On Christmas Eve in 2013, the Reserve Bank of India (RBI for short) issued a note warning Indians about the financial, legal and security risks of cryptocurrency. It came four years after the world’s first cryptocurrency, Bitcoin, was launched.
Resistance to cryptos is getting stronger
Central bank opposition to crypto has only grown stronger over the past eight years. Earlier this month, the RBI told its council that a complete ban on crypto would be necessary, as only partial restrictions will not work. In 2018, the RBI had effectively banned crypto trading in India. It instructed the banks not to facilitate this. However, a Supreme Court ruling in 2020 set the central bank’s injunction aside.
The RBI has consistently opposed crypto because it has concerns related to financial stability. The central bank’s monetary policy would be less effective if crypto were allowed to circulate freely. Other concerns about crypto are its extreme price volatility and the difficulty of tracking transactions.
In addition, in a country like India it will be more challenging to manage currency risk. The money will flow in via digital currencies and not necessarily in the form of dollars. Sources at the RBI have argued this. Even IMF chief economist Gita Gopinath highlighted this challenge when he pointed out that emerging and developing countries face a greater threat.
The stance of Mumbai’s Mint Road is that crypto should be treated neither as a currency nor as an asset. The concern about the illegal transfer of funds plays a major role in this.
The government has yet to determine its position, as not all wings are on the same page on the issue – something which led to the introduction of the proposed legislation being postponed until at least the next parliament session.
Government against a complete ban
According to a fintech player, part of the government may be against a complete ban because they fear being shut out globally and aligning with China. The Chinese banned crypto this year.
Legal experts say that while recognizing crypto as legal tender is out of the question, it is too late to ban crypto. According to them, the government’s approach will have to be balanced so as not to hurt investors, but at the same time not to allow them to grow unchecked. This could threaten the country’s foreign exchange reserves. It could also lead to disruptions in the economy. L. Badri Narayanan, executive partner at Lakshmikumaran & Sridharan Attorneys, said:
“The government considers cryptocurrencies to be investment vehicles and plans to regulate them. Under income tax rules, cryptocurrencies are likely to be treated as assets and attract capital gains. GST and TDS are other areas where the legal position is not clear.”
Need for comprehensive regulation
Legal experts said extensive regulation is needed and it would not be fair to compare India’s policy stance on crypto with that of developed countries such as the United Kingdom. The latter uses a ‘fragmented regulatory approach’. The United Kingdom does this because of differences in foreign exchange regulations. Narayan said the following:
“You can’t take money out of India without permission. We are a foreign exchange regulated market and that means we cannot make certain decisions like developed countries, which have a free market.”
He added that it would be difficult for regulators to stop crypto payments by Indians abroad.
More clarity desired about legislation
The crypto industry has also asked for clarity on foreign exchange and tax laws. Sumit Gupta, CEO & Co-Founder of CoinDCX, a crypto exchange, and co-chair of trade association BACC says:
“Under FEMA (Foreign Exchange Management Act), the cross-border movement of ‘goods’ and ‘services’ is classified as import/export. However, the regulations do not clarify whether crypto tokens are ‘goods’.”
Some of the government has suggested that crypto could be regulated as an asset class by market watchdog Sebi. To that end, a bill on cryptocurrencies, along with some amendments to the RBI and Sebi laws, would be introduced in parliament. However, the long-awaited crypto bill and other amendments were not tabled during the parliament’s just-concluded winter session.
Prime Minister Narendra Modi has said emerging technologies such as crypto should be used to “strengthen, not undermine” democracies. FM Nirmala Sitharaman has said that cryptocurrencies will not be allowed for payments in India.