Everything you need to know about the new Cryptocurrency regulations being proposed
In this era of rapid economic and technological advancements, the medium of transacting and effecting business has transformed exponentially. However, the foundations of such revolutionary methods of transactions where one was not even required to be present physically were laid down way back in the 19th Century when Western Union introduced the Electronic Fund Transfer (EFT) in 1871 [1]. The inherent technology and core aspects attributed with them have since materialised into a more sophisticated and user-friendly system with the onset of globalisation. One such avenue of conducting transactions online has gestated in the form of Cryptocurrency. In basic terms, Cryptocurrency can be defined as a sort of digital asset that can be employed for partaking in online transactions.
Cryptocurrency and Bitcoin
Cryptocurrency and Bitcoins always get associated with each other, many of us unwittingly err to assume that they mean the same thing. Granted that the two terms are very closely related, however, there is a very fundamental difference between the two that needs to be addressed to understand the very essence of the aforesaid transactional system and the proposed regulation; Cryptocurrency is the inherent technology that facilitates online transactions whereas Bitcoin is a digital currency that employs cryptocurrency as a medium or facilitator. Hence, the Cryptocurrency regulations being discussed in the Indian Parliament will adjudicate and regulate Bitcoins and other such digital currencies within the wider ambit of Cryptocurrencies as a whole.
The Appeal of Cryptocurrency
Cryptocurrency in itself possesses many attributes due to its functionality that on paper make it a much more viable and lucrative alternative to contemporary legal tender. For instance, because it can be transacted online and is decentralized i.e., not governed, controlled or regulated by a Central authority, it transcends geographical boundaries. Further, it is much harder to forge and does not conform to the whims of inflation induced by Central authorities[2]. Another feather in its cap is the fact that anyone can get Bitcoins without having to actually spend any cash. This can be facilitated through running Bitcoin’s mining programs that function on an algorithmic lottery system through encryption functions called ‘hash’.
Timeline of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
The Reserve Bank of India in 2018 had banned the processing of transactions involving Cryptocurrency in India. However, this was overturned by the Supreme Court of India in 2020 on the grounds of disproportionality.
In 2019, a bill was purported namely The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. This however, never saw the light of day as it was not introduced in the Parliament. It is pertinent to note though that, the aforesaid Bill pursued the idea of completely outlawing and criminalizing the possession and use of Cryptocurrency in India.[3]
A new Bill has been purported in 2021 namely The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 that seeks to ban all Cryptocurrency in India while also formulating legislative framework for inculcating a digital currency system that borrows from the inherent principles and technology of Cryptocurrency.
Need & Rationale behind the Bill
According to the Reserve Bank of India, there is an ongoing evaluation over the need and feasibility of a digital currency in India that essentially substitutes the current currency [4] . However, it feels due to the inherent threats posed by Cryptocurrencies and their unregulated operational framework that there is a need to strongly intervene. Further, the aforementioned overturning of the ban created a gap in the legislation with regards to Cryptocurrencies in India. The RBI has already elucidated their concerns regarding the aforesaid, wherein, the Central Bank of India cites caveats such as possible loss of identity and access credentials due to hacking, no established framework for customer recourse, peer-to-peer anonymous transactions being transacted through Bitcoin and other Cryptocurrencies for illegal and illicit purposes that expose users to potential financial and legal transgressions amongst others to deter the public from using Cryptocurrencies[5]. The argument can be drawn about the need for stricter regulation rather than a blanket ban, however, the Government and Central authorities feel it best to start from scratch and develop a digital currency system that borrows from the inherent idea of Cryptocurrency but is honed to suit the characteristics and environment of the Indian demographic and market.
Key points for discussion
The 2021 Bill itself has not been made available to the public, however, the intentions surrounding the same have been enumerated by the Finance Ministry and the RBI as follows;
The Government proposes a blanket ban on the use, storage and dissemination of Cryptocurrencies in India if the Bill is passed in the parliament.
The proposal further states that, a new digital currency shall be formulated along with a stringent regulatory framework that will ensure a safe transactional medium while also preserving the inherent ethos of this new age of digital transactions.
The aforesaid digital currency will be bolstered with the underlying technology and principles of Cryptocurrency.
Further academic discussion on the same would only be possible once the Bill is up for public scrutiny however, the need to discuss the impact of the proposed legislation if brought to fruition is apparent.
Impact
As discussed above, there is a need to discuss the possible implications and ramifications of the proposed Bill. However, first we must understand who would be facing the brunt of the Bill. The 2019 Bill enlisted and prohibited both Individuals as well as Commercial Entities from partaking in, holding and/or mining Bitcoins and Cryptocurrencies. However, as per draft clause 3(2) of the Bill, “Nothing in this Act shall apply to any person using technology or processes underlying any Cryptocurrency for the purpose of experiment or research, including imparting of instructions to pupils provided that no cryptocurrency shall be used for making or receiving payment in such activity.”[6]. This meant that the holding and/or dissemination of Cryptocurrencies for academic purposes was not prohibited provided that Cryptocurrency was not a mode of giving or taking consideration for such academic activities.
As stated above, the details of the 2021 proposed legislations are not out yet hence, any discussion is thus rendered only academic. However, the intention of the Government to impose a blanket ban on Cryptocurrencