Cryptocurrency is Virtual, Risks are Real – The Indian Dilemma

By Neelam Rani and Jatinder Handoo

The current Status

Are Cryptocurrencies and Virtual Digital Assets (VDAs) illegal in India? While every investor would yearn to untangle the real essence in-between the fine lines, the short and sweet answer is ‘no’, VDAs, of which cryptocurrencies are a form – are not illegal in India as of March 2022. One can trade VDAs including cryptocurrencies online through cryptocurrency exchanges. However, having said that, the damocles’ sword dangles over future of cryptocurrencies in India in terms of policy regulations. It is noteworthy that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is still, in a scary avatar, waiting to be tabled in Indian parliament (hopefully by May 2022). The bill proposes to prohibit all private cryptocurrencies in India however permitting for certain exceptions that promote blockchain technology. It also creates a framework for central bank digital currency (CBDC) that will be issued by the Reserve Bank of India.
The silverlining in cloud however is the recent union budget of India, where Indian finance minister in her budget speech defined Virtual Digital Asset (VDAs) and proposed a 30% flat income tax on capital gains from VDAs (including cryptocurrency), to which many analysts have interpreted as a positive step towards the shift in the stance of Indian lawmakers. However, a few may exactly know what’s there is in the store.

Size of the Pie

On business front, as per coinmarketcap data global market cap of cryptocurrencies as on March 09,2022 is close to USD 2 Trillion and there are more than 10,000 cryptocurrencies in the world. As per a report published by chainanalysis , India stands second globally at Crypto Adoption Index (2021) rankings . Domestically, In one of their interviews , co-chairs of the Blockchain and Crypto Assets Council (BACC) of the Internet and Mobile Association of India (IAMAI) mentioned approximately 15-20 million cryptocurrency users in India hold around USD 0.9 billion (INR Billion 6.6) worth crypto assets which makes India a potential market for cryptocurrencies and other VDAs . India on other hand has around 350 crypto start-ups and two crypto unicorns as per a monograph published by the Observer Research Foundation.

Public Policy

The Reserve Bank of India (RBI) has taken a hard stand on private cryptocurrencies; however, it is proponent of Central Bank Digital Currency (CBDC). In a recent speech, RBI Deputy Governor TR Sankar cited cryptocurrencies as a threat to the country’s financial and macroeconomic stability. He also warned investors about it.

The RBI’s circular dated April 06,2018 explicitly prohibited all regulated banks including Cooperative banks to deal in Virtual Currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs and also prohibited banks to maintain accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.

It also instructed to cease existing relationship with any such clients within three months from the date of the circular. This circular was challenged by IAMAI in Supreme court of India, finally on March 04, 2020, the court ordered to set aside RBI’s circular. The RBI on May 31 ,2021 through its circular asked banks not to cite its 2018 order as a reason to deny banking services to customers who deal in cryptocurrencies.

Since then, although many critical developments including a high power meeting on VDAs chaired by PM Modi has taken place in November 21, but there has never been an actual ban on any aspect of crypto currencies.

The volatile nature of the fluctuating values of cryptocurrencies, absence of a centralized authority, no explicit grievances redressal mechanism, lack of transparency and a sense of overpromise – the dangling chimaera of big profit especially to young customers concerns financial regulator(s) and law makers alike.

End client protection is on the topmost agenda of financial regulators, particularly RBI and SEBI. Portrayal of over promise and glamorous advertisements with popular influencers masks actual degree of risks associated with digital assets and cryptocurrencies. Keeping this in view, India’s Advertising Standards Council of India (ASCI) – the industry self-regulatory organization (SRO) has introduced advertisement guidelines for promotion of VDAs effective from April 01,2022 , according to which all VDA products and services should carry the disclaimer: “Crypto products and Non Fungible Tokens (NFTs) are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.” Which is an another step to generate a general awareness among masses about the risks associated with cryptocurrencies.

The Way Forward

Finally, converging the business, technology and policy considerations , the big question is what will happen to cryptocurrencies in India once the bill is tabled in parliament? Will Govt. go ahead with RBI’s view ignoring lobbying efforts and take a different route? RBI deputy governor has already hinted about it in detail. In his recent speech, dated February 14,2022, he clearly said that 4 out of 5 cryptocurrency investors have ticket size less than INR 10,000 whereas average ticket size per account is around INR 1566, which is not a big investment as of now , but if allowed this number could be large in future. Should cryptocurrencies be banned in India , these nascent investors still could use cryptos outside of India. Similarly, former Governor of RBI and a steller economist Raguram Rajan also echoes similar sentiments about cryptocurrencies.

The question which public-policy in India encounters is whether or not intent, time and level of maturity of end users is ripe in the country to allow cryptocurrencies. Once allowed openly they will run deep into veins and arteries of this country, considering that 65% of our country is young  and almost every young woman and man is connected with a digital highway through her smartphone, consequences could be unintended. Policymakers and Multilateral institutions like IMF & the World Bank  are still looking for  evidence and learnings from countries like El Salvador where Bitcoin has been allowed as a legal tender last September. 

IAMAI and BAAC in India through a sustained policy engagement may persuade policymakers to allow a self-regulatory regime and adopt an incrementalist  policy approach about VDAs. Crypto currency service providers must invest in awareness and stakeholders’ education infrastructure rather than stary advertisements. They must engage , advocate and  take benefits of approaches like  regulatory sandbox framework of RBI. The advocacy efforts must me directed at following a hybrid approach  which necessarily means co-habiting  with policymakers and regulatory agencies , assuaging their concerns about end users interests not just in metro cities but in small towns as well.

Birth of Cryptocurrencies at a philosophical level is akin to an antithesis to prevalent financial system. However, reality of the day is different. To survive and grow, the idea and approach may need to adapt itself to existing reality so that innovations like Decentralised Finance (DeFI), Decentralised internet, decentralized autonomous organization (DAOs) , Smart Contracts , Enterprise use cases may be possible.

Cryptocurrency as a medium of exchange may still be a long way to go in Indian ecosystem. Crypto exchanges, specialists and lobby agencies must remember an old adage – Slow and Steady wins the race, they must not kill the golden goose in over exuberance and zeal of dynamic technology.

(Neelam Rani is Associate Professor and Jatinder Handoo is scholar at IIM Shillong. Views expressed are those of the authors.)