Banning cryptocurrencies in India: Will this move backfire?

India is considering presenting a bill to ban private cryptocurrencies such as Bitcoin in India, during the ongoing Budget session of the Parliament. If passed, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will impact the future of cryptocurrencies in the country.

While the details are not clear yet, the Bill broadly entails banning all private currencies and creating a framework for the introduction of an official digital currency issued by the RBI.

Such a move, however, is being looked at as a step back, especially at a time when the popularity of cryptocurrencies is skyrocketing. Bitcoin, for example, jumped 14 per cent after Electric auto manufacturer, Tesla, announced that it had acquired around USD 1.5 billion in Bitcoin and that it plans on accepting digital currency as a payment for its high-end vehicles Tesla.

What is cryptocurrency?

A cryptocurrency is a form of digital or virtual currency which is exchanged over the internet and uses cryptography as a means of security. There is no central authority governing cryptocurrency, the money does not pass through a third party or a middleman and is a completely decentralised peer-to-peer payment system. While transactions and accounts can be traced, the owner accounts are usually not easily traceable.

Cryptocurrencies can be used to make payments, international transfers and transact online. It is also used for investment purposes. A large number of individuals and even businesses have started using the digital currency, including retailers, restaurants, and even law firms. Many online websites also accept virtual currencies as payment.

A step backwards?

Atul Khekade, Co-Founder of XinFin Network that is building regulatory-compliant blockchain network for Trade Finance to empower MSMEs, believes with the technology behind cryptocurrencies, there is a huge potential for India to build a competitive advantage in the global economy by training its vast pool of software developers and creating more jobs/wealth for the country.

However, not leveraging on this would be counterproductive.

“India has over 2.75 million software developers, while the pandemic resulted in job losses and unemployment. If the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is passed, it will lead to massive unemployment in India’s young and emerging youth,” he states.

This is not the first time that such a move is being considered. In 2018, the Reserve Bank of India (RBI) had banned banks from dealing in virtual currencies such as cryptocurrencies. However, after cryptocurrency exchanges filed a lawsuit in the Supreme Court, the RBI ended the ban in 2020.

A number of investors and cryptocurrencies such as CoinDCX and WazirX are running the campaign #IndiaWantsCrypto, to protest against the Bill. The campaign directs people to its website, urging people to write to their local Member of Parliament and urge them to push back against the Bill.

As per the campaign website, in India, alone, more than 8 million people are saving, earning and investing in the global crypto economy.

With #IndiaWantsCrypto focused on supporting healthy adoption and regulation of the underlying technology to create more jobs and giving people more control over their finances, Khekade feels that the Government should look at fair regulation and support the movement.

“Government should look at the real underlying potential of blockchain technology. Cryptocurrencies is an overly abused word that makes people think that the underlying technology is bad,” he says.

Concerns over crypto

There have always been concerns of cryptocurrency being used to fund unlawful activities. According to the RBI, the potential risks of cryptocurrencies include the possibility of being used to fund unlawful activities in the absence of any central authority.

Cryptocurrencies are also traded on platforms located in multiple jurisdictions where the legal status is unclear. Further, since they are virtual currencies stored in digital/electronic media, they are more prone to attacks and losses that arise out of such attacks.

In fact, Microsoft co-founder and philanthropist Bill Gates recently said that cryptocurrency allows for certain kinds of criminal activities and that it is better to get rid of it.

However, Khekade is of the view that while cryptocurrencies need regulation, data suggests that unlawful activities are still funded through traditional cash. “All cryptocurrency transactions can be tracked online. It is practically impossible for unlawful activities to be carried out using cryptocurrencies without getting caught,” he says.

A sovereign digital currency

The Bill is being looked at as a framework for creating sovereign digital currency, as well. Currently, China has the world’s first sovereign e-currency – the Digital Currency Electronic Payment (DCEP).

However, does such a move make sense? Khekade believes that India already has the best payment system in the world - UPI is widely used by people here. “It is not clear why the Government would want to conflict with its own successful system. In terms of applications like global trade and finance, export funding that can support the Atmanirbhar Bharat initiative very well. The Government should look at working with existing Digital Asset players and bring them under regulation," he explains.

Khekade feels that a sovereign digital currency wouldn’t solve India’s collateral problem to sustain its imports and exports to support India’s population.

“In 1991, India had to physically transport half of the country's gold reserves to the Bank of England to provide collateral to cover risk for India’s import and exports. Digital Assets and cryptocurrency technology can be used to act as payment obligation and cover collateral risk for millions of Atmanirbhar MSMEs entrepreneurs so that they can be more competitive in the global marketplace,” Khekade states.