At a time when cryptocurrencies are becoming part of the mainstream global financial system, the government of India is set to put a complete ban on the digital currencies. It declared its plans to bring a new bill on cryptocurrencies to enforce the ban. However, the ban would hit nearly eight million investors in India who own cryptocurrencies worth over $1 billion. The question arises, how the proposed ban can impact the investors of crypto currencies in India.
The story so far…
The Central government on Sunday revealed that it will bring a new bill on cryptocurrencies (The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021). Finance Minister Nirmala Sitharaman has said that an inter-ministerial committee (IMC) has suggested a ban on private cryptocurrencies in India, like Bitcoin, in India.
Additionally, the same committee has pitched for the introduction of an official digital currency that will be appropriately regulated by the Reserve Bank of India.
In the current scenario, the Indian government does not consider cryptocurrencies legal tender or coins. The Reserve Bank of India (RBI) had banned banks from processing transactions relating to cryptocurrency in 2018.
Last year, in March, the Supreme Court lifted the ban, stating that it was violative of the freedom of business and profession under Article 19(1)(g) of the Constitution. Since then, cryptocurrency has been operating in a legal vacuum in India.
How will the ban impact Bitcoin investors?
Analysts have speculated that the new cryptocurrency bill might impact the existing investors who are already investing in private digital currencies like bitcoin in the country. Undoubtedly, cryptocurrency trading platforms in India are anxious about the government’s impending decision.
Those against the ban believes that the world is becoming increasingly ‘digital’ and cryptocurrencies are, of course, digital by their very nature, making it the perfect ‘Internet currency’. Studies have also proved that millennials prefer Bitcoin to gold as a safe-haven asset.
MasterCard and Visa have opened their payments network for some cryptocurrencies. Customers using these platforms can now pay or accept money through crypto. Recently, auto giant Tesla made a big bet on bitcoin. The company bought more 1.5 billion dollars worth of bitcoin. It also allowed customers to pay through bitcoin for its products.
Bitcoin continues to be pushed as a currency. Twitter CEO Jack Dorsey on Friday announced a trust to fund Bitcoin development, with an initial focus on India and Africa. Dorsey partnered with rapper Shawn Corey Carter, also known as Jay-Z, to fund the trust and the duo will initially give 500 Bitcoins (valued at around Rs 170 crore) for the trust.
Needless to say, India cannot afford to ignore this shift but it needs a legal framework first. Analysts have speculated that the new cryptocurrency bill might impact some existing investors who are already investing in private digital currencies like bitcoin in the country.
Undeniably, if private cryptocurrencies are banned in the country, it will be a loss to the existing crypto investors of the country. As Vatsal Gaur, Advocate and crypto expert mentions in a recent blog, “Banning cryptocurrency would negatively impact early-stage startups from raising funds. The ongoing COVID-19 pandemic has caused widespread recession across India. Early-stage startups are likely to struggle in raising funds.”
Opposing the government’s move, Crypto startups in India believe the country can become a thriving hub for crypto-innovation. Some have started a campaign to lobby the government to reconsider its proposed ban on cryptocurrencies.
Need for greater clarity, robust policy
Presently, the regulator bodies like RBI and Security and Exchange Board of India (SEBI) do not have any legal framework to directly regulate cryptocurrencies.
The government’s ban however, may not be totally baseless, considering that cryptos are created in a decentralized fashion and are not secure, if you lose your private key. The rate at which it exchanges for regular currency is again a function of sentiment, not rational economic factors. It also consumes electricity and could add to climate change, if used extensively.
However, instead of a ban, it is far more useful to educate investors about the risk involved in the currency, its volatility and use. The need of the hour is also a robust policy and best practices from countries like the US, South Africa, Japan and Spain that are key drivers for profitable crypto mining operations.
Of course, the ban won’t be enforced overnight and cryptocurrency investors will be given a transition period of 3-6 months after the implementation of the new law to liquidate their investments. They could allow the promotion of the underlying technology, blockchain, the decentralized digital ledger.
Moreover, a crypto bill will pave the way for RBI to create a “facilitative framework” to issue an official digital currency. In a booklet on payment system printed on January 25, the RBI had hinted that it was exploring ways to issue an official digital currency in India.
Others believe that a complete ban is not possible and the proposed ban is only on private cryptocurrencies. It is still not clear if the new legislation will include Bitcoin or Ethereum under the list of banned private cryptocurrencies, as these are ‘public’ owned. Hence, the government, technically, cannot term them ‘private’. Hence, we need to watch this space.