India’s long-standing aversion to cryptocurrencies has never been a secret.
In fact, its apex banking body, the Reserve Bank of India, has often found itself making headlines for its slew of attempts to discourage crypto use within the country’s financial ecosystem.
Yet, despite the challenges posed to it by the lack of regulatory support, the crypto community in India had soldiered on, hoping to usher in a “Digital India” that would have space for crypto assets.
A new draft bill, titled Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019, prepared by an inter-ministerial committee, has somewhat thrown off the optimism of several crypto investors and many tech-focused startups in the country, by calling for criminalisation and jail term for trading in crypto.
Coming shortly after the right-wing Modi government took office with a resounding mandate from the people, the new draft, reflects the authorities’ growing concern with the widespread incidence of crypto scams and tries to rein in the possibility of risks to investors.
The underlying intentions of the bill seem justified, especially considering how the $300 million crypto scam case involving the Bharadwaj brothers have jolted the Indian crypto enthusiasts out of their complacency of late.
Yet, the harsh prosecution model that has been suggested by the draft bill, with jail term of upto 10 years, being proposed for the act of crypto trading, has garnered criticism for being unwarranted. In addition, several frequent investors, and many insiders in India’s burgeoning startup ecosystem have pointed out some inherent issues with the draft bill.
What Does The Draft Bill Argue?
To analyse and understand the bill prepared by the inter-ministerial committee, it is essential to understand its basic premise and arguments. With the committee being headed by Subhash Chandra Garg, secretary, Department of Economic Affairs (DEA), the proposed draft bill seeks to put in place a complete ban on the use of cryptocurrencies in the country, either as currency or as legal tender.
Instead, it focuses on the need to encourage and facilitate the growth of the blockchain industry, harping upon the multitude of use cases digital ledger technologies can potentially support. Even though it summarily dismisses the need to leave some room for blockchain’s primary form of application: the cryptocurrency, it seems open to having a Digital Rupee or a CBDC (Central Bank Digital Currency).
While it is indeed interesting and even heartening to note that the committee is considering a modified application of the original crypto model, many players in the Indian venture capital and startup sectors have raised questions about the sagacity about such a suggestion.
My understanding is that even if a Digital Rupee were to be introduced, it would allow little deviation from the digital money system already in the works thanks to apps like Paytm and Google Pay, which allow users to send and receive legal tender digitally.
Nischal Shetty, one of the co-founders of the startup WazirX, a Mumbai-based crypto exchanging service, has pointed out a fundamental irony in the committee’s argument.
The report promotes the role of a public blockchain, the use of “decentralized” ledger technology in facilitating many tech focused developments. At the same time, it takes a hardline stance against crypto, axing at the very foundations of decentralization as a concept.
Various contradictions stated in the report, are as follows:
- It has failed to include fiat cryptocurrencies under the overall umbrella of crypto assets, even going on to suggest the adoption of such fiat cryptocurrencies. Besides, its argument that crypto is a privately owned asset system seems misplaced as cryptocurrencies are essentially built on a public blockchain with an open source code.
- It focuses exclusively on crypto’s role as a currency, even though they have mostly been used as assets in the Indian crypto sector so far. Although it is undeniable that even the use of crypto as assets can cause high risks of fraudulence, especially at a time when the industry is still at a nascent stage, a blanket ban could easily hurt the immense economic potential the industry presents. This risk-averse and conservative approach could be considered as being prudent by some, but it is important to remember that an outright ban on such assets could close off the doors of possibilities that lie ahead of the fraudulence concerns.
- The report also repeatedly cites the stance taken by China, of promoting blockchain development and blocking the growth of crypto-based transactions within its economy. However, what this argument fails to account for, is the fact that Chinese courts have, on more than one occasion, accepted Bitcoins as being legitimate forms of asset or property and the country itself has been home to the creation of some top crypto projects. Most importantly, the acknowledgement of Bitcoin being an actual form of virtual property gives crypto users in China proper ownership rights in the case of disputes, an aspect not matched by the draft bill’s proposals.
