The Indian Government is planning to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, in Parliament with an intention to ban cryptocurrencies. The whole objective is to curb the illegal activities which are outside the preview of various regulations in India. The govt has been facing many challenges in keeping track of investors in India and cryptocurrency exchanges.
In the Union Budget of 2018, the then FM, late Shri Arun Jaitley, announced that Cryptocurrencies are not legal tender and only allowed to be held as assets and not to be used as currencies. Based on this, RBI took steps to ban Crypto in India.
A case was filed Supreme Court in March 2020 (Internet and Mobile Association of India Vs RBI) . The appellant's main contention was that the ban of cryptocurrency is a violation of Article 19(1)(g) of the Constitution of India. The Hon’ble SC upheld the argument made in relation to Article 19(1)(g) and held that RBI could not substantiate the negative side of cryptocurrencies and did not suggest an alternative solution i.e. regulating Crypto etc.
If we talk about the proposal which was brought by the govt, it was a kind of blanket ban with a window period of 6 months to sell off all your Crypto.
In Feb 2021, FM Smt Nirmala Sitharaman announced that the Govt is considering banning cryptocurrencies, and a digital rupee will be launched (central bank digital currency).
Let's discuss why crypt becomes a painful issue for the govt.
Why is the Government worried about Crypto?
Crypto is based on blockchain technology, and it is not controlled or regulated by anyone. There is enormous volatility in crypto pricing. Cryptocurrencies can be transferred from one address to another address in few minutes.
There is no clarity on how to charge tax on the income generated on Crypto. It’s a difficult task as how to track Crypto to crypto gain, how to track which currencies are shifted on exchange-based outside India
There is no clarity as to how to apply exchange regulations i.e. FEMA rules on Crypto. It is very easy to shift money outside India via Crypto, which could lead to illegal activities, violation of FEMA regulation, and loss of tax revenue
Acceptance of Crypto could be an issue for the Indian rupee.
Crypto is based on blockchain technology. It is very difficult to track and regulate on a real-time basis.
In a country like India, it would be a huge challenge to regulate Crypto.
The Govt believes that cryptocurrencies are used to fund criminal activities, so they must be banned.
What will happen if cryptos are banned?
As per Chainalysis, cryptocurrency investments increased from $923 million in April 2020 to nearly $6.6 billion in May 2021. India ranks at 18th in the list of top 25 countries. India now has more than 15 million traders, compared to 23 million in the United States.
Govt is very much supporting blockchain technology, but it is entirely against accepting Crypto as an asset or currency. Allowing blockchain without Crypto would be like allowing a train to run without train tracks. Almost all blockchain companies need to issue a cryptographic token for getting funds for their projects.
Ban on cryptocurrencies could reduce investments in blockchain startups. Many VC firms are investing in Indian blockchain startups. Banning Crypto could result in shutting those startups and move overseas. Also, the NFT market is also based on Crypto, and India is also ahead in the race of NFT marketplaces and NFT creation. A ban on Crypto will hit the NFT market very hard.
From an investment perspective, for those who are using legitimate funds to get returns, a blanket ban would be a significant loss to those investors.
The bottom line
India is the fastest-growing economy and ahead in the race of blockchain-based startups. There is a huge potential in India to grow and create a world-class ecosystem for blockchain and Crypto. As per the recent communications from the govt officials, it seems that even the Government prefers that cryptocurrency be regulated rather than banned. Nasscom acknowledged the huge potential of cryptocurrencies and their potential contribution to India’s GDP.
While China is against cryptocurrency, India can take a big advantage of it and regulate cryptocurrencies instead of banning them. Regulating Crypto (i.e., imposing taxes and applying exchange control regulation) would be a win-win situation for Govt, crypto investors, crypto exchanges, and hundreds of blockchain startups in India.
It would be interesting to see the regulations which India will come up with to regulate/ban Crypto.