Indian Crypto regulations and its snowball effects.
The finance world in the last decade has been taken by storm with the latest reforms in technology. And Cryptocurrency has become a modern-day equivalent to the ‘Future of Money. But with its growing acceptance in the market, we have arrived at the time when its regulations are much discussed. Although with a lot of push and pull, there seems to be a chance for significant legislation development around digital currencies in the near future.
Crypto regulations have been in talks in many countries especially in 2021. Such talks have had drastic effects on the market. Whether it is El Salvador accepting Bitcoin as a legal tender or China banning bitcoin or SEC suing ripple, governments around the world have contributed a lot to the crypto space in 2021 both positively and negatively.
However, crypto regulations in India become the highlight of the year.
The Cryptocurrency Bill in India was supposed to be tabled at the parliament in the winter session of 2021. However, the bill created some friction in the market and amongst the investors. The government decided to revamp the current draft of the bill with better-suited regulations that are in line with global cryptocurrency regulation.
India has about 100.7 Mn crypto holders, a number bigger than that of the US without considering the holding valuation. According to CREBACO, a crypto research firm, overall investments in Crypto have soared to $10 Billion, which is 10x growth in a year’s span. The bill has to be meticulously drafted and put forward with numbers this big.
While we wait for a clear draft, let’s take a look at what does the Indian Cryptocurrency Bill really mean –
A Little Background to The Bill –
The RBI has repeatedly voiced its concern over the growth of virtual currencies for its lack of safety and anonymity. On 6th April 2018, the RBI issued a circular barring crypto transactions for all banks. This meant that the banks were no longer permitted to register, maintain accounts, trade, settle, clear, or even issue loans to any exchanges dealing with cryptocurrencies.
The Indian Mobile Association challenged RBI’s decision in court in March 2020. To RBI’s dismay, the circular was quashed by the Supreme Court of India in the Internet and Mobile Association of India V. Reserve Bank of India. The apex court pointed out that cryptocurrencies were never banned in India but just barred in several capacities. However, the grounds of barring by the RBI wasn’t just as there was no concrete evidence of any wrong with the operations of crypto exchanges. The RBI lifted the pause on 31st May 2021. The new bill is a result of this decision by the supreme court to regulate digital currency.
The Legal Stance Of The Bill:
There are two primary aspects to the Bill –
- A Facilitative Framework for CBDC
- Ban on all Private Cryptocurrencies in India
The Bill is named ‘Cryptocurrency & Regulation of Official Digital Currency Bill, 2021’. The primary motto of the bill was to bring a Facilitative Framework for CBDC, which is supposed to be the official digital currency issued by RBI. The bill also talks about the prohibition of private cryptocurrencies in India.
What is CBDC Exactly?
The finance ministry expressed their support to the Central Bank Digital Currency (CBDC) but only after the due diligence. CBDC is a digital currency that the central bank of India will back up. Similar to stablecoins, CBDC will be volatile in nature, unlike cryptocurrencies in general.
In 2021, the RBI proposed an amendment in the Reserve Bank of India Act, 1934, to include digital currency in the definition of ‘banknote.’ The RBI is still working on use cases of CBDC and how it can be strategically implemented.
Other Speculations On The Bill:
However, the proposed bill and the government have been in favor of Blockchain, the underlying technology of crypto, and its use cases. With a lot of speculations around, the bill possibly mean –
- Only crypto covered by the government’s definition will be allowed to trade (speculated by the public statements)
- Crypto could be treated as an asset/commodity.
- It could be categorized as per the tech they use.
- The government’s focus would be on the end-use of the asset for regulatory purposes.
- Taxation: Could be taxed as short-term capital gains, 20-30% slab.
Finance Minister On Retrieving Current The Crypto Bill –
The bill that was not tabled at this winter session was retrieved, citing, “There were other dimensions, and the bill had to be reworked, and now we are trying to work on a new bill.” Investors have been advised to remain cautious while the risks of cryptocurrencies getting into the wrong hands are being assessed. The Finance Minister said that they would be proposing a well-consulted bill soon.
The Impact Of Cryptocurrency Bill –
The Cryptocurrency Bill 10 crore crypto investors and over Rs 15,000 crores of crypto investments. At present, India witnesses about Rs. 3,500 crore of daily trade volume, and the law will impact over 340 crypto startups in India.
Why is Crypto Growing in India?
While there are various reasons for the growth of crypto space in India, to list a few –
- Failed government policies
- Disillusionment with the banking system
- Progressive taxation
- Crypto is now considered digital gold.
How Can Crypto Benefit India Largely?
- Reduce Financial Frauds
- Reduce corruption with better transparency
- An immediate transaction with lower fees that can boost businesses
- Enhance Startups
- More option for RBI to regulate monetary policy
- Attract Foreign Direct Investments
- Development of technological infrastructure
- Drive the economy altogether
Stats On Illicit Crypto Activity:
The stats of illicit crypto activity is almost negligible compared to its growth. According to stats from Cipherbrief, illegal activities of crypto on Bitcoin were less than 0.5% from 2017-2020 and less than 1% in the Crypto industry altogether.
Concerns of Government on overgrowth of Crypto –
To understand the reluctance of government that shows in the Crypto Bill, let us look at the concerns of government over the growth of cryptocurrencies –
- Deregulated: Crypto being built on blockchain is a truly decentralized medium. It is relatively challenging to regulate the network resulting in a lack of regulation that can fit the model.
- Privacy: Virtual currency is based on blockchain tech and is highly secure, making it difficult to trace the origin of a transaction. The pseudo names used for transacting and its lack of traceability can lead to its growth in illicit activities.
- Lack of Security: Like any digital medium, crypto is also prone to security compromises.
- Vulnerable to Fraud: The network is reasonably new and susceptible to fraud.
- Scalability Issues: The infamous crypto trilemma is at the forefront of the concerns, i.e., issues with speed, security, and decentralization. Although newer projects are addressing these issues, the older and established networks are still to address these. E.g., Visa processes 24k transactions in a second, whereas Bitcoin processes about 3-7 transactions in a second.
- Is it India-ready? There are still a digital divide and digital literacy issues in India, where people are still struggling to pave through digitization.
What Does The Indian Crypto Bill Really Mean For The future?
If ever India decides to put a blanket ban on Blockchain and Cryptocurrency, India can be in a China-like situation. In an interview with Republic TV and crypto expert Suril Desai, Mr. Desai said,
“Banning cryptocurrency in India will make the business go underground and would create an environment similar to that in China. They tried to ban Bitcoin, but everyone was using VPN and alternative routes. It will be very difficult to enforce such a thing because it’s a technology and also the fact that private cryptocurrencies are like private websites on the internet. Not confident about the positive effects of the ban”.
This gives a strong statement on the future of cryptocurrency to the authorities. Although the space cannot be left unregulated for long to prevent its misuse, the regulations that come forth will need to be stringently thought through. The current bill, in many ways, seems regressive and restrictive in nature as it seeks to ban all private cryptocurrencies. By banning private currency and proposing a single digital currency, CBDC could defeat the purpose of digital currencies.
Any technology that can change the face of a system would come with some inherent risks; however, regulation is always a better approach than banning them outright. With the crypto bill, India has chosen a better way out. The well-consulted bill will hopefully follow the steps of countries like Canada, Japan, Singapore, and UAE, where the laws have covered all possible AML policies. If well regulated, the industry can become a massive revenue generator for the country, making it a win-win for investors and the government.