The regulation of cryptocurrencies has presented governments the world over with significant challenges, prompting an array of policy responses that range from outright hostility to wholesale embrace. But arguably no major jurisdiction has seen the level of uncertainty — and eager anticipation — experienced in India.
The approach taken by the country’s central bank has been emblematic of the regulatory confusion surrounding cryptos. The Reserve Bank of India has for years been publishing circulars warning investors and banks away from the unregulated crypto space. Yet at the same time it has been careful and consistent in maintaining the stance that cryptos are not prohibited in India.
Early last year, the Supreme Court struck down an attempt by the RBI to impose a de facto ban on cryptos. The bank had in 2018 issued a circular instructing all businesses within its purview to end any involvement with cryptocurrencies. Although the court’s judgment helped encourage banks to resume services to cryptocurrency businesses at the time, the RBI held fast to informal guidelines asking lenders to sever ties with the crypto community.
When banks started issuing warnings to customers and stopped services to crypto businesses citing the scrapped RBI circular in June, the central bank did little to help. It issued a statement noting that its 2018 circular was no longer valid, but did not explicitly instruct lenders to resume services to crypto businesses.
Policy paralysis
The RBI’s indecisiveness has been mirrored in government policy. Despite receiving several proposals on regulating the crypto space from various committees over the years, New Delhi has yet to clear up the confusion and take a position.
As early as November 2017, the government set up an inter-ministerial committee to study issues related to the use of cryptos. The following year then-finance minister Arun Jaitley announced in his budget speech that the government did not recognize cryptocurrencies as legal tender and would take measures to ban their use as a means of payment. The minister also linked them to the financing of illegal activities.
Jaitley’s speech guided the inter-ministerial committee’s recommendation of a blanket ban on cryptocurrencies. In a report published in February 2019, the committee issued a draft regulation named the Regulation of Official Digital Currency Bill, 2019 that proposed a ban on crypto transactions and severe penalties for transgressions, including imprisonment. However, the committee was not opposed to the use of the technologies underpinning cryptocurrencies, such as blockchain and distributed ledger technology, and it recommended keeping an “open mind” towards the issuance of an official digital currency. The bill was never brought before parliament.
In January, the government included the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, a piece of legislation based broadly on the 2019 draft bill, in its budget session agenda.
The new bill’s purported aim was the creation of a facilitative framework for an official digital currency to be issued by the RBI. It read: “The bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
The bill was not read in the budget session, possibly due to the devastating wave of Covid-19 that swept through India at the time.
Mixed messaging
Practically the only thing that has been consistent in the government’s approach to cryptos is its mixed messaging, one day leaning in favor of a complete ban, the next toward regulating the industry.
For instance, in an interview in early March, finance minister Nirmala Sitharaman told CNBC: “We want to make sure that there is a window available for all kinds of experiments which will have to take place in the crypto world. We are not closing our minds.”
Although the minister’s comments briefly reassured industry participants, reports of a planned crypto ban continued to circulate.
A member of parliament’s upper house questioned the finance ministry about whether the government was considering a ban on cryptocurrencies, and requested information on taxes that could be collected from cryptocurrency transactions.
Anurag Singh Thakur, the minister of state at the finance ministry, said in late March that the government would follow the recommendations of the inter-ministerial committee and prohibit crypto. He added that although crypto transactions were not exempted from tax, the government did not have any data on how much tax had been raised from crypto transactions.
In early June, a report published by the New Indian Express newspaper said India might take a softer approach to cryptocurrencies and classify Bitcoin as an asset class to be regulated by the securities and exchange board.
Industry opportunity
Amid the policy flip-flops and uncertainty, industry players are taking the opportunity to lobby the government for a more open approach to cryptos. They are also making efforts to self-regulate in order to show the government that they are not averse to enabling regulation through such initiatives as the establishment by the Internet and Mobile Association of India’s Blockchain and Crypto Assets Council of a self-regulatory body and code of conduct for crypto exchanges.
Referring to the possibility that Bitcoin could be classified as an asset class, Sharan Nair, chief business officer at exchange CoinSwitch and a member of the IAMAI-BACC, told Forkast.News: “This is exactly what all crypto exchanges have been requesting from the regulators and policymakers. If you look at the current scenario, more than 99% of buying and selling of cryptocurrency is purely done as an investment [rather] than for payments. Over time cryptocurrencies have proven to be a great investment asset.”
Earlier this month, the finance minister hinted that a draft crypto bill was ready and could be up for discussion during the monsoon session of parliament, which commenced today. However, the crypto bill was not on the agenda for the session, and it remains unclear whether it will appear during the following parliamentary session.
According to a recent report by business media outlet Moneycontrol, parliament is dealing with a number of new bills that take precedence, and the Ministry of Finance is engaged in further deliberations with the RBI and other industry stakeholders.