- The inter-ministerial committee has further argued that global best practices do not support the use of crypto as legal tender within a country’s economy. While that in itself may be a logical conclusion considering the status of crypto in most jurisdictions, the report does not help explain why it is shying away from the route taken by countries such as Malta or Switzerland. These countries have enjoyed major economic advantages by rolling out the red carpet for crypto, and their governments have not had to give away their powers over the legal tender to reap the benefits of growing crypto trades in their countries.
- The report also claims, somewhat inaccurately, that cryptocurrencies have no inherent value of their own. The truth is that the very concept of a crypto-based currency system is hinged upon the creation of value in a decentralized network according to cryptographic principles. Besides, many cryptocurrencies in existence do have their values pegged to real-time objects and assets such as gold, petroleum and even the US dollar.
- Another concern that has been raised by the report is about the environmental impact of the process of crypto mining. While the concern is not misplaced, it does fail to take note of some key facts around this aspect. As a CoinShares report has pointed out earlier, over 70% of crypto miners use environmentally sustainable fuel for the mining process. Moreover, there have been several other implementable solutions that have been suggested to tackle the issue of environmental damage.
What Will The Implications of A Crypto Ban Be?
If the draft bill is passed and made into law, it would present a significant hindrance to the fast-growing startups based in the crypto payments ecosystem, and would also disadvantage venture capitalists and angel investors who have bet their money on crypto. It would also discourage foreign investments from flowing into the sector, thereby effectively shutting off a prospective route of economic growth.
Many commentators have argued that the draft bill seems to be in contravention of Article 19(1)(g) of the Indian Constitution, which gives traders the fundamental rights to freedom of trading in their preferred industry. However, as I see it, the legislators of the country do have the power to override that contravention by deeming the industry itself illegal. After all, no drug peddler could convincingly claim of being stripped of his fundamental right to trade under Article 19(1)(g)!
Having said that, even if the legislators were to indeed exercise such a power, it would be quite difficult to actually implement a complete ban. After all, the basic notion of crypto allows for a great deal of privacy, which means that if one wanted to be evade traceability while trading in crypto, it would not be too difficult to ensure.
A blanket ban is likely to promote a Streisand Effect, which results in people desiring a prohibited thing more with greater enthusiasm than they would have otherwise had. In any case, India has already seen crypto users shelling out a premium upward of $500 to get their hands on crypto in the face of the government’s hardening stance. A complete prohibition is hardly likely to take that interest away. If anything, it will only increase the risk of scams by leading to the creation of an unregulated underground market.
What Next for Crypto in India?
One promising aspect that does emerge from the report is its suggestion to constitute a Standing Committee that would periodically revisit the observations of the Garg report. This indicates that the inter-ministerial committee is not shutting the door on future prospects and developments entirely.
In any case, introducing appropriate regulations instead of straightway banning the use of cryptocurrencies would be far more beneficial to those at a risk of being scammed in crypto-related cases as that would allow them a legally defined avenue to seek redressal. Otherwise, they would simply have to deal with the repercussions of operating in an unregulated, criminalised industry by themselves, without the perpetrators of the scam being brought to task.
Since the report does not suggest how existing investors and players in the crypto industry can withdraw without attracting legal penalties, it is unclear as to how the effects of such a bill will pan out in the short run. In the long run, the inadequate implementability of the suggestions also make the draft bill sounds like it could do with some revisions.
As of now, the government has not confirmed its intention to ban crypto. In fact, when Anurag Thakur, the Minister of State for Finance and Corporate Affairs, was asked in the Rajya Sabha if his government had essentially prohibited crypto in India, he said that it was not the case. He said:
“Presently, there is no separate law for dealing with issues relating to cryptocurrencies. Hence, all concerned departments and law enforcement agencies, such as RBI, Enforcement Directorate and Income Tax authorities, etc. take action as per the relevant existing laws. Similarly, police/courts take action on IPC (Indian Penal Code) offences. Further, in view of the risks and dangers associated with cryptocurrencies, (the) government and RBI have been issuing advisories, press releases and circulars to the public.”
As it stands now, we must let time run its course and let us know if the proposed ban will really be implemented. For now, the crypto insiders and startup founders are keeping their fingers crossed!