Cryptocurrencies in India: fad or future?
Cryptocurrencies: digital fad or the future?
Cryptocurrencies have become synonymous to quick money, “being cool”, and participating in the future; such has been its impact on the minds of the current generation. Even with a tremendous growth in terms of consumer awareness, trading platforms, informative literature and numerous advertisements, cryptocurrencies are not legal tender, period. It is a combination of skepticism amongst the lawmakers, consumers, and the volatility of the indices, that have staggered the sudden spike that we witnessed a while ago.
Learning the Basics
To begin with, we must try and understand the basics of blockchain, cryptocurrencies. Simply put, blockchain is a type of database, which stores data in blocks which are chained together. Every time a new data input is made to a fresh block, and the block gets filled up, it gets chained onto the previous block which already hosts data, and the blocks are so chained in a chronological order. It is so designed that it can process copious volumes of data, and, can be accessed, manipulated, quickly, from anywhere, by any number of users.
Cryptocurrency is essentially a digital or virtual currency, which relies upon cryptography for security. Several known cryptocurrencies premise themselves on decentralized blockchain technology. The decentralized technology stores the currency information in blocks, thus providing for safe and secure storage, without the necessity of a national bank for accounting and retention purposes.
Anonymity and security are the buzz words associated with cryptocurrency, and have also proliferated the growth of private cryptocurrencies, which use novel tactics such as stealth addresses, ring signatures to hide a user’s real wallet balance and address. Foreign jurisdictions (South Korea, USA) have taken steps to restrict private cryptocurrency trading/ developing tools to remove the secrecy of transactions conducted through private networks.
Several jurisdictions have been reluctant to impose reactionary restrictions on cryptocurrency trading, owing to the pervasive amounts of investment already secured by such technologies, standing at 2.3 trillion dollars globally. Furthermore, blockchain technology is rooted in decentralized ledgers, which may render any reactionary ban/ embargo futile, as people will always rely on ingenious methods to continue their access to such exchanges, ledgers situated outside the country.
In China, recently, mining of cryptocurrencies, and trading in cryptocurrencies were both outlawed. This ban was applicable across all natural and juristic persons and resulted in several entities shifting out their businesses and set-ups outside the country. For the period between the distinct bans being implemented, individual users also migrated to foreign exchanges for continuity of their investments. However, while China did weed out the rampant proliferation of cryptocurrencies from their soil, citing inter alia ESG (Environmental, Social, Governance) concerns as reasons for the ban, there is still heavy dependency on the use and deployment of the decentralized ledger technology.
The Indian Trajectory
Across the border in India, the tale is not very different. Earlier in 2018, the Reserve Bank of India (RBI) had imposed a ban on banking and financial institutions from trading in cryptocurrencies, and did not ban the instruments per se. With several homegrown companies offering solutions and currencies stemming out of this technology, there was a split between the “adopters” and “naysayers”, and this action of the banking regulator was challenged before the Hon’ble Supreme Court of India. The legal tussle yielded in the apex court directing RBI to withdraw the ban, and opened up the floodgates for Indian, foreign exchanges to pursue widescale operations.
While countries like El Salvador proceeded with adopting a particular cryptocurrency to be accepted as legal tender, here in India we witness a continued struggle for an effective bargain being struck between deregulation and complete embargo. The proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Bill) was scheduled to be introduced during the Winter Session of the Parliament, amidst ambiguity regarding the stance of the government towards the regulation of the cryptocurrencies. The Bill is posed to create a facilitative framework for the creation of an official digital currency to be introduced by the RBI; to prohibit all private cryptocurrencies in India. However, from how it appears, there is a possibility that there could be allowance made for certain exceptions to promote the underlying technology of cryptocurrency and its uses. Owing to the disparity which exists between the demands of the users, entities, and the discussions that the government intends to make, it appears that the proposed Bill will not be legislated before the end of this year.
In India, even the Bill recognizes the reliance of several sectors, including the financial sector, on blockchain technology, and there is an intention to allow continued use of the underlying technology across several sectors, industries. This is similar to the developments in China. Even the premier government thinktank has issued strategy notes discussing adoption and implementation of blockchain across sectors.
Certain prevalent issues which have also been acknowledged by the government in India, arise out of the fact that blockchain technology (some of them) allow for anonymity in their transactions. This becomes a roadblock for the banking and financial sector, where non-repudiation as a concept is baked into the consumer journey, and which will not be realized for cryptocurrency which is based on blockchain. Furthermore, as the financial sector also has other obligations to be met with, in respect of anti-money laundering provisions, know-your-customer obligations, combating of financing of terrorism, and likewise, it could become difficult for providers of the technology, to meet these elements in a uniform manner across their customers.
In view of how the technology works, there exists the potential of information being stored across nodes on a blockchain network, which are situated outside the Indian territorial jurisdiction. This will defeat any data localization requirements that are currently in place, and which may come to be, should there be adoption of blockchain technology for banking and financial services. Therefore, any regulation of cryptocurrency will invariably create a ripple effect across other sectoral laws, including but not limited to data privacy and statutory compliance, among others.
Moving away from a complete ban on transactions related to cryptocurrencies, RBI has come around to accepting that virtual currencies are here to stay. This has resulted in a stated intent to introduce its own version of virtual currency. The proposed Bill will have to address this expression of intent and may clarify the presently prevailing confusion around the interplay between existing investments in cryptocurrencies on the one hand and the virtual currencies which may be issued by the central bank/ the regulator, on the other.
Central Bank Digital Currencies (CBDC) are being considered across several jurisdictions to curb the frenzy amongst the investors willing to partake in this dynamic economic venture. The CBDCs typically act as virtual form of fiat currency, as issued, and regulated by the central banking authorities. The intention is to ease distribution of benefits or calculation and collection of taxes.
Before one decides on taxation, at this juncture, it is also important to note that there are different schools of thought divided on whether cryptocurrencies should be classified as a “security” or “commodity”, with several jurisdictions devising novel methodologies for the regulation of these instruments. For instance, the United States implements the Howey Test to determine whether a financial instrument will be considered an “investment contract,” and therefore, a security. The regulation of cryptocurrency as a security would lead to greater oversight and resultantly engender greater customer confidence therein.
In view of the discussions and the anticipated legislation, it will be left to the course of the market and the regulations to decide, evaluate whether the creation, adoption of a CBDC is the right way forward, or whether assessing this opportunity to be one which generates revenues, taxes for the public exchequer prevails. With the volumes of investment which have been parked by Indians, a complete ban would lead to an opportunity lost. For something which is here to stay, and will most likely find wings to soar high, it is best suited that RBI alongside introduction of CBDC, also identifies cryptocurrencies as a “class” which can be either taxed, regulated, or at least be used as a valid means of trade across sectors.
In an age where RBI is moving towards tokenization, tap and pay method systems, walking away from this, now, might not lead to the desired results.