Banning cryptos will hurt innovation

Updated on: Nov 30, 2021
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The government can learn lessons from developed nations and move towards effective regulation

Last week, the government released a list of 26 Bills, including the much-awaited cryptocurrency Bill, to be tabled in the upcoming winter session of Parliament. Post the release, there have been widespread speculations of an imminent crypto ban in the Indian crypto circuits and trading circles.

The crypto industry’s wait towards the much-anticipated parliamentary discussion on the crypto Bill is getting more anxious with speculations of an imminent crypto ban circulating the crypto circuits and an atmosphere of fear and uncertainty looming in the markets.

Finance Minister Nirmala Sitharaman issued a statement that there was no proposal to accept Bitcoin as a currency. The current description of The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 seems to be getting ready to ban all but a few cryptocurrencies to promote blockchain technology and bring forth India’s official digital currency.

Considering cryptos as a mere mode of exchange shows a lack of understanding of the technology. Countries like Korea and Japan have recognised cryptos in view of other aspects of technology. Cryptos can be classified into several broad categories, store of value being one of them. Industry experts, in their recommendation to the Parliamentary standing committee on November 16, told the government that the technology is here to stay and the best way forward would be to regulate them and partake in the disruptive innovation overtaking the globe.

Earlier, too, there have been several positive developments including the official government-stakeholder meet-ups with the government talking of a ‘calibrated approach’ towards cryptos, an inter-ministerial committee set up for investigations, RBI’s detailed report about upcoming CBDC trials in December to name some. The highlight of these events was the November 13 meeting chaired by the Prime Minister himself, which could prove to be a landmark in the turn of events towards favourable and forward-looking crypto regulations.

Industry juggernauts, still, are optimistic that the current Bill would talk of legislation for reining in cryptos rather than pushing for a ban, given the massive surge in crypto adoption and investment worth hundreds of crores of rupees being driven into the crypto economy by the 15 million Indian crypto investors lately. The broad consensus opinion talks in favour of regulations seeking investor interest, illicit financing, capital controls, and the foremost, financial stability.

Moving underground

Experts feel that the speculated crypto ban if imposed could defeat its purpose as it would cause investors — big or small — to move underground and obtain cryptos and trade in them illegally. Moreover, the P2P transactions do not fall under any legal ambit and hence, decentralised exchanges would continue to thrive regardless of the ban. Banning cryptos would not only prove a technological challenge for the government but also mean huge capital funds moving out of the country.

BACC (Blockchain and Crypto Assets Council) released a statement reiterating the futility of the ban, “Blanket ban on cryptocurrencies will encourage non-state players, thereby leading to more unlawful usage of such currencies.”

Can India that has ever been at the forefront of changing digital landscape afford to miss the trillions of dollars worth of global opportunity? The industry doesn’t feel so. From the threat of a blanket ban, the industry has witnessed several positive developments, the crypto awareness in the country is rising, and a full-fledged statutory Bill is underway.

Unlike China, no democratic country can afford to ban cryptocurrencies including India. Developed nations like the US, the UK, Japan, Australia, etc., have regulations and require exchanges to obtain a license before procuring business in the crypto markets. The US SEC considers cryptos as securities for tax purposes, while Japan recognises them as legal assets, while the income from cryptos is treated as a ‘miscellaneous income’ and taxed accordingly. India can learn a lesson or two from these nations.

The alternatives

Setting the implications aside, what can be the possible alternative course that the government can take while keeping in mind the interests of the stakeholders in the crypto industry?

For the first step, the government needs to define the scope and meaning of the term ‘private cryptocurrencies.’ If the definition concerns ownership rights or anonymity of transactions — almost all the cryptocurrencies would be private except significant cryptocurrencies like Bitcoin and Ethereum that the miners collectively own. The next obvious step would be to classify the cryptocurrencies depending on their use case, specifically. Not all cryptocurrencies are stores of value like Bitcoin; some are utility tokens like Ethereum, Cardano, etc.

Similar to the crypto norms prevalent in other nations, exchanges could be asked to procure a license and follow stringent KYC/AML procedures to dissuade money laundering and terror financing activities.

The latest FATF guidelines for monitoring and regulating virtual assets and virtual asset service providers were released last month, and India will likely align its crypto regulations in line with them. FATF recommendations make monitoring crypto the sole obligation of the governments.

The current draft of the crypto regulation Bill is not the final verdict. The Bill will be up for debate and discussion in Parliament soon. The bright side is — the government has taken the initiative to learn the stance of the stakeholders in the country and conduct extensive research into the implications of adopting a CBDC system alongside cryptocurrencies.

On the other side of the equation, there is an air of optimism in the crypto industry that the stream of discussions about to happen could prove to be the primer towards the web 3.0 revolution in India.

The writer is Founder, WazirX

Published on November 30, 2021

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