This article is written by Kazi Ashique Azfar pursuing Diploma in Cyber Law, FinTech Regulations, and Technology Contracts from LawSikho.
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The idea of banning cryptocurrency is not new in India; the Reserve Bank of India (RBI) had virtually banned the same in 2018. This resulted in plummeting interest in cryptocurrencies, but the Supreme Court in 2020 quashed the RBI curb and allowed trading in cryptocurrencies. However, there is renewed interest in banning trade in cryptocurrencies which has taken the shape of The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. According to which possession, mining, trading, and transferring any crypto assets would be illegal and would invite huge fines.
As it stands today, there are more than 7 million investors in cryptocurrency in India who will be hit if there is a ban on cryptocurrency. This bill, if enacted, would be even more strict than the ban on cryptocurrency in China, where mining and trading crypto have been banned but not simple possession.
Understanding the term cryptocurrency
A cryptocurrency is a form of digital currency that is decentralised and encrypted using cryptographic techniques. They are not legal tenders backed by any central government but are still used for trading, investing, saving to use later. Bitcoin, Ethereum, and Ripple are some of the most prevalent forms of Cryptocurrencies. Decentralisation means that there is no central government in charge of keeping track of transactions, and instead, anyone can initiate a transaction. These transactions are recorded and transmitted across multiple distributor networks through independent computers using Distributed Ledger Technology.
The need for banning cryptocurrency
The impending bill is based on a high-level Inter-Ministerial Committee (IMC) recommendation under the Secretary (Economic Affairs) Chairmanship, which recommended banning all private cryptocurrencies except any virtual currencies issued by the state. The committee noted various concerns for banning the cryptocurrencies like fluctuation in prices, the risk to consumers, impact on power consumption, potential use for criminal activity.
However, experts state that the reasons for banning crypto in India and various other countries are the same – perceived threat to the current monetary system. An alternative payment mechanism, it is argued, could destabilise the current banking system. The Central Bank’s ability to control monetary policy will be harmed as a result. For example, a demonetisation of all ₹500 and ₹1,000 banknotes done on 8 November 2016 would never be possible. And, even more significantly, it has the potential to weaken a portion of the government’s power structure. Further, most countries want to introduce their own digital currency or Central bank digital currency (CBDC), as is also the plan in India.
Supreme Court on the RBI ban on cryptocurrency
The Reserve Bank of India (RBI) released a circular in April 2018 prohibiting the financial institutions from providing services to businesses engaged in the exchange or trading of cryptocurrencies, throwing the Indian cryptocurrency trading industry into disarray. Various crypto-trading companies filed writ petitions questioning the validity of the circular in the Supreme Court. The Supreme Court, in its considered opinion, overturned the circular in the Internet and Mobile Association of India v. Reserve Bank of India.
The court had then rejected the contention of petitioners that excessive power had been used by the RBI. The court held that the action of RBI was in “public interest, interests of depositors and interests of the banking policy”. The court had based its decision upon the contention of the denial of the right to carry on any trade or profession under Article 19(1)(g) of the Constitution. However, the court stated that there are three distinct categories of people who deal with cryptocurrency, and this decision is applicable for only one of them.
First, those who buy and sell cryptocurrency as a pastime are not covered by Article 19(1)(g), which only applies to trade, occupation, career, or company. Second, people who trade in cryptocurrency cannot argue that the circular forced them to shut down their businesses because they may still trade-in “crypto-to-crypto” pairs or use the currencies in their wallets to make payments for products and services to those who are willing to accept them, whether in India or abroad. The decision is of assistance to only the third category, i.e., cryptocurrency exchanges, which suffered as a result of the circular, as they had no other way of surviving if they were cut off from banking channels.
How does the cryptocurrency ban work?
The best way to understand how or if a cryptocurrency ban can work is by studying the example of China. In 2017 China banned trading in cryptocurrencies on exchanges and made it illegal for Chinese start-ups to raise funds via initial coin offerings, resulting in a slump in crypto prices. However, the ban could not affect the investors and the market in the long run because soon the market recovered and even saw an upward slope. And despite this ban currently, over 60 percent global hash rate (bitcoin) is controlled by the Chinese mining pool.
This pattern has been credited to FUD (fear, uncertainty, and doubt) created due to the ban and the media coverage, which it gets leading to lower demand and prices, but after the shock is digested, investments seem to get back to normalcy. Investors merely shift from centralised crypto exchanges to peer-to-peer dealings, as has already started in India.
India by 2018 contributed between 2 and 10 percent of the US$430 billion virtual currency market worldwide, which has only increased in the meantime. Thus a ban can and will create a panic situation where many will completely dispose of their crypto assets. However, a large chunk of the investors will not dispose of their assets and instead will be forced to work in unregulated environments and contribute to the formation of an underground economy or shadow economy. This will be more so because the Indian authorities do not have the capacity to identify and track down these markets. The government can neither seize nor gain access to a global network of computers mining cryptocurrency and maintaining blockchain ledgers. In order to enforce such a blanket ban, authorities will have to create an invasive monitoring system to monitor all digital and internet activity in the country.
If a ban is enforced, crypto-assets would be sold on the black market; as is always the case with unintended effects of prohibitions, the market would not go away; rather, it will move to darker places, where threats such as money laundering and terrorist financing may arise as regulators lose sight of the operation. Rather than enacting laws to prohibit these properties, it is preferable to establish the legal and policy infrastructure to control them.
Therefore, if the ban is enacted, more than 7 million people who hold cryptocurrency will either be forced to liquidate their assets or take part in the shadow economy. If a large number of such investors do dispose of their assets, it can lead to a spike in supply and reduction in price, but as had been in the case of China, there won’t be any long-term effect. However, recent statements from the minister have hinted at a more “calibrated approach”. They have stated that they will ensure that the “interest of crypto investors is protected in the Bill”.
The government has decided to bring in a much-needed definitive regulation on cryptocurrencies; however, the news of a complete ban on cryptocurrencies that has come out has created fear among the investors. As the bill is yet to be released in the public domain, the exact effect on the investors legally and financially is still uncertain.
However, as has been seen in the case of China a complete ban on cryptocurrency is next to impossible, and investors will find one or another to use and invest in cryptocurrencies. Cryptocurrencies being decentralised is a stateless asset, and thus no country can ensure or enforce a blanket ban on them. Therefore, an attempt at banning will further enhance the risks, citing which the law is being brought to life. In the end, the investors will not be affected much through such bans because there are multiple markets for cryptocurrencies like bitcoin, whose acceptability globally is only rising.
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