The recent government decision to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the upcoming winter session of Parliament has created a furore in the market. The outcry is expected because India’s digital currency market was worth $6.6 billion in May, compared with $923 million in April 2020, according to 2021 Chainalysis’ Global Crypto Adoption Index.
The Bill intends to “create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”. 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.” This would be India’s first step towards regulating cryptocurrency.
Recently, Prime Minister Narendra Modi while speaking at the Sydney Dialogue urged co-operation between the democracies to ensure cryptocurrencies do not end up in the wrong hands. Countries have in the past expressed concerns about cryptocurrencies being used in organised crime, and flagged it as a matter of national security and sovereignty.
In 2017, the Government of India set up a high-level inter-ministerial committee under the chairmanship of Subhash Garg, Secretary, DEA, to study the issues related to virtual currencies, and propose specific action to be taken in this matter. In its July 2019 report, the committee submitted a draft Bill for the banning of cryptocurrency.
The committee recommended that all cryptocurrencies have been created by non-sovereigns, and are in this sense entirely private enterprises. There is no underlying intrinsic value of these private cryptocurrencies as they lack all the attributes of a currency. The report also highlighted that since their inceptions, cryptocurrencies have demonstrated extreme fluctuations in their prices, and are inconsistent with the essential functions of money/currency, hence private cryptocurrencies cannot replace fiat currencies. The committee recommended that “all private cryptocurrencies, except any cryptocurrency issued by the State, be banned in India”.
In September, regulators in China banned all cryptocurrency transactions, and mining of cryptocurrency, and introduced its own digital currency, known as the e-CNY. Taking into account the economic potential of digital currencies, the Reserve Bank of India (RBI) could introduce a strong and legitimate regulatory framework around its own Central Bank Digital Currency (CBDC). Principles for the CBDC was recently endorsed by G7 officials, and over 80 countries launching some form of initiative related to the CBDC.
El Salvador is the only country to permit them for official use; the country is also planning to build a Bitcoin City. However, the International Monetary Fund (IMF) warned El Salvador that Bitcoin should not be used as legal tender considering the significant risks it has for consumer protection, financial integrity, and financial stability. The IMF also urged the Central American country to strengthen the regulation and supervision of its newly-established payment ecosystem. A review of global best practices shows that private cryptocurrencies are not recognised as legal tenders.
In 2020, a three-judge bench of the Supreme Court of India in the Internet and Mobile Association of India v RBI quashed the RBI’s order which imposed curbs on regulated entities such as banks and NBFCs from dealing with virtual currencies. The court held that “when the consistent stand of RBI is that they have not banned Virtual Currencies and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate”. However, now the Government of India has taken a proactive call.
The unregulated nature of the cryptocurrency system functioning in India is a direct threat to one of the basic norms of sovereignty — ‘the monopoly over money’. Any currency gets its validation when the State grants it validation. A parallel currency ecosystem that functions with anonymity and under pseudonyms without the State’s legitimisation threatens State control.
Reports have also warned that virtual currencies “enable transnational criminal organisations to easily transfer illicit proceeds internationally”, and the associated risks concerning terrorism, money laundering, and other forms of financial crime make State control over cryptocurrency imperative.
The possible ban could be challenging when it comes to its implementation stage because the already large number of crypto investors could move to Dark Net. It would also be a possibility that the crypto returns can be considered as capital assets under income tax.
The recent Bill to be introduced by the government can also be construed as India’s first semiotic step to exercise its sovereignty over digital currency.
Adithya Anil Variath is a researcher at Maharashtra National Law University Mumbai.
Views are personal and do not represent the stand of this publication.
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