Crypto-assets: To ban or not to ban?

News: The government has listed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 for the upcoming winter session of Parliament.

About the Banning of Cryptocurrencies and introducing National Digital Currency

How do other countries view cryptocurrencies?

– El Salvador becomes first nation to adopt bitcoin as legal currency. Further, the country is on the way to develop a dedicated Bitcoin city.

– Canada, Japan and Thailand permit the use of virtual currencies as a payment method.

– China started a trial run of their digital currency e- RMB amid pandemic. They plan to implement pan-china in 2022.

In general, some jurisdictions regulating them as digital assets, and others as a commodity. Canada and the U.S. closely monitor virtual currency activity to ensure they do not run afoul of laws on financial crimes.

Why does India need to regulate cryptocurrency?

Cryptocurrencies, or more correctly crypto-assets. So, if regulated, India can earn tax revenue on transactions like Canada.

Post-liberalisation India moved from outright bans to “controls”. So, India shouldn’t ban cryptocurrencies.

Innovation and entrepreneurship: Like fintech, there are strong links between crypto-assets and India’s sunrise industry, IT services.

The government can’t ban cryptocurrency as it is a “technological and financial innovation.”

What are the challenges in regulating Cryptocurrencies?

Regulators are bound by their existing mandates under their parent legislation. But neither the RBI nor the Securities and Exchange Board of India (Sebi) is specifically empowered to deal with “crypto-assets.”

What should India do?

As 20 million Indians (and mostly young) hold crypto assets, the government respect the economic freedom of citizens. Further, instead of banning crypto-assets altogether, the government should work on customer protection.

India should avoid the temptation to join China in proscribing virtual currencies and instead aim to tightly regulate their trading through monitored exchanges and earn revenue.

The Financial Sector Legislative Reforms Commission in 2013 had said that “the present arrangement has gaps where no regulator is in charge”. The report recommended the setting up of a unified financial agency that would implement consumer protection law and micro-prudential law for all financial firms other than banking and payments. It is time for India to setup unified financial regulatory architecture to regulate an unregulated activity.

Given the characteristics of crypto-assets, regulators ought to build capacity in, both, the technological and economic aspects of crypto-assets.

Source: This post is based on the following articles

“Regulation, not ban: on cryptocurrencies” published in The Hindu on 30th November 2021.

“Crypto-assets: To ban or not to ban?” published in Business Standard on 29th November 2021.