In less than two years, there has been a discernible shift in the Centre’s stance on cryptocurrencies – to potentially define these virtual currencies as financial assets and to stop short of a full ban on their circulation – based mostly on two specific triggers: the Supreme Court order of March 2020 that reversed the Reserve Bank of India’s move to cut the money supply to crypto exchanges, and the exponential increase in investment flows into crypto assets post the judgment.
The change in the government’s stand is evident from the title and scope of the new legislation – The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 – which is distinctly different from the earlier – Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 –recommended a couple of years back by an inter-ministerial committee comprising representatives from the Finance Ministry’s Department of Economics Affairs, Information Technology ministry, SEBI and the RBI, but ultimately ended up not being introduced by the government in Parliament.
While the older law sought to impose a complete ban on all crypto-related activities including mining, buying, holding, selling, and dealing, the new one, in contrast, will look to make a clear distinction when it comes to its oft used categorisation as a currency — with the definitional clarity expected to have a clear bearing on the regulatory aspect. In not treating these financial assets as currencies, indications are that the Centre is aiming to address some of the macroeconomic risks posed by cryptocurrencies that were repeatedly flagged by the central bank in recent weeks, both verbally and in writing.
On Tuesday, the government announced it would introduce the new Bill in Parliament during the upcoming winter session. It said the Bill has been listed to be taken up for introduction, consideration and passing during the session for the purpose of creating “a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India”. “The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” it added.
However, multiple developments occurred in the run up to the announcement are likely to have shaped the Centre’s stance. During the last one month, the debate on cryptocurrencies gained momentum with a Prime Minister-chaired meeting on November 13 having arrived at a consensus that future steps by the government in the field of cryptocurrency will be “progressive and forward-looking”, following which, on November 15, the Parliamentary Standing Committee on Finance met key stakeholders of cryptocurrency space in India. Last Thursday, Prime Minister Narendra Modi, speaking at the Sydney Dialogue, identified cryptocurrencies as one of the key areas where democracies should work together.
The progression in the government taking up the cryptocurrency debate came after the central bank formally raised its concerns with the virtual currencies with the highest levels in New Delhi. Its concerns included the various advertisements that were being run by crypto trading platforms, and implications of allowing cryptocurrencies on aspects such as money laundering, terror financing, and even potentially undermining RBI’s monetary policy.
This fresh stance is in stark contrast to that taken back in 2019 through the Bill that proposed to prohibit mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country. That Bill had also proposed that mining, holding, selling, issuing, transferring or use of cryptocurrency be made punishable with a fine or imprisonment of up to 10 years, or both. This bill was based on a report submitted by an inter-ministerial committee headed by the Department of Economic Affairs in 2019, which had recommended that all private cryptocurrencies, except any cryptocurrency issued by the State, be banned in India. The committee had also endorsed the stand taken by the RBI in 2018 to “eliminate the interface of institutions regulated by the RBI from cryptocurrencies” and seemed to build on it. In April 2018, the RBI, through a circular, prohibited all banks from dealing with virtual currencies effectively, cutting off the money supply of platforms facilitating access to these digital assets.
The circular was challenged by the Internet and Mobile Association of India (IAMAI) in the Supreme Court, and in March 2020, the apex court overturned the ban paving the way for start-ups to operate exchanges and trading platforms.
In the 180-page judgment issued by a three-judge bench led by Justice Rohinton F Nariman, the court set aside the RBI circular on grounds of “proportionality”. It pointed out that the 2019 bill had not become law, the position as on date was that virtual currencies (VCs) were not banned. “…but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector,” it said. “What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned”.
In the aftermath of the Supreme Court order, cryptocurrency exchanges and trading platforms started mushrooming across the country. This was despite several large banks and financial technology players not allowing the use of their infrastructure to such platforms. Currently, cryptocurrency exchanges in India operate with the support of a handful of banks including Punjab National Bank (retail), Federal Bank, Bank of India, Bank of Maharashtra, Indian Bank, Deutsche Bank, etc, and one major e-wallet issuer.
In 2021 alone, cryptocurrency exchanges and trading platforms have raised close to half a billion dollars from marquee venture capital and private equity investment firms, with number of investors of the half a decade old Indian crypto industry having grown to 15 million, by conservative estimates, around 60 per cent of the investor numbers in the mutual funds industry, which is nearly six decades old.
Notably, even as both the government and the RBI were on the same page with respect to the functioning of cryptocurrency platforms, they were in favour of use of the underlying blockchain technology. On February 1, 2018, while making the Budget speech for 2018-19, then Finance Minister Arun Jaitley had said: “Distributed ledger system or the block chain technology allows organisation of any chain of records or transactions without the need of intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system”. “The Government will explore use of blockchain technology proactively for ushering in the digital economy,” he had said.
