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This article is written by Akshita Rohatgi and Loreal Sahay, students of GGSIP University, New Delhi. It covers the journey of cryptocurrency in India, analyzes the merits of banning and regulating it and lays down the path forward.

Introduction

This article mainly deals with the draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which was proposed by the Indian Government and has become a key area of discussion amongst academicians and experts alike. It explores the emergence of cryptocurrency in the modern world. The article lays down arguments in favour of both sides of the coin- is a complete ban on cryptocurrency favourable or are regulatory measures better suited for India? Finding the latter more apt in the current scenario, this article also provides constructive and detailed measures that the Indian Government can undertake to ensure the same.

The journey

The Global Financial Crisis of 2008, triggered by the collapse of Lehman Brothers bank, devastated the international economy. Against this backdrop, a paper titled ‘Bitcoin’ was published under the pseudonym ‘Satoshi Nakamoto’, arguing for a peer-to-peer electronic cash network. Soon after, the first block of Bitcoin – the ‘Genesis Block’ was unveiled, signifying a landmark in the field of cryptocurrency. One of the first transactions with Bitcoin was in 2010, where 10,000 Bitcoins were used to buy two pizzas. 

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Coming to India, it took a few years for the currency to pick up the pace. By 2012-13, Bitcoin started gaining some prominence within the international community, which left its imprint on India. The turning point was the demonetization of 100/- and 500/- Rupee notes in 2016. The uncertainties of physical currency drove people to invest in bitcoin. However, this came to be short-lived. In 2017, the Government of India warned the people against possible fraud using Bitcoin, which suppressed its demand by a considerable margin.

This trend continued in the Union Budget of 2018-19 when the Union Government announced that no form of cryptocurrencies would be regarded as legal tender in India due to market risks and uncertainties. Consequently, the Reserve Bank of India banned the transaction- buying or selling- of cryptocurrencies in India. Two years later, this prohibition was reversed by the Supreme Court in the case of Internet and Mobile Association vs. RBI (2020).  The reason offered was that the prohibition was violating the Fundamental Right to Carry on Business, as enshrined in Article 19(1)(g) of the Indian Constitution. The ban was disproportionate to its objectives of preventing scams and thus, did not fulfill the requirements of proportionality.

Due to this tumultuous journey of Bitcoin in India, the Central Government is considering the Cryptocurrency and Regulation of Official Digital Currency Bill. The February 2021 draft attempted to ban private cryptocurrencies and bring in India’s official digital currency issued by the RBI. However, as of 26th November 2021, the Bill intends to make the trading of a few particular private cryptocurrencies explicitly legal in India, while banning all others. Since the negotiations are ongoing and the nature is rapidly changing, it would be fallacious to speculate on any outcomes. 

Arguments for banning cryptocurrency

The fear of uncertainty

Cryptocurrency, as we have already established before, is a form of digital currency. Thus, there is no Central Authority that regulates their functioning and exchange. Consequently, this may lead to an environment where criminals would be propagated and encouraged since no checks or regulation system exists on this platform.

Criminal activities

This digital currency world is possibly the favourite playground of any crime due to the anonymity it offers. Most of the illegal markets and criminals on the Dark Web accept payment only through Bitcoins because of their transactions’ instantaneous and hidden nature. According to Elliptic, criminals have become more sophisticated in using cryptocurrencies to launder money, with millions of dollars of dirty funds flowing through digital wallets to hide their trail.

Terrorist funding

In 2019, the military wing of the terrorist organization Hamas, named Izz ad-Din al-Qassam Brigades, managed to collect money through a website that would generate a new Bitcoin address for every donor to send their donations. They also generated a campaign where they taught people how to donate money anonymously. This is a quintessential example of how technologically competent criminals and terrorists can take advantage of cryptocurrency and exploit this platform for their gains.

Illicit crypto mining

Outside the realm of regular cryptocurrency lies the world of crypto mining. In layman terms, illicit crypto mining is when malicious JavaScript or any other applications are installed on a specific device or embedded into a webpage, with the intention of mining cryptocurrency through the device or browsers of the visitors. This highlights the risk of installation of malware and fraud through Bitcoin. 

High risk for investors

Most cryptocurrencies are subject to fluctuations in their value as well as their market. For instance, a period of high rising value may be followed by a period that leads to a collapse in this value. The volatile nature of cryptocurrencies makes it a dangerous forefront for investments by private investors, corporations or banks due to the high investment risks that may follow.

Arguments for regulating cryptocurrency

Capital

For an industry that was not even on the charts a decade ago, cryptocurrency snowballed and is now a trillion-dollar industry. Bitcoin takes up a healthy piece of the pie, with $600 Billion in net worth. Hailed to be a ‘civilizational advance’ compared to the internet itself, on banning cryptocurrency, India risks cutting itself off this rapidly expanding industry. This would also have the inadvertent consequence of discouraging foreign capital from reaching India.

Moreover, considering the size of investment Indians have already made in cryptocurrency, a ban would criminalize the holdings of innocent Indians, and drive their capital away from India to secure havens of other countries with more liberal laws. Instead, India offering a conducive environment for cryptocurrency to grow and flourish would attract foreign capital and investments to our country. 

Sovereignty

Cryptocurrencies are decentralized currency, not controlled by any government or supranational entity. The New York Times in early 2019 published an article claiming cryptocurrency would undermine the US’s sanctions on Iran, and US Congressman Brad Sherman went on to claim bitcoin to be a danger to the dominance of the US Dollar. In fact, Bitcoin has often been called ‘Digital Gold‘ because of its reliability and independence from state power. Thus, prominence in the Bitcoin market would allow India to safeguard its sovereignty by mitigating the threat of US sanctions on India.

Authenticity of transactions

The popular myth is that cryptocurrency encourages financial frauds and is unreliable. This disregards the fact that cryptocurrencies’ blockchain technology is considered highly reliable, as it creates an unalterable record of every transaction concerning Bitcoin, which is disseminated to users across the network. This could help completely autonomate or robotize accounting by limiting fabrication and forgery. In India, this could be a game-changer, as it would reduce corruption and increase trust in our financial systems.

Independence, innovation and exclusion

It is in the very nature of Blockchain technology to have open-source codes, even allowing users root access to its entire database and replay any actions executed by that Blockchain. This has led to significant advances in the digital realm, and certain Blockchain developers are building technologies that would allow users to control their login identities, notification systems that do not require Big Tech intervention and much more.

Further, Blockchain  is a reliable technology, especially for transferring assets between people,  since it allows verification of the transfer. This allows broad scope for the digitization of stocks, bonds, and various other financial apparatuses. The concept of Decentralized Finance (“DeFi”) talks about replacing the traditional system of centralized finance controlled by states. It relies entirely on decentralized money, i.e., cryptocurrencies like Bitcoin. If implemented, it would change the nature of the financial system as we know it. On banning private cryptocurrencies, India loses access to this revolutionary next-generation technology and plays a role in developing these technologies. 

The way forward

Various countries have adopted a generous view of cryptocurrency. For instance, in the USA, federal agencies and policymakers have generally praised cryptocurrency for its progressive nature and have deemed it an essential part of its future infrastructure. So far, the country has wisely opted for a broader paradigm to regulate the use of cryptocurrency. Similarly, Singapore follows a balanced and justified regulatory system in terms of cryptocurrencies. In fact, a senior Minister, Tharman Shanmugaratnam, stated in an interview that the country would encourage experiments in Blockchain so that these innovations could turn out to be helpful for the country, economically and socially. However, at the same time, they also acknowledged the fact that they will stay alert to new risks.

Taking inspiration from these countries, we propose regulating cryptocurrency, but in a way that would suit Indian needs. Making laws to mitigate risks associated with cryptocurrency while pushing a Digital Rupee and building a new and fair digital institution for billions of people worldwide would be most favourable for India’s strategic and economic interests. A liberal regulatory environment for cryptocurrency would allow crypto-capital to enter India, which would help us encourage the development of decentralized crypto protocols that are not invasive and do not centre the authority in any nation. India can pursue its self-interest through this decentralized platform, giving it an edge in the international market and other international institutions.

Moving on to domestic advantages and the Digital Rupee, there is a widely held assumption that cryptocurrency will disturb our Government’s monetary policy. However, the efficient use of cryptocurrency will end up strengthening our monetary policy instead. To elucidate, let us consider an analogy. Why does the RBI hold over 600 tonnes of physical gold? The reason is that in the event of an economic crisis, the rupee may need to be backed by gold. Thus, a digital rupee may need to be backed by digital gold. 

To clarify this further, any country’s national currency is traded against every other currency in the world in a global foreign exchange market. This is why all the central banks worldwide continue to hold gold; it is a buffer against inflation and is internationally accepted even in a crisis. Cryptocurrency is valuable for the very same reasons that gold is accepted widely and internationally, highly scarce and cannot be seized with a keypress. So, a digital rupee will need to have digital gold for times of crisis to mitigate the threat of this digital rupee’s inflation. 

Conclusion

Banning cryptocurrency would exclude us from this rapidly expanding industry while the various countries keep moving forward. On the contrary, regulating and taking advantage of this new technology would help India advance its interests while shaping the new world order. Efficient regulation would also help prevent scams and illicit use of cryptocurrency. Better insight into what the Bill can bring can only be ascertained once the Bill is presented and its text made public.

References

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