India’s stance from absolute ban to allowing cryptocurrency in some form is on the back of its popularity and the realisation that the country cannot remain behind the curve.
India is finally ready to bite the bullet as a bill on cryptocurrency comes for discussion during the Winter Session of the Parliament. The demand to come clear on it has been a longstanding one and the Government and the banking regulator, the Reserve Bank of India (RBI) have now realised that a law is now necessary, considering the amount of money riding on it. It is estimated that anywhere between Rs 7 and 9 lakh crores has been invested by Indians.
India’s renewed stance to allow cryptocurrency in some form is speculated to be based on the growing popularity of this class of assets and the top most economies already having adopted it.
The bill which is known as the ‘Cryptocurrency and Regulation of Official Digital Currency Bill 2021’ will be one of the 26 bills that will be coming for discussion during the session. It is expected to be brought in as a money bill and may not require to be passed in the upper house. It will be seen if it is passed during the session.
As and when the law is implemented, the investors will be able to make informed choices and the industry will also be able to tune its processes according to the law of the land.
Why is regulation needed?
The decision to bring a law on cryptocurrency comes after a lot of deliberation between various stakeholders including government, RBI and industry. The consideration is not just about protecting investors’ money (as many as 10 cr investors have put money into this digital currency, according to media reports) but also owing to concerns linked to national security and organised crime.
But the biggest consideration is issue affecting India’s sovereignty as cryptocurrencies are Dollar denominated. If it is allowed as a legal tender, it could potentially replace the Indian Rupee is what believed in many quarters.
The RBI has on several occasions expressed its concerns over risks that cryptocurrencies like BitCoin, Ethereum and Dogecoin could pose to financial stability. It had also questioned claims of market value while asking investors to not get lured by the promises of returns on cryptocurrencies.
While, investments in cryptocurrency can be made at very nominal value, the value of one unit of any cryptocurrency is deemed quite high, especially in the absence of underlying assets. The value determination is a grey area. Moreover, it is very volatile, and has potential to move exponentially on news or sentiments.
One example of this was announcement made by US Billionaire of Tesla Inc Elon Musk to invest USD 1.5 billion in BitCoin which shot prices in just a couple of sessions. The prices crashed equally faster when he endorsed Dogecoin and expressed how much energy inefficient and polluting Bitcoin.
There have also been speculations that the Government could bring in a law that would ban private cryptocurrencies in the country and in turn allow a sovereign cryptocurrency.However, there will not be a ban on technologies that aid the cryptocurrency functioning, adoption or regulation. The bill,after becoming an act (passed by the parliament and notified by the government), will likely clear the status of cryptocurrency use in India and also the laws that will govern it.
It is also likely to clear the status whether cryptocurrency will just remain as an asset class or would also double up as legal tender.
It is a widespread belief that the government could allow it only as an asset class for now and not as a legal tender.
Earlier this month the Prime Minister chaired a meeting to discuss the future of cryptocurrencies. He also warned against cryptocurrency falling in the wrong hands.
The Government is planning new changes in the income tax laws in a bid to bring cryptocurrency gains under the tax radar and also to introduce them during the Union Budget next year.
It will be interesting to see which authority will be regulating cryptocurrency, the RBI or the Securities and Exchange Board of India (SEBI) or both. Both the institutions have had their differences on many key aspects including the definition of cryptocurrency itself.
It all began with the Supreme Court lifting the ban on cryptocurrency in March this year. The apex court’s order was on the basis that there must be a law that could ban activities around cryptocurrency. Legislating a law is the domain of the government and must come from the Indian Parliament. On this premise, the top court set aside the RBI circular banning cryptocurrencies in 2020 and also set quashed another circular of 6th of April, 2018 which prohibited banks and entities regulated by it from providing services with connection to virtual currencies.
The Centre too had shifted its stance on this digital currency from no cryptocurrency from the one operated by the Government of India. The new bill that will now be introduced is a departure from previous bill – ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’. It was recommended a couple of years back by an inter-ministerial committee comprising representatives from the Finance Ministry’s Department of Economics Affairs, Information Technology ministry, SEBI and the RBI. It did not see the light of the day as it was not even introduced by the government in the Parliament.
While existing investors have their fingers crossed and are expecting rules that would not harm their interest, the development around cryptocurrency is a positive one in a sense that a clarity will come on it.
Many potential investors have not been investing in this because of the absence of regulations and redressal mechanisms in place. A clarity on this would not only bring an additional investment opportunity for investors abut also revenues for the government even if it is a sovereign cryptocurrency to start with.
The RBI in this July had said that it was working towards its own digital currency and the Central Bank Digital Currency (CBDC).
“A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade. Private virtual currencies sit at substantial odds to the historical concept of money,” RBI deputy governor, T Rabi Sankar had reportedly explained.