The brilliance of cryptocurrencies is they don't need the regulatory support of countries to function. Although the path to mass adoption becomes easier if populous countries jump on the bandwagon. Unfortunately, the world’s second largest country, India, seems to see crypto as more of a threat, than an opportunity. The question is why?
India has always been sceptical of cryptocurrency, vacillating between prohibition and regulation.
In 2018, the Reserve Bank of India (RBI) alerted all banks to stop dealing with private cryptocurrencies. However, the Supreme Court of Indian squashed this ban in 2020, asserting that RBI had not presented any empirical evidence that cryptocurrencies harm the banking sector or any other regulated entity.
Not even one year has gone by since the ban was rescinded and now another bill to ban cryptocurrencies has started to float in the legislative assembly of India.
The bill titled, "‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’, seeks to prohibit all cryptocurrencies in India and create a facilitative framework to create an official digital currency to be issued by RBI.
While the bill is pending approval, it's clear that there is an aversion to cryptocurrency within the Indian government. It also suggests India may take a similar path to their great rival, China, developing a CBDC (Central Bank Digital Currency) which cherry-picks those elements of crypto that are beneficial to government i.e control and visibility of money.
The digital version of the Yuan is currently deployed in two major cities to test the water. It will be interesting to see whether India follows a similar path to its biggest geopolitical rival, or ploughs a lone furrow.
The new bill could be motivated by four factors that were raised in previous legislation.
The first is a desire to protect unwary investors from losing money by investing in cryptocurrencies. In the past, Indian investors have lost more than $500 million in ICO scams.
As recently in September last year, a scam of nearly $272,000 involving a cryptocurrency exchange called Pluto was unearthed. The company's director collected more than $6.8 million from 43 investors, in addition to shifting surreptitiously to Dubai without informing the clients.
In December 2020, another scam of about $142 million was discovered when the Enforcement Directorate of India arrested a citizen involved in an online betting racket with Chinese operators.
The second concern of the Indian government about cryptocurrency is usage for funding terrorist activities. Given India's history with terrorists and separatists, the central bank's concern is grounded in experience, though terrorists are unlikely to be inconvenienced by unilateral efforts by India to prohibit use of crypto.
The other reasons for opposition are less justifiable. The 2019 draft bill mentioned the environmental impact of Bitcoin mining. We’ve written separately about the reality of proof of work energy usage, so leaving the specifics of that argument to one side, India’s concern for global warming is in contrast to its actions. It is the world’s third largest contributor of greenhouse gases and most of its economic growth has been fuelled by coal.
The last argument is a familiar one; the threat to the Indian’s ability to control monetary policy and more widely, national sovereignty. This seems to be the most pressing concern because it touches on the central issue of control and politics.
The Indian government imposed draconian rules around cash in 2016 when it banned high-currency paper notes in order to remove black money from the economy.
Though a string of frauds were unearthed after demonetisation, it seems hard to justify the actions given it disproportionately hit low-wage earners but also took at least a percentage point off India's growth rate for the next year. Besides, banknotes worth INR 107.2 billion weren't deposited, which led analysts to state the effort had failed, other than proving that cash is more anonymous that crypto.
The epic failure of demonetization questions the intention of the government. Was it practical? or ideological? Or simply to gain control over people's money?
Whatever the reasons may be, unpredictable moves like these only undermine the confidence in Indian Rupees. No wonder Indians trust gold more than the government to preserve wealth in times of economic turmoil and through this process of demonetization.
Besides, the yellow metal has an ancient history with India. In addition to being an investment, gold is an integral part of Indians' lives and has a cultural significance.
Now that digital gold exists in the form of cryptocurrencies like Bitcoin, there is a strong interest in Indians for crypto-assets. Moreover, the onset of the COVID-19 pandemic spurred an influx of new investors to the digital space. Presently, over 7 million people in India hold digital assets worth $1 billion. If the government tries to impose a ban, it must find a way to reimburse all those crypto-holders.
Nonetheless, cryptocurrencies have the potential to make the financial system more robust and genuinely global. When competitors can accept the next frontier of financial innovation and efficiency, it would not make sense if India avoids the entire virtual currency parade.
Moreover, India has always been at the forefront of the digital payment revolution. For instance, RBI developed Unified Payment Interface (UPI) that instantly transfers funds from one bank to another. In mere three years of launch, UPI was accepted by 142 banks and processed over a billion transactions. The world praised Indian governments’ efforts to digitise the country. However, security remains the major concern as every year thousands of bank accounts get compromised.
With blockchain bringing transparent and secure financial solutions, the government should focus on legislating cryptocurrencies rather than banning them in order to stay ahead of the curve. It will ensure effective verification levels are applied to counter money laundering or terrorism financing risks, which was the primary reason for implementing demonetization. Negative concerns with digital assets can then be comprehended and shaken off.
There is still no clarity over the bill to ban cryptocurrencies. The bill was supposed to be presented during the Union Budget on February 1, but it got pushed back. As of now, no clear indication is given by the finance ministry officials for introducing the bill to the legislative assembly.
Though crypto bans instil fear among investors and traders, Indians exchanges observed some of the highest trading volume despite the government introducing a bill to put a blanket ban on cryptocurrencies. WazirX, the largest crypto exchange in India, hit the billion dollar mark in February. CoinDCX, a Coinbase-backed Indian exchange, said there was no drop in volume. Regardless of the government's stand, the interest in cryptos among Indians is surging and it’s expected to only grow in the coming months.
In what seems to be a relief for crypto enthusiasts, Finance Minister of India, Nirmala Sitharaman hinted (on March 9th, 2021) the government might not put a blanket ban on digital currencies. She sounded much more open to flexibility.
"We are not closing our minds. We are certainly looking at ways in which experimentations can happen in the digital world, in cryptocurrency, and so on."
More recent signs of optimism were reported by the Economic Times on May 19th, 2021 with a headline that reads: "Govt may set up new panel to study crypto regulations". The basis of that piece are government sources who suggest that the policy advice from as recently as 2019 is outdated. Another reminder that governments can't really ban crypto, they can just ban themselves from crypto.
The constant U-turns suggest that India’s on-off relationship with cryptocurrencies stems from a lack of vision within government. Unlike China, Japan, or Korea that have signalled very clear intention, India seems to be torn between a conservative approach based on monetary control and its desire to be a leader in the digital economy.
We don't know for sure how that conflict will be resolved but despite the country's efforts to reign in cryptocurrencies, the Indian crypto community has grown steadily and shows no sign of stopping. That’s the beauty of crypto, it respects no borders and as history as shown, sound money always wins.