According to sources cited by the report, the RBI is still in favor of a blanket ban, but the government is leaning towards a softer approach. Although an outright ban is unlikely, crypto is expected to be classified as an asset and not a currency, the report said.
Nischal Shetty, CEO of crypto exchange WazirX and a member of the IAMAI-BACC, said: “I believe that when it comes to crypto, the government’s concern here is around its usage as a ‘currency’ or as a payment mechanism. As an industry, we’re in sync with the fact that [the rupee] is the only legal tender in India, and about crypto being an asset/utility which people buy and sell.
“But the thing that is unclear — and something that we believe will be in the right direction — is that crypto is an asset and its trading will be allowed in India. Positive regulations will bring in this clarity and help us innovate,” he said.
Interestingly, the Supreme Court judgment scrapping the RBI’s circular pointed out that cryptocurrencies were capable of performing most or all of the functions of a currency, regardless of whether they were legally recognized as such or not.
Dated proposals
Shetty said the government regards the recommendations of the 2019 inter-ministerial committee’s report as outdated, not least because several countries have issued new regulations in the crypto space since it was published. For instance, the report noted that a review of global best practices showed that crypto was not recognized as legal tender anywhere, an observation that has been overtaken by events, as El Salvador became the first country to accept Bitcoin as legal tender last month.
Shetty said: “I’m optimistic that our government will follow the footsteps of other developed nations, involve the crypto industry in decision-making, and introduce positive regulations.”
The delay in the introduction of legislation has left the crypto ecosystem in limbo, although many industry players view that as a positive sign.
In a recent panel discussion on what the delay in crypto regulation means to industry experts, Sathvik Vishwanath, CEO and co-founder of crypto exchange Unocoin, said bringing in new legislation in India is a long, tedious process, and that once rules are introduced, “we live with them for decades.”
Navin Surya, an advisory board member of the IAMAI-BACC, said blanket bans in India were almost always ineffective and led to surges of illegal activities, as had occurred with gambling and liquor.
“We are all in for regulation and not banning,” he said.
Ketan Surana, a director and CFO at crypto exchange Coinsbit, and a member of the IAMAI-BACC, told Forkast.News that the delay to the release of a draft bill were a “good sign for all crypto industry stakeholders as it can help the government to validate the issues, clear their doubts, consult industry experts to establish well-laid plans and also [examine] how global economies are drafting frameworks related to cryptocurrencies, which will give a much clearer idea to the government to design and create a strong draft which can be implemented in India.”
Echoing Surana’s thoughts, Nair said: “A bill passed in haste and without much consideration certainly cannot benefit the crypto industry. We look at it as an opportunity for the industry to hold further positive conversations with regulators and policymakers.”
Vikas Ahuja, CEO of digital asset investment and trading start-up Crosstower, and a member of the BACC, told Forkast.News that the delay also signified the government’s interest in exploring the potential of blockchain technology, as the finance minister has reiterated.
However, Nair said that for any sort of experiments or pilot projects involving blockchains, crypto would be necessary, which means that crypto trading would have to continue on a regulated basis.
“It wouldn’t be technically possible for India to participate in the global blockchain ecosystem without adopting cryptocurrencies,” he said. “I am sure regulators and policymakers are aware of this or will soon realize this when they study this in-depth. And if crypto is to be adopted, then crypto trading inevitably becomes a part of it.”
Ahuja said crypto investors currently operated in unmonitored markets, which required regulation to minimize risk, fight money laundering and protect the interests of Indian investors. He said the volatility of cryptocurrencies had prompted the government to look at including “circuit breakers” to protect investors, and that more clarity on the tax implications of profits generated through crypto trading was needed .
But crypto experts are divided on what any new bill might entail. Sandeep Parekh, a managing partner at Finsec Law Advisors said that despite the delay, he expected the legislation to be “a hard-hitting bill to ban crypto.”
“If there were any rethinking, [lawmakers] would have sent it back to a parliamentary committee, and I don’t see that happening,” he said.
The Enforcement Directorate issued a show-cause notice to WazirX last month for allegedly violating the Foreign Exchange Management Act in cryptocurrency deals worth approximately US$362 million. The development came amid heightened pressure on Binance, WazirX’s parent company, in multiple countries, and may be a bellwether of government thinking on cryptocurrencies and crypto-related businesses in India.
Ever since reports of an impending crypto ban surfaced, some in India’s investor community have dialed back their commitments to it, but most have doubled down. Bloomberg Quint reported that crypto investments in India grew from about US$923 million in April 2020 to nearly US$6.6 billion in May 2021, a 612% rise in crypto investment year on year.
Entrepreneur and crypto investor Kaparthi Jonnalagadda told Forkast.News: “As an investor, what I see is the government is open for discussion, which is definitely positive. Regulating something as complicated as crypto will definitely take time, and hopefully, the government will approach positive regulation [rather] than an outright ban.”
