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The Reserve Bank of India (RBI) has been in a cold war with India’s crypto industry. The equation between the two can best be described as antagonistic. Since the central bank concerns itself with India’s ability to absorb financial shocks, it has time and again flagged the disadvantages of using cryptocurrencies. However, the industry has construed RBI’s reaction as hyperbolic. India has been particularly belligerent towards cryptocurrency, so much so that it constituted a high-level intermediate committee to report on issues related to it. In 2019, this panel had recommended a blanket ban on private cryptocurrencies in India, which threatened to put crypto investors on the wrong side of the law.

The belligerent attitude towards digital currency has led banks, apparently egged on by RBI, to emphatically distance themselves from the crypto community. In May, HDFC Bank sent a rather strongly-worded email to customers warning them against virtual currency transactions. The email cited an RBI circular published on 6 April 2018 that reportedly instructed all businesses it regulates to cease any involvement with cryptocurrencies. State Bank of India has also taken a tough stance on cryptos. Several large banks, such as ICICI Bank, are found to have stopped providing services to crypto exchanges. Many such exchanges have reported difficulties with getting bank deposits and transfers.

Investor woes: As it could be anticipated, cautionary emails from bank had prompted an uproar among customers and crypto investors, with many of them taking to social media to express their discontent. Some of the anger of investors can be attributed to their fear of missing out on the high profits that crypto trading offers them. A research report by Bloomberg Intelligence that appeared earlier this year, before Bitcoin’s recent slide, said this crypto’s technical outlook was strong and its price could surge to $400,000 in 2021.

The government’s disposition raises the question of whether all authorities in India are wary of digital currencies. Apparently not. RBI’s 2018 anti-crypto circular was struck down by the Supreme Court, which observed in a March 2020 ruling that RBI had failed to provide sufficient proof and detail instances of losses arising from crypto transactions that might justify such a drastic measure as a de facto ban on banks’ involvement with cryptos. Therefore, it can be stated that some pressure is being exerted on Indian authorities to allow crypto services.

Crypto endorsers: It is hardly news that Tesla founder Elon Musk is an ardent endorser of cryptos. While many might view him as a crypto guru, others see his actions as charades of manipulation that have caused great volatility in the market.

This is among the reasons that Indian authorities are so averse to cryptos. Their prices are highly volatile, they might not be running rationally, and this poses the risk of a financial bubble doomed to burst. The pandemic has seen crypto prices boom, but there’s no saying if this will last. A bigger worry, perhaps, is the anonymity of usage that cryptos grant users, which has led them to be seen as safe transaction tools for cyber criminals. Yet, it is unclear if cryptos should pay a price for the inefficiency of authorities in tracking down perpetrators of online crimes. Potential losses of revenue are also a big challenge for the government. Since the crypto market is unregulated, it is almost impossible to track crypto payments for any tax liabilities that may apply.

Globally, cryptocurrency acceptance has been growing. Crypto-friendly Miami, US, played host recently to an international crypto conclave, and El Salvador has become the first country in the world to grant Bitcoin legal-tender status. Pressure to flip the policy coin in favour of cryptos seems to be rising. However, given the irrational behaviour associated with the market, and comments like “Crypto isn’t the real economy" by Elon Musk and put-downs by others—former US President Donald Trump, for example, dismissed cryptos as a farce—both sides of the coin appear evenly balanced at the moment.

While countries like South Korea are implementing legislative frameworks to regulate cryptocurrencies and exchanges, India is considering the imposition of an effective ban on ‘private’ digital assets and currencies. The Indian government has indicated that it will table in Parliament the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will effectively ban private cryptocurrencies and allow the introduction of an alternative by means of a central bank digital currency (CBDC).

India’s approach of trying to reduce the domestic cryptocurrency sphere to a state-backed CBDC under RBI does not come as a surprise, but whether it’s viable is another matter. The Achilles’ heel of this approach is the delusion that it is possible to ban cryptocurrencies, while the global experience so far suggests that a blanket ban would be ineffective and it may be wiser to regulate them to mitigate systemic risks.

Going forward, it is imperative that a dialogue be held among all stakeholders on their concerns. As of now, crypto investors and traders risk getting dragged into litigation quicksand, which could cause much unease in this nascent sector.

If India’s cryptocurrency bill is enacted by Parliament in its current form, it would serve RBI’s objective. However, this would be a battle victory and need not indicate who will eventually win the crypto war.

Sonam Chandwani is a managing partner at KS Legal & Associates

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