Cryptocurrencies and Indian regulations – Explained, pointwise

Introduction

Cryptocurrencies are registering a spectacular rise globally. In India also, despite RBI’s strong reservations, investment in cryptocurrencies by Indians has been growing. Blockchain data platform Chainalysis says crypto investments in India have grown some 200-fold in the past year, from about $200 million to nearly $40 billion. There are more than 15 million cryptocurrency traders in India — about two-third of the number in the US and more than six times that in the UK.

What is Blockchain?

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack or cheat the system. It is a digital ledger of transactions. Blockchain technology is the underlying technology for cryptocurrencies.

Cryptocurrency regulations in India by RBI

• The RBI in its 2018 circular banned banks from dealing with virtual currencies and Bitcoins in any form. But the Supreme Court of India had set that circular aside.
• On May 31st, the RBI issued a release saying its April 2018 circular was no longer valid and that no bank should quote it to reject cryptos.
  • The May 31st release also said that the banks must carry out customer due diligence in line with regulations governing standards. Such as, know your customer (KYC), anti-money, combating of financing of terrorism and obligations of regulated entities under the Prevention of Money Laundering Act as well as the Foreign Exchange Management Act.
  • These make it impossible for banks to deal with cryptocurrencies because of their very nature. (The persons who engage in cryptocurrency transactions are not known).
• The RBI has issued at least three releases, including one in April 2018 cautioning both the regulated entities and the public against the “risks” associated with cryptocurrency.

Government response to Cryptocurrencies

• A high-level inter-ministerial committee(SC Garg Committee) constituted under the chairmanship of the secretary (economic affairs) to study the issues related to virtual currencies and propose specific actions to be taken.

• Recommendations of the SC Garg Committee:

• • The committee recommended that all private cryptocurrencies have to be prohibited in India, except any virtual currencies issued by the state. Further, the panel recommend a jail term of one to 10 years for exchange or trading in digital currency.
  • However, the committee is not against blockchain, the underlying technology for such currencies. The committee is in favour of exploring the enormous possibilities of blockchain for various purposes, including keeping land records.
  • The committee has recommended a central bank’s digital currency.
• Apart from the committee, The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 was to be introduced in Parliament’s Budget session. But the government is still discussing it with the stakeholders. It is supposed to ban all private cryptocurrencies and prepare the ground for a CBDC in India.

What is the central bank’s digital currency?

It is a wallet or an electronic purse issued by the RBI. A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency. Instead of printing paper currency or minting coins, the central bank issues electronic tokens. This token value is backed by the full faith and credit of the government.

Federal Reserve, Bank of England and even the European Central Bank are moving towards the so-called central bank digital currencies (CBDCs). On the other hand, China has already claimed success of its first pilot project of digital yuan currency.

Why is India is against cryptocurrency?

• Cryptocurrency can’t be slotted: They are neither a commodity, nor a currency, nor part of the payments system. Simply put, cryptocurrencies such as Bitcoins,  Dogecoin, Ethereum, Litecoin, Cardano, Polkadot, Steller and many others, defy classification.
  • According to the RBI, a cryptocurrency cannot be classified as an asset since there is no future cash flow
• The regulator doesn’t consider this as a currency as it is not issued by the central bank and doesn’t have sovereign backing. They also could jeopardise financial sector stability since there is no central monetary authority.
• Further, its value fluctuates because of speculation. It has poor storage value, and it’s not widely accepted.
• It’s also not part of the payments’ system, like a credit or a debit card or internet banking.
• Transactions are anonymous and transactions cannot be tracked. So, they are outside the ambit of public scrutiny. This has serious implications for KYC norms and is fraught with risks of money laundering and terror financing.
• Besides, there is no consumer protection. Once one misplaces the password, there cannot be any transaction as there is no central issuing authority for such currencies.