Home / Opinion / Views /  Prohibition or regulation? Crypto's fate is hanging in the balance

The Indian government has listed its Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, for enactment in Parliament this winter session to facilitate the issuance of an official digital currency by the Reserve Bank of India (RBI). According to the listing notice, the Bill also “seeks to prohibit all private cryptocurrencies in India". However, “it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses." Earlier, in 2018, the draft of a Virtual Currency, Crypto Token & Crypto Asset (Banning, Control & Regulation) Bill was drawn up, but was not enacted. The government’s second draft for crypto legislation, the Banning of Cryptocurrencies and Regulation of Official Digital Currency Bill of 2019, which sought to impose a blanket ban on cryptocurrency, also remained on paper.

The Standing Committee on Finance, chaired by Jayant Sinha, in conference with Blockchain and Crypto Assets Council, crypto exchange representatives and market experts, recently concluded that cryptocurrency ought not to be banned, but regulated instead. The panel also met Prime Minister Narendra Modi and officials of various ministries over the matter. While word of a ban is currently in the air, enthusiasts of virtual currency may yet be satisfied by the knowledge that the government is working on a Central Bank Digital Currency (CBDC), which may soon undergo a trial, and the probability of digital currencies being classified and treated as tradable commodities.

The bill seems influenced by the approach taken to virtual currencies in announcements made by Beijing and European governments. India rightly underscored the need to regulate virtual currencies at the United Nations recently. Moreover, the Supreme Court of India, in the case of Internet & Mobile Association of India vs. RBI, revoked RBI’s ban on virtual currencies, noting that in the absence of any legislation, the central bank could not impose disproportionate restrictions on crypto trading. This could well be construed as nudging the authorities to pass legislation for the regulation of cryptocurrencies.

In the aforementioned case, RBI had pleaded for a crypto-ban on the basis of a lack of any structured mechanism for investor grievances, exposure to illegal activities enabled by pseudo-anonymity, ineffective know-your-customer norms, the possibility of overseas transactions, ambiguity on taxation and lack of accountability. While we could soon have a definite crypto law in place, the lack thereof at the time of the Supreme Court ruling had rendered RBI’s authority over virtual currency ultra vires, or beyond the scope of its remit.

In this context, it is pertinent to mention that the Securities and Exchange Board of India (Sebi) has jumped into the crypto space by approving India’s first blockchain index fund. Called Invesco Coinshares Global Blockchain Fund of Fund, it was designed to offer Indian investors exposure to global companies involved in blockchain- related business activities such as cryptocurrency mining, blockchain-based financial services, payment systems, and so on. This exchange-traded fund (ETF) was expected to work in accordance with the framework of Undertakings for Collective Investments in Transferable Securities. However, this launch was deferred once speculation arose around crypto regulation.

RBI’s record of opposition to the legitimization of virtual currencies makes for a compelling snapshot. In 2013, RBI announced that cryptos are not backed by central banks, nor by tangible assets. This was in the light of the traction gained by cryptos, which had coincided with the National Spot Exchange Ltd scam related to a payment default involving e-series contracts that enabled investors to buy or sell metals in demat form. In 2014, RBI released another statement, pointing out potential risks associated with speculation in virtual currencies.

In 2017, RBI reiterated its concerns, describing the post-demonetization crypto boom as “an unintended consequence" of a rise in digital payments. The bank regulator took a stringent step in 2018 by banning all financial institutions from dealing in cryptocurrency. This ban, however, lost its significance soon. The same year, India saw its first crypto ATM start operations in Bengaluru. The ban was struck down shortly afterwards by the Supreme Court.

All cryptocurrencies use decentralized blockchain technology. This makes it nearly impossible to track and ban all forms of crypto. With things moving fast, the only way out is to either ban all forms of crypto mining and use in India, or regulate the crypto space. Given the way that technology is evolving, especially artificial intelligence (AI), Indian authorities have been in need of a wake-up call. AI, particularly, is expected to play a significant role in the crypto space.

One cannot turn a blind eye to RBI’s concerns, but banning all virtual currencies is not feasible. This can’t be overlooked either. With Bitcoin mining reaching for the stars, it may be possible for cryptocurrencies to be mined using satellites in the near future. While banning them will not impact their existence, given their decentralized nature, regulating them under robust enablers of a crypto ecosystem might help sort out the issues raised by RBI. Which way India goes is yet to be seen, even as two major financial regulators have taken mutually antithetical stances on crypto-regulation.

Trisha Shreyashi & Chandan Goswami are, respectively, an independent legal counsel and the managing partner of TYT Partners

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