From China to Britain, crackdowns on cryptocurrencies have turned the market bearish. Binance, the world’s largest cryptocurrency exchange, was forced to halt trading in stock tokens on July 16 in the face of these actions.
In India, the cryptocurrency ecosystem has been in constant flux. Since 2013, RBI has been warning of the potential risks of crypto use. In April 2018, RBI issued a circular banning regulated financial institutions from providing services to businesses dealing with cryptos. RBI’s cautioned against risks to consumer interests, market integrity, the credit system, of money laundering, and use in terrorist financing.
This Ain’t Cryptic
In 2019, an inter-ministerial committee released a report recommending the banning of private cryptocurrencies. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to create an official digital currency and simultaneously ban all private cryptos was prepared on the basis of this report.
In March 2020, the Supreme Court struck down the April 2018 RBI circular proscribing any services to cryptocurrency players. In March 2021, in a reply to a question raised in Parliament, the finance ministry highlighted that in the 2018-19 budget speech, it was stated that GoI ‘does not consider cryptocurrencies legal tender or coin, and will take measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system. The government will explore use of block chain technology proactively for ushering in digital economy.’
The latest statement about RBI ‘plans’ for CBDC is part of this hopscotch narrative.
Clearly, there exists a regulatory vacuum for participants in the industry. This has led to the proliferation of cases of illegality. The Enforcement Directorate (ED) recently issued a show cause notice to WazirX, India’s largest crypto exchange, for facilitating money laundering and for the infringement of the Foreign Exchange Management Act (Fema) to the tune of almost ₹2,800 crore. The Registrar of Companies (RoC) issued a notice to Bitcoin India Software Services, an Andhra Pradesh-based cryptocurrency wallet, following complaints that it had collected over ₹200 crore from investors and duped them.
The Internet and Mobile Association of India (IAMAI) has set up an advisory board to implement a code of conduct for the industry. Its Blockchain and Crypto Assets Council (BACC) will act as a self-regulatory organisation for the sector. This, however, may not be enough.
Since 2013, RBI wants to create a robust oversight mechanism. On May 31, it stated that no bank should quote its April 2018 circular to reject crypto assets. The same statement also said that there is a need to ensure high-quality compliance with KYC, anti-money laundering/combating terrorist financing guidelines.
RBI’s issues are underpinned by the dilemma of classification of cryptocurrencies. Are they assets, a currency or a payment system? Can they be slotted as private or public? Will it be possible to achieve a transparent, coherent and practicable regulatory framework? There are no successful standards set yet. An accommodative approach in Japan, a heavily regulated one in the US, practically no regulation in India, and a ban in China make up the spectrum.
RBI is also keeping in mind cryptocurrency’s contribution to the economy. Cryptocurrency doesn’t contribute to capital formation, nor does it contribute to the exchequer through taxes. Should GST be applicable, or an equalisation levy be charged?
Another, often ignored, aspect is the power consumed by the mining process inherent in blockchain technologies. According to the Cambridge Centre for Alternative Finance (CCAF), bitcoin currently consumes around 110 terawatt hours a year — 0.55% of global electricity production, or roughly the annual energy draw of Malaysia or Sweden. So, it has its environmental impact.
RBI’s interest in CBDC arises from a growing interest in it across central banks. Britain has set up a task force to study the need for a digital version of the pound sterling. The European Central Bank is also moving towards a CBDC. China has already claimed the first pilot project of the digital yuan. More than 50 other countries are running CBDC pilot programmes.
Meanwhile, regulatory absence vis-à-vis cryptocurrency does no good for its stakeholders — governments, investors or intermediaries. But a blanket ban is neither feasible nor helpful. Prohibition will only push things underground, create a parallel economy.
Blockchain technology is at the core of cryptocurrencies, and a crypto ban can stunt potential innovation and development. GoI is exploring the enormous possibilities of blockchain for the data economy, energy and governance, including keeping land records.
It is time GoI clears the haze around cryptocurrency. Parliament should discuss it. A first good step will be to clearly categorise cryptocurrencies. India should initiate a round table to bring in the best minds from across the world to prepare a multilateral agreement defining global standards.
Till then, GoI, in conjunction with RBI, must put together suitable legislation and policy to govern the cryptocurrency industry. Only after the regulatory process is set should we transition to ‘soft touch regulations’ to allow innovation to thrive and the industry to expand.