Asian jurisdictions have been cautious in developing legal frameworks around virtual currencies, but the volatile market and relentless evolution of cryptos are pushing regulators to act
The cog that turned the regulatory machinery in India to regulate cryptocurrencies, or virtual currencies (VCs), was the circular dated 6 April 2018, issued by the Reserve Bank of India (RBI), prohibiting the banks and financial institutions from dealing or providing services to people dealing in VCs. So far, the regulatory position regarding trading and investing in cryptocurrencies in India fit broadly under two categories: First, the position followed with the issuance of a prohibitory circular by the RBI; and second, the position advent with the pronouncement of a decision by the Supreme Court that struck down the said prohibitory circular of the RBI, being unconstitutional.
Before April 2018, the crypto industry in India remained fairly unregulated, posing a potential impact on the effectiveness of monetary policy, along with risks and concerns about consumer protection, market integrity and systemic safety associated with dealing with digital currency. However, the issue of how to deal with VCs has been lingering with the RBI since June 2013, when in its financial stability reports of 2013, 2015 and 2017 the regulator has consistently raised concerns about legal and operational risks associated with VCs, and has also issued public warnings about the risks associated with VCs.
Between 2013 and 2018, there was a significant rise in the value of many cryptocurrencies, and rapid growth in initial coin offerings (ICOs). This caused wariness with the regulators, triggering the constitution of an inter-disciplinary committee in 2017, comprising the Special Secretary (Economic Affairs) at the Ministry of Finance, and representatives from the departments of Economic Affairs, Financial Services, Revenue, Home Affairs, Electronic and Information Technology, and from the RBI, NITI Aayog, and the State Bank of India, to examine the regulatory and legal structures and suggest measures for dealing with VCs.
The report submitted by the committee recommended issuance of a clear warning through public media, stating that the government does not consider cryptocurrencies as either coins or currencies, to warn investors to offload such currencies, and to recommend action against those who, despite warnings, indulge in buying or selling, or offering the platform for trading of cryptocurrencies. However, the committee clarified that there is no restriction to using blockchain technology for purposes other than creating or trading in cryptocurrencies.
On 2 November 2017, an inter-ministerial committee was set up to examine the pros and cons of banning and regulating cryptocurrencies. While submitting a draft bill known as the Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018, the committee recommended regulating private cryptocurrencies. The committee believed that banning cryptocurrencies would be an extreme measure, and therefore advised regulatory tools for regulating VC exchanges to permit the sale and purchase of private VCs.
This aided the advent of regulation of the crypto industry in India, though an about face to the recommendations of the inter-ministerial committee in the form of total prohibition, by introducing the circular dated 6 April 2018, issued by the RBI, that prohibited banks, financial institutions and online payment system providers from dealing in VCs or providing any services to people dealing in such currencies with immediate effect.
In this way, the oxygen support to various VC exchanges in India was removed, since access to banking services in the modern economy is essential, especially in light of the restrictions on cash transactions under the Income Tax Act, 1961.
The crypto industry challenged the prohibitory circular, under the aegis of the Internet and Mobile Association of India, before the Supreme Court. Another inter-ministerial committee was constituted by the government, which, by its report submitted in 2019, recommended bolstering the prohibitory circular with the law and completely banning private cryptocurrencies through legislation, namely, the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. At the same time, the bill also contemplated the creation of a digital rupee as legal tender by the government in consultation with the RBI.
On 4 March 2020, the Supreme Court struck down the prohibitory circular issued by the RBI, terming the total prohibition as disproportionate, while emphasising that this was done even though VCs are not banned by the government, in effect sending the functioning of VC exchanges comatose by disconnecting their lifeline, i.e., interface with the regular banking sector.
The present position
After this tug of war, the position in India today is that there is no law or policy that prohibits trading or investment in cryptocurrencies, but the question that concerns investors is the uncertainty of such a position in future. This is especially in the light of the impending ban with a new bill being introduced in the Indian parliament, namely the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The contours of the bill are not yet available in public, but the expectations are that this bill will take forward what was set in the draft legislation of 2019, which proposed to ban cryptocurrencies in India.
The 2019 bill gave a very loud and broad definition of cryptocurrency as “any information, code, or token which has a digital representation of value, and has utility in a business activity, or acts as a store of value, or a unit of account”, and sought not only to prohibit or ban the trade of cryptocurrencies but also to penalise the mining, holding, selling, issuing, transferring or use of cryptocurrencies as punishable with a fine or imprisonment up to 10 years, or both. The purports of the new 2021 bill are:
(1) To create a facilitative framework for the creation of an official digital currency to be issued by the RBI; and
(2) To prohibit all private cryptocurrencies in India, but allow for certain exceptions to promote the underlying technology of cryptocurrencies (i.e., blockchain and distributed ledger technology) and its uses.
The bill seeks to create a central bank digital currency to be issued by the RBI, which will be a digital form of Indian rupee, backed by the RBI and having the same value as fiat currency. It is speculated that the bill will be one of the world’s strictest policies against cryptocurrencies. If the ban becomes law, India will be the second major economy, after China, to make the holding of cryptocurrencies illegal, even though China has not penalised the possession of cryptocurrencies.
The bill is slated to be introduced in the lower house of the parliament very soon, and being at the receiving end of the onslaught, this has rightly left many investors and traders anxious. The government has tried to alleviate concerns by giving signals that there will not be a complete blanket ban, and a window will allow and encourage experimentation and exploration of emergent technology underlying cryptocurrencies for research or teaching.
The government has acknowledged that the technological innovations underlying crypto assets can improve the efficiency and inclusiveness of the financial system, and are advantageous in controlling fraud and maintaining privacy. However, what has bothered the government and the RBI is the host of other issues regarding consumer and investor protection, money laundering, tax evasion, the threat to the existing monetary or credit system, and terrorist financing.
One cannot doubt the justification of government concerns regarding risks associated with the unregulated use of VCs due to their anonymity, layering, lack of backing by tangible assets, and volatility. But it would be disproportionate to impose an absolute ban while ignoring certain advanced benefits of VCs, like more efficient cross-border payments and better record keeping, especially when cryptos are going mainstream with widespread applications. The US and European countries have also chosen to embrace and regulate private cryptocurrencies while orienting towards mitigating specific risks.
A total ban would also make the trade illegal and push the industry underground, which would entail a rise in black marketing, abuse and exploitation. It would also force crypto-holders to take their wealth offshore. It is also impractical to ban cryptocurrencies as they exist on the internet, and it is almost impossible to implement a ban in the digital world.
Letting the RBI issue its own central bank digital currency is an effective idea from the perspective of monetary sovereignty, but the International Monetary Fund (IMF) recently indicated that public money and private money could co-exist and complement each other.
According to the IMF, this system offers significant advantages, including innovation and product diversity, which the private sector will provide, and stability and efficiency, as ensured by the public sector. The IMF argues that if countries move to a central bank digital currency, they should consider leveraging private currencies.
At this point, the opportunity to have a dual monetary system must be seized by India, and many other countries.
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