Global collaboration needed to regulate cryptocurrencies, says FM

Finance Ministry on Monday said regulation for cryptocurrencies can be effective only with the help of international collaboration. It also reiterated that Reserve Bank of India is in favour of complete banning it.

In response to a question, Finance Minister Nirmala Sitharman said in a written reply: “Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”

This response has come at a time, when government has implemented income tax provisions on virtual digital asset (VDA), popularly known as crypto, but yet to give a time frame for introduction of bill to regulate it. In May, Economic Affairs Secretary Ajay Seth had said that consultation paper fairly ready. “We have gone through deep dive, consulted not just domestic stakeholders but also organisations like IMF, World Bank. We hope we’ll soon be in a position to finalise consultation paper,” he had said while adding that a law on cryptocurrencies may take some more time as India awaits an international framework on it and is closely engaging with the International Monetary Fund and the World Bank.

On Monday, Sitharaman said that in view of the concerns expressed by RBI on the destabilising effect of cryptocurrencies on the monetary and fiscal stability of a country, the central bank has recommended for framing of legislation on this sector. “RBI is of the view that cryptocurrencies should be prohibited,” she explained.

RBI circular

The RBI has been cautioning users, holders and traders of virtual currencies (VCs) through public notices on December 24, 2013, February 1, 2017 and December 5, 2017 that dealing in VCs is associated with potential economic, financial, operational, legal, customer protection and security related risks.

In a circular, dated April 6 2018, RBI had prohibited its regulated entities to deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. The said circular has been set aside by the Supreme Court on March 4, 2020.

Further RBI, vide its circular dated May 31, 2021 has also advised its regulated entities to continue to carry out customer due diligence processes for transactions in VCs, in line with regulations governing standards for know your customer, anti-money laundering, combating of financing of terrorism (CFT), obligations under Prevention of Money Laundering Act (PMLA), 2002, etc. in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.

According to the Finance Minister, RBI has registered its concern over the adverse effect of cryptocurrency on Indian economy. The central bank mentioned that cryptocurrencies are not a currency because every modern currency needs to be issued by the central bank / government. Further, the value of fiat currencies is anchored by monetary policy and their status as legal tender, however the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a destabilising effect on the monetary and fiscal stability of a country.

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