The Ministry of Finance and the Reserve Bank of India are running out of reasons not to implement consolidated cryptocurrency regulation in India. It’s time for them to finally bite this bullet. Their hesitance made some sense initially, nascent as the crypto industry was at the time. But it’s now clear that India is a major crypto market—one of the largest in the world—and the crypto craze is thriving, regardless of how hostile policymakers make it for traders.
Yet, even the latest statements by RBI Governor Shaktikanta Das make it seem as if policymakers either don’t understand or are deliberately ignoring the reality of what’s happening in the crypto market. Most of the concern seems to be about the ramifications of widespread use of cryptocurrencies as a currency, with close to none being about their use as assets.
This selective blindness is strange, especially considering how proactive the RBI has been about Central Bank Digital Currencies (CBDCs) and the fact that the government itself refers to cryptocurrencies as virtual digital assets (VDAs).
The thing is, people don’t buy private cryptocurrencies—such as Bitcoin, Ethereum, Dogecoin, and the like—so they can use them to buy bread. That kind of role as a medium of exchange may have been part of the original idea of cryptocurrencies, but the thinking has since evolved. People buy cryptocurrencies with the hope of achieving the super-normal profits that many have seen from such investments in recent years.
Cryptocurrencies have resurrected and democratised the possibility of becoming fabulously wealthy overnight, and this is the idea that is finding increasing appeal in economies where income inequality is widening—not the notion of using cryptocurrencies at the grocery store.
The 2023 edition of the ‘Geography of Cryptocurrency Report’ by the crypto analytics firm Chainalysis, released earlier this month, has pegged India at the top of the crypto adoption index, which basically means that India is experiencing the highest levels of crypto adoption at the grassroots level.
The report also says that India has the second-highest levels of crypto transaction volumes, second only to the US, and beating out wealthier nations like the UK, Canada, and Germany.
The report made it a point to mention that India’s emergence as a top crypto market is happening despite a tax and regulatory environment that “can be challenging for the industry to navigate”. In other words, even though policymakers have made it tough to operate in this space, crypto adoption and usage are still surging in India.
It’s not hard to understand why this is happening in developing countries such as India, Vietnam, the Philippines, Indonesia, Pakistan, and Thailand—all of which feature in the top-10 countries in crypto adoption. High rates of economic growth and distress are typically accompanied by rising inequality levels. Those at the bottom increasingly look for unconventional ways to augment their subdued incomes.
Enter cryptocurrencies offering the allure of overnight millions.
Also read: How hyperinflation, economic turmoil is pushing people to adopt crypto in several emerging economies
The missing touch
Now, it’s not as if the finance ministry or the RBI have been blind to this growing interest in cryptocurrencies in India. Over the years, both bodies have made it clear that investing in cryptocurrencies is akin to falling for a Ponzi scheme. The RBI has consistently and vocally advocated for banning cryptocurrencies.
The finance ministry has somewhat softened its stance, changing the nomenclature of its proposed legislation to remove the word ‘banning’ from the title and instead focusing on regulation. However, despite being finalised back in 2021, the crypto bill is no closer to being considered and passed by Parliament.
Instead, the government has taken a more piecemeal approach to regulation. In Budget 2022, it announced a 30 percent tax on profits arising from crypto transactions and a 1 percent tax deducted at source (TDS) on all crypto transactions. In March of this year, it said that the Prevention of Money Laundering Act (PMLA) would apply to crypto transactions as well.
However, these are all high-level regulations, whereas what’s needed are the nuts and bolts of the rules. India’s stubbornly growing crypto industry needs clear regulations covering aspects such as know-your-customer norms (currently based on the PMLA), explicit specifications on whether cryptocurrencies can or cannot be used as mediums of exchange, and rules for fraud prevention and resolution, among other aspects.
In fact, the Chainalysis report has highlighted that an uneven implementation of the TDS regulation has led many Indian users to flock to international crypto exchanges that don’t collect TDS as effectively, to the detriment of homegrown exchanges.
The finance ministry has been saying that it will finalise its own crypto regulations once there is international consensus on what shape such regulations should take. That consensus is now in place, thanks in large part to India’s efforts during its recently concluded presidency of the G20. With a draft bill already in place, it should be relatively easy to tweak it and introduce it during the upcoming winter session of Parliament.
RBI Governor Shaktikanta Das recently revealed quite a bit about how the government and RBI are thinking about the crypto issue. Speaking during a one-on-one chat with an International Monetary Fund official during a G20 meeting in Marrakech, he highlighted the risks associated with cryptocurrencies as currencies.
According to him, these risks included threats to domestic financial stability, global financial stability, domestic monetary system, global monetary order, and problems of terror financing and money laundering. “The central bank itself will lose control over the monetary system,” he lamented.
As the governor of India’s central bank, he would, of course, be well aware of these risks, but noticeably absent in his reply was any mention of cryptocurrencies as assets.
Sure, dealing with assets might have been outside his jurisdiction as a central banker, but a mention of that manner of usage of cryptos would have shown that the regulators were cognisant of how cryptos were actually being used in the country. The fear might be of cryptos as currencies, but the reality is cryptos as assets.
The governor, in Marrakech, evocatively said, “We need to know, before entering the water, how many sharks are there inside the water”. The thing is, it’s the regulators that can and should dispel the sharks. Leaving Indian crypto enthusiasts to the mercy of these ‘sharks’ for too long isn’t prudent regulation; it’s irresponsible.
Views are personal.
(Edited by Prashant)