India caught in crypto crossfire

Last Tuesday, the Centre listed the Cryptocurrency and Regulation of Official Digital Currency Bill for introduction during the winter session of the Parliament. On the face of it, the bill seeks to prohibit all private cryptocurrencies, while providing for exceptions to push forth the underlying technology and its use-cases. Interestingly, the bill is also looking at building an ecosystem to create an official digital currency to be issued by the RBI, something on the lines of Central Bank Digital Currency (CBDC) being considered by international central banks. These developments are taking place at a time when operators in the crypto space have reiterated that rather than opting for a blanket ban on private digital currencies, regulating them like shares, bonds or specific asset classes should be considered by the policymakers. The lobby comprising several unregulated crypto exchanges, essentially platforms on which crypto can be traded, has been vocal about inclusion within a regulatory framework. What led to this crackdown in the crypto space? For starters, the RBI has expressed its fears over the use of cryptocurrencies for illegal purposes such as terror-funding, human and drug trafficking, defrauding, and money laundering. A few days ago, PM Narendra Modi said crypto must not fall into the wrong hands, which could adversely influence youngsters. The message was not lost on investors who had pumped in chunks of their savings into the crypto ecosystem, and who might stand to lose if crypto is banned in India. The apex bank also has reservations regarding the impact of cryptocurrencies on our foreign exchange and on the rate of inflation, as well as their potential to further exacerbate the economic imbalance. One of the major arguments is that highly volatile cryptocurrencies can never be referred to as currency or the equivalent of fiat currency as only the sovereign has a right over the issuance of currencies. The argument that it might offer financial inclusivity to the underbanked and underserved are offset by the technological curve of investing in cryptocurrencies, in a nation where digitisation is still in progress. India can’t be faulted for erring on the side of caution as many nations are gradually waking up to the promise, and the threat of crypto and introducing legislation to deal with it. Banking agencies in the US recently issued a checklist to inspect instances of oversight within the crypto space. The idea is to ascertain whether activities undertaken by US banks on account of crypto assets are legal, or not. Our neighbour China had banned all private cryptocurrencies in September while issuing its own CBDC. It might have a reason to do so, as China is reported to have lost as much as $80 bn via crypto in 2020. The fear is palpable in India too as the money pumped into crypto in India could exit out of the country in hard cash. The exception to the rule is El Salvador, which has made it officially legal to use cryptocurrencies. Crypto experts have spoken about the challenges of enforcing a blanket ban on digital currencies. The trade can be driven underground, thanks to the geographically agnostic functioning of blockchain technology. In a worst-case scenario, transactions might be routed through the Dark Net. The Centre and RBI are not on the same page regarding crypto. The RBI had once banned investments in cryptocurrencies, but the Supreme Court had dismissed the circular as illegal. India’s response to any revolutionary idea seems to be knee-jerk reactions like speculative bans. For a relatively nascent technology such as crypto, this might not be the way to go. Recognising cryptocurrencies as an asset class, while bringing in a framework to regulate them, will allow the government to monitor activities of trading. It will provide avenues to impose capital gains taxes on investors, and for the enforcement of standards of transparency and a code of conduct. With a balanced approach, this might herald the second IT revolution in India.