What is the first thing that comes to mind when we hear the word cryptocurrency? Risk, challenge, threat, cybercrime, terrorism, and so on. However, there are many who consider cryptocurrency as an opportunity — to become richer as well as to fulfil their many aspirations.
In January 2019, had anyone invested ₹100 in Bitcoin, its valuation would have increased to ₹1,700 by March 2021. Today, we are sitting on a heap of more than 10,000 cryptocurrencies, with their market capitalisation exceeding $2.1 trillion, which is almost three-fourths of India’s GDP. Globally, 150 million people have invested in cryptocurrencies, of which 10 per cent (15 million) are Indians.
Ever since its inception, Bitcoin was projected to be an alternative to the conventional banking system, which is projected to be slow, costly (on account of multiple players) and vulnerable to frauds (counterfeiting, forgery of negotiable instruments and bank records, wrongful transactions, etc). For example, the international SWIFT transactions take longer time and involve higher transaction fees when compared to cryptocurrency transactions over blockchain.
But that’s not the complete story. Cryptos are increasingly being looked upon as conduits of money-laundering. The alphanumeric cryptocurrency wallet IDs (equivalent to bank account numbers) and the impregnable blockchain network offer anonymity that the unscrupulous can exploit. A substantial number of transactions on the Dark Net are being carried out in cryptocurrencies.
Cryptocurrencies are also seen to be challenging the sovereign function of the state — that is, currency and coinage. Countries seem to have been divided between banning cryptocurrencies (example, Bolivia) and accepting them as legal tender (El Salvador). In the US, 22 per cent adults are estimated to be holding cryptocurrencies. In the UK, it is not unusual to see people buying Bitcoins at the designated ATMs. And in Hong Kong, companies are allowed to hold a portion of their assets in the form of cryptos.
In this backdrop, India’s regulatory response lacks clarity. Since December 2013, the RBI has issued multiple notifications flagging various risks associated with virtual currencies. With effect from July 6, 2018, the RBI prohibited banks, NBFCs and payment system providers from either dealing in or providing services pertaining to virtual currencies. However, this RBI directive was set aside by the Supreme Court — vide the Internet And Mobile Association of India v. RBI case — on March 4, 2020.
Now, the Union Government has sought policy intervention in the form of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The Bill seeks to ban all “private” cryptocurrencies while providing the RBI with powers to develop another central bank-backed digital currency (CBDC). This Bill is yet to be tabled in Parliament.
This regulatory conundrum does not give a clear messaging to investors, inventors and innovators associated with the crypto industry.
Despite the not-so-clear regulatory directions, the investment in cryptocurrencies in India is growing. This calls for re-examining our policies in the larger interest of industry, society, individuals, and the state. It could be a four-pronged approach.
Firstly, the hypothesis that cryptocurrency is all about blood money, narco-trade or terror funding needs to be revisited. People are investing a lot of ‘white money’, which is driving the crypto frenzy. Per information available in public domain, Indians had invested an estimated ₹49,161 crore ($6.6 billion) in cryptocurrencies by May 2021. According to the ChainAnalysis Blog, Indians made profits of around ₹1800 crore in 2020 from their crypto investments.
Secondly, we must understand how the other leading economies are taking a broader view about the cryptos.
Thirdly, Indian technocrats and software professionals are sought after by the blockchain industry across different geographies. However, on the Indian soil, the blockchain industry is not getting developed for want of regulatory clarity.
And, fourthly, it is important to weigh the effectiveness of banning cryptocurrencies. Ineffective banning may result in a parallel economy involving cryptocurrencies, which will be detrimental to India’s socio-economic interests.
The crypto industry can probably be regulated through strong enforcement of Know Your Customer and anti-money laundering norms.
The writer, an ex-IPS, is Senior Director, MIT-WPU School of Public Policy