Introduction
Cryptocurrency is the most recent attempt to reinvent how we exchange money. Cryptocurrencies such as Bitcoin, Tether, and Ethereum have all seen the rage. Many technologists are intrigued by the potential of its innovative blockchain technology. For numerous entrepreneurs, especially early adopters, cryptocurrencies represent a once-in generation wealth opportunity. However, it also suffers from the risk of cyber-crimes and market crashes, resulting in a chorus of critics warning that it’s risky and perhaps similar to a pyramid scheme.
Top Indian officials have referred to cryptocurrency as a “Ponzi scheme”. Recently, the Indian government put millions of investors in a fix by announcing that it would propose a law banning all crypto investments and punish those found dealing in them. In response to the government’s proposal, the Technology Services Industry Association (“Association”) has advocated implementing traceability regulations for cryptocurrency investments and trading to combat money laundering and illegal activities. The Association representing many internet startups, unicorn and investors like Zupee, RedBus, Ola Electric etc., submitted a white paper to the government asking to recognize the crypto investment as a legal business. It also suggested the government regulate the entire crypto market by adopting accounting and tax regulations.
On 15 September 2016, the Bank of England released a report indicating that implementing a digital currency may see a surge of 3% in the country’s GDP. Moreover, the “Global Blockchain and Cryptocurrency Market 2021” report indicates that the cryptocurrency would significantly contribute to the global GDP, injecting up to USD 2 trillion into the global market. Hence, considering the impact that crypto-investments is about to have on the global economy, India should open her arms wide open and bring a friendly regulatory framework governing the crypto-investments.
Regulatory challenges
In India, cryptocurrency has already gone through certain regulatory hurdles. In 2018, the Reserve Bank of India (“RBI“) issued a circular that barred banks and other financial institutions from facilitating cryptocurrencies transactions. It caused an uproar in the country. Countering the circular, the Internet and Mobile Association of India (“IMAI“) and other petitioners argued that it had effectively killed the industry by removing it from the formal economy, despite the fact that cryptocurrencies are not illegal in India.
Two years later, the Supreme Court quashed the central bank’s circular on the grounds of disproportionality. The judgment noted that the RBI has failed to show “at least some semblance of any damage suffered by its regulated entities” to back its decision to ban cryptocurrencies in India.
As a result, the government brought a new bill – The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 that will ban all private cryptocurrencies but bring public digital currency.
The development created a real hullabaloo not only inside the parliament but also outside the parliament. There is a crowd of angry stakeholders asking for regulating crypto assets rather than banning them. Following how demonstrators responded, the Central Government may set up a new panel to decide on Cryptocurrency regulation in India.
Five-point regulatory framework
The Technology Services Industry Association, on 6 May 2021, released a whitepaper on a framework to regulate crypto investments in India. The primary purpose of the proposal is to clear the air of misunderstandings amongst government officials concerning the use of digital currency. The Association recommended a five-point regulatory framework to enable traceability and instil a sense of safety in the minds of investors and government:
- Define crypto assets and establish a mechanism for registering local homegrown cryptocurrencies.
- Introduction of checks and balances structure to combat money laundering and illegal activities.
- Treating crypto assets as current assets by taxing them directly and indirectly, fetching additional revenue for the state.
- Safeguarding retail investors from fraudulent activities by taking protective measures.
- Allowing self-regulation, including establishing a clear code of conduct that aligns with consumer protection and financial stability.
Key recommendations
The guidelines recommend the following:
| Definition and Indian Ownership requirements |
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| Compliance, Verification, and Reporting |
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| Taxation, Disclosure and Import |
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| Crypto as a means of payment and tokens |
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| Self-regulation | Unless additional regulation kicks in, the Association proposes to adopt principle-based self-regulatory guidelines. It is preferable to have the guidelines implemented by a government-recognized body to maintain accountability and transparency. |
What do critics have to say on The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021?
The government and the RBI are hopelessly muddled when questioned about the future of crypto assets in the country. Recently, a senior official from RBI told Inc42 that the RBI is bound to stop large conversions of INR into cryptos unless there is legal clarity. However, another official said that even though the crypto exchanges are ready to adhere to the norms and guidelines issued by RBI, the bank doesn’t seem to change its stance.
Meanwhile, RBI Governor Shaktikanta Das gave a favourable reply. He said that “The time has come to leverage its applications while at the same time strengthening the digital infrastructure.” He also mentioned that RBI is working on its digital currency. However, the official also added that it is not a cakewalk to develop a regulatory framework on cryptocurrency. The job becomes even more complicated when finance and technology are linked together.
Balaji S. Srinivasan, the former CTO of Coinbase, said that banning Crypto is like banning the financial internet. As a result, India will miss trillions of dollars of economic growth, and it will be a setback for India, said, Srinivasan. He also said that banning Crypto to prevent national security and illegal activities is like stopping drunk driving by banning cars.
Rameesh Kailasam, CEO and President of IndiaTech.Org. gave a very positive and optimistic response by stating that “Crypto has become an exciting area of interest for investors, entrepreneurs and consumers. This sector holds great potential for Indian startups in the crypto space to grow out of India. The main need today is to give this sector the much-needed regulatory clarity it has sought.” He also mentioned that “There are perceived risks associated with crypto that may have implications for the safety and security of investors that can be addressed through necessary regulatory controls as in other sectors, including financial products.”
Conclusion
India should instead buy bitcoins than banning them. India has the opportunity to attract global praise and support from one of the most renowned technologists and financiers. Though people are sceptical about the value of bitcoin, even among them, the wisest realize that an outright ban is not the answer. The need of the hour is the discussion about how can we benefit the most from this technology. Even the former Economic Affairs Secretary, Subhash Garg, recently said that there is merit in seeing Crypto as an asset and not a currency.
Furthermore, the Association’s white paper is only the tip of the iceberg. However, it has the potential to influence the decision-making processes of the stakeholders. It provides readers with concise information about this complex issue and assists them in understanding it. It also argues that their recommendation to introduce crypto assets is the best way to address the government’s concerns and the RBI have raised.