Rashmi Deshpande and Priyanka VenkatasubramanianJul 10, 2019 10:06:09 IST
The announcement of social media giant Facebook’s global cryptocurrency ‘Libra’ has brought the debate around cryptocurrencies to the forefront once again.
The Indian government and policymakers have maintained an unfavourable stance towards cryptocurrencies and have been unrelenting in their stand so far. The Reserve Bank of India (RBI) issued a rather controversial circular dated 6 April 2018 which effectively placed a ban on cryptocurrencies in India. All entities regulated by the RBI were prohibited from dealing in virtual currencies or providing services which facilitate entities dealing with virtual currencies. Such ‘services’ included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of virtual currencies.
Response to a Right to Information (RTI) application filed in relation to the said RBI circular revealed that the RBI neither has an internal committee on cryptocurrencies nor did it conduct any consultation or research before placing the ban.
Litigation challenging the RBI’s ban on cryptocurrencies is currently underway before the Supreme Court of India (SC). The apex court in February 2019 had given the government four weeks to come up with its cryptocurrency policy. However, the matter was adjourned during the hearing scheduled for March 2019 and is now scheduled to be heard in July 2019. Without any relief forthcoming from the Supreme Court, the RBI’s restriction on cryptocurrency platforms continues to be in force in India resulting in a rather uncertain and chaotic environment for cryptocurrency investors and businesses.
Despite the vocal opposition to the ban on cryptocurrency, the government seems rather steadfast in its stance. Several unverified reports indicate that the government has finalised a draft bill banning cryptocurrencies called the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. Reportedly the draft Bill proposes a 10-year-long prison term for individuals who "mine, generate, hold, sell, transfer, dispose of, issue or deal in” in cryptocurrencies and makes it a cognisable and non-bailable offence. If reports are to be believed, the draft Bill proposes the imposition of a monetary penalty of up to three times the loss caused to the exchequer or gains made by the cryptocurrency user, whichever is higher, on a defaulter.
India’s stance against cryptocurrency is in contrast with several other countries in the world like Japan, Australia and Germany which have adopted a permissive and friendlier policy towards cryptocurrencies. Japan became the first country to require registration of cryptocurrency exchanges in 2017.
Nonetheless, the use of cryptocurrencies is not entirely devoid of concerns. Cryptocurrencies worth billions have been reported stolen by hackers in Japan and North Korea. Critics have also raised concerns regarding cryptocurrencies being utilised for money laundering. It is to be noted, however, that conventional currencies and modes of banking are also riddled with concerns of fraud, money laundering and cyber-attacks and such concerns are not peculiar to digital currencies. It is imperative that the government focuses on deploying effective countermeasures and putting in place a robust regulatory environment to meet these challenges.
Another concern surrounding cryptocurrencies stems from its high volatility and unreliability. Stablecoins, the value of which is pegged to fiat money or commodities like gold, offers a price-stable alternative to cryptocurrencies, like Bitcoins, the value of which is driven by market forces. Facebook’s cryptocurrency ‘Libra’ is proposed to be pegged to US Dollars or a basket of currencies and will reportedly be backed by a ‘Libra Reserve’. Currently, from a regulatory standpoint, India does not draw a distinction between cryptocurrencies which are linked to fiat money and those which are not asset-backed and operate in isolation.
Undoubtedly, with cryptocurrency we are venturing into unchartered waters and challenges are expected to arise. However, from a purely regulatory standpoint, it is important for India to embrace these technological developments and put in place pre-emptive regulations to ensure financial and cybersecurity. Presently, the government’s stand against cryptocurrencies is amiss on several counts. The government has offered no substantial reason or rationale to back their stand on cryptocurrencies. Lack of a transparent and open consultative process creates the risk of alienating players in the cryptocurrency market and driving investors as well as market players away from India.
Needless to say, cryptocurrencies are gaining traction globally and are here to stay. India would be remiss in banning this technology. If the country is to keep up with global trends and ensure that it is not left behind, it needs to unwind its policy towards cryptocurrencies and replace it with an informed and reasoned approach which focuses on regulating cryptocurrencies instead of banning it.
Deshpande is a partner and Venkatasubramanian is an Associate at Khaitan and Co.
To know more about Facebook's new cryptocurrency and digital wallet, read here