An inter-ministerial committee led by Economic Affairs Secretary Subhash Chandra Garg has proposed that holding cryptocurrency in India be made illegal. Directly or indirectly investing, trading, or exchanging foreign cryptocurrencies could lead to a prison sentence for up to 10 years or a fine up to ₹25 crores.
The committee’s argument is that banning cryptocurrencies makes sense given the risks associated with them and volatility in their prices. RBI governor Shaktikanta Das has backed this decision, going as far as to call cryptocurrencies a ‘Ponzi scheme’. In an interview, Das stated that the issuance of currency is a sovereign function. Allowing private companies to issue currency will undermine and destroy macroeconomic and financial stability. He also aired that they would raise concerns about money laundering and terror financing-things.
There is some substance to the argument. But a blanket ban on cryptocurrencies might be hard to implement and might do more harm than good. That’s not me saying it, the committee itself has previously argued this. They also argued that a blanket ban would drive operators underground and might prove to be a catalyst in cryptocurrencies being used for illegitimate purposes.
So why does a committee go from being on the fence on cryptocurrency regulation to a blanket ban? Cryptocurrency has never been legal tender (it might be once Facebook-led Libra comes out). It has always been traded like more of an asset. So it’s not like bitcoin was challenging the Rupee (or Dollar or Pound in the first place). The recommendation is still a draft law. But once it is imposed, there is no plan to facilitate an exit for current crypto holders, who will end up being criminalized. According to The Wire, there are 50 lakh crypto traders in India and trading volumes are in the range of 1500 Bitcoins a day, or around INR 1 Bn. It lags some way behind the global trading volume which is in excess of $21 Bn. So if you hold/continue to hold foreign cryptocurrency, there is a real chance that one fine day you might wake up a criminal.
Billion. All of them are banned unless they are Indian. The panel recommended that the RBI can consider having a digital banknote as India’s official digital currency. So there is hope yet for crypto in India, just none for the private sector. In addition, there is also plenty of hope for blockchain technologies.
According to the report, blockchain can be used by banks and other financial firms for processes such as loan-issuance tracking, collateral management, fraud detection and claims management in insurance, and reconciliation systems in the securities market.
Broadly there are two points of contention that this ban and encouragement of blockchain presents. Firstly, implementation. Crypto trading and investing do not require government or third party approval. This means it is hard for the government to detect where, when, and by whom crypto transactions are being conducted. This is before we get into the state’s capacity to monitor all these transactions.
Secondly, winners and losers. RBI emerges out of this a winner. Not having to regulate cryptocurrencies under its mandate means that the can has been kicked down the road at the moment. There will be arguments made that the Indian economy also won. The burden of proof here is to justify how the Indian economy was losing when the crypto ban wasn’t in place.
As for losers, there are two big stakeholders that lost. Firstly, for India’s startup community involved in crypto, this is a major setback. Crypto exchange CoinRecoil’s CEO Kunal Barchha in an open letter to the PM said as much. One possible means of recourse for them might be the law. Article 19 gives citizens the fundamental right of freedom to business in any sector or trade. It is hard to predict how the judiciary might rule on this when asked in court, but a legal challenge will provide hope to businesses dealing with cryptocurrencies.
The second loser here is Facebook. More specifically, Facebook-led Libra. The ban means that if the currency achieves mass adoption, it is not going to have a user base in India. This might mean that Indian’s lose out on innovations in fintech until the ban lasts or is circumvented at least. As the crypto business flourishes globally, India might be left to play catch up once the ban is lifted.
Bottom line is that there are good arguments on the side calling for the curtailment of cryptocurrencies. However, they are not nearly enough to call for a blanket ban. Let alone one that punishes through ₹25 crore fines and 10-year imprisonments. Even the committee or earlier versions of it would agree. The crypto ecosystem could have done without regulation in order to grow. As with other areas of technology, the government’s approach protects us for the moment. However, bans such as these, even if implemented well, will have to come down someday. Let’s hope we are prepared for when that happens.
The writer is Policy Analyst – Technology, at the Takshashila Institution and the co-author of Data Localisation in a Globalised World: An Indian Perspective. Views are Personal.
This article was first published in Deccan Chronicle.