stance from RBI, SEBI entered Crypto space by approving India’s first blockchain index fund. It was called Invesco Coinshares Global Blockchain Fund of Fund. This Exchange Traded Fund (ETF) offered Indian investors exposure to global companies involved in blockchain- related business activities such as cryptocurrency mining, blockchain-based financial services etc. However, the launch was deferred once speculation arose around crypto regulation.

– As per D. Subbarao (former Governor of the Reserve Bank of India) – One of the approach can be to follow countries such as the UK, Singapore and Japan that have allowed space for cryptos to operate under a regulatory radar but without recognizing them as legal tender. India should follow this middle path.

What is the way forward?

Cryptos need intelligent light-touch regulation. Bans do not work and hurt the exuberant innovation that can throw up valuable products and services.

Firstly, let stablecoins proliferate so that intense market rivalry lets no single token achieve dominance.

Secondly, A digital rupee issued by RBI could be positioned as the real thing for online use. Official backing would lend it a unique advantage. If it’s well crafted, it could exploit the market’s need for a common standard to attain domestic pre-eminence. This would help RBI keep in control over monetary policy

Thirdly, Digitisation is the future and it offers many advantages in lower transaction costs, including ease of cross-border transactions. Hence, Central Bank Digital Currencies (CBDCs) need to offer these facilities, to prevent a shift of users towards payment services of large global players such as Facebook.

Fourthly, Another possible approach for India is to ban crypto as a medium of exchange, while regulating it as an asset. Tech-based regulation can build on the India stack that makes KYC relatively easy. It can provide investor protection, while taxing capital gains as well as transactions. Macro-prudential regulation could reduce volatility.

Fifthly, exchanges must meet standards of governance, transparency and audit. Advertising must be responsible, highlighting the risks, providing investor education and raising awareness.

Sixthly, cross-border transactions can be tracked and capped in line with the capital control regime in place.

Seventhly, continuation of Cryptocurrency as potential competition to the domestic currency will encourage innovation and more stability in the latter.