No Digital Currency for Digital India?

Introduction

The Indian government is going full-throttle to introduce a new bill during the ongoing Budget session of the Parliament that explicitly bans private cryptocurrencies like Bitcoin in the Indian economy. Additionally, the bill will also bring to the table a new digital currency that will act as a better alternative to such cryptocurrencies and will bolster the Indian economy. If passed, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will impact the future of cryptocurrencies in India.

The government’s move has been heavily criticised and condemned by investors and industry experts who describe it as a step back, especially at a time when the popularity of cryptocurrencies is off-the-charts. Recently, Bitcoin saw a jump of 14% after Tesla announced that it had acquired around USD 1.5 billion in Bitcoin and further plans on accepting digital currency as a payment for its high-end vehicles.

This article delves deeper into the recent controversies on cryptocurrencies and examines how we got here, what’s the current status and what’s next.

Road So Far                                                                                                               

Cryptocurrencies such as Bitcoin, Litecoin, Swiftcoin, and Namecoin steadily gained attention between 2012- 2017. This period also saw cryptocurrency exchanges like Zebpay, Coinsecure, Unocoin, Koinex, and Pocket Bits mushrooming in India. The 2016 demonetization led by the Modi Government further drove tech-savvy customers to cryptocurrency exchanges as consumers started exploring different ways of digital payments over the conventional banking system. 

Suddenly in 2018, RBI issued an order stating that banks and financial institutions shall not deal with crypto-related businesses, and all regulated entities falling within its purview shall stop providing services to such platforms. Crypto exchanges, unable to access banking services in India, found their businesses crippled overnight with trading volumes falling by 99% by August 2018.

In 2020, the Supreme Court struck down the provisions of RBI’s ban on cryptocurrency by terming them ‘unconstitutional’. Exchanges suddenly saw an incremental rise in interest as the SC verdict coincided with the crypto-boom with the price of Bitcoin soaring more than 700% between April 2020 and February 2021. Finally, in 2021, the government is planning to introduce a bill that formulates the creation of a sovereign digital currency and simultaneously bans all private currencies. The recently-revived industry realises that it is on the verge of facing a second existential threat.

Government’s Perspective

The Government is fairly adamant about putting a curb on the nationwide use of private cryptocurrency. One of the main reasons presented by the Government for a nationwide ban on cryptocurrency is that there is no official body regulating the issue and use of such currencies. Let’s understand this in simpler terms: If you invest your money in stocks, the Security and Exchange Board of India (SEBI) has the authority to control it, ensures that your money is in safe hands, and further keeps a check on any potential threats. There is no such authority and regulation when it comes to cryptocurrency which is what raises the red flag for the Government.

Another prominent reason against cryptocurrencies is that they don’t derive its value from any underlying assets or earnings. Since the value solely depends on what the investor is willing to pay for it, it can be easily swayed by speculative bids. Moreover, such currencies generally keep the investor’s identity anonymous, creating problems in tracking its flow. This can potentially cause security risks and the currencies can be used to funnel black money.

Implications of the Ban

Industry experts opine that banning crypto would be a reversal of economic liberalization in many ways, similar to banning financial internet entering the Indian market. The ban on cryptocurrencies will lead to a slump in the growth of private investors in India. The ban will also affect the block-chain industry that has been growing in India for several years. Not only will it devoid Indians from participating in virtual trading but will also adversely affect the crypto-firms that have been blooming for the past few years.

The pause on the use of cryptocurrencies can also create an economic divide in the economy as it will affect the two social factions differently — wealthier investors or the rich shall continue to invest in cryptocurrencies like Bitcoin outside India and will reap the advantages of Crypto-innovation and on the other hand, the small investors or the common man, who won’t have enough financial resources to invest abroad will be losing on crypto-innovation, thereby breeding inequality.

Road Ahead

The ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ seems to be more positive and forward-looking as compared to the previous one titled ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill’ which outrightly banned the use of cryptocurrencies. The former intends to give the Government the right to regulate such currencies and ban the use of only ‘private currencies’. What would be considered a ‘private currency’ is still a question.

More importantly, the future of cryptocurrencies is not as bleak as the government predicts. Industry experts have high hopes that cryptocurrencies will replace traditional fiat currencies soon. The unprecedented unemployment that has come with the pandemic can be resolved with crypto-startups which will not only create an array of job opportunities ranging from blockchain developers, software analysts, project managers, promoters and marketers but also spur economic activity. Its greater adoption will further attract a higher number of  institutional investors to the Indian forefront.

Another important reason which accounts for the bright future of cryptocurrency in India is the fact that there are still 300 million Indians who are unbanked. Unlike traditional banking, crypto currency doesn’t require any physical infrastructure and promises greater accessibility, therefore, it can be the ‘bank’ for this section of the society.

Many developed economies such as Australia, UK, and the USA have regulated the use of cryptocurrencies instead of banning them. The Australian government regulates every person involved in the life cycle of crypto-assets from issuers, intermediaries, miners, exchanges, and trading platforms. From a tax perspective, they are treated as an asset and upon any gains, they are subjected to capital gains tax. Therefore, India should follow the suit of such economies and choose regulation of such currencies over an outright ban.

Regulation of cryptocurrency would be a middle ground offering twin benefits:  overseeing the operations of the players and protecting the consumers, and, curbing any money laundering concerns. Cryptocurrencies will hold an important position in the future as most of the leading countries have accepted their use and India’s decision will only hold the country back when it comes to development and technology. A move in favour of cryptocurrencies would attract global attention and will put India at the forefront of the rapidly growing financial and technological industry.

Om Agarwal is a second-year student at Ashoka University majoring in Economics and Finance.

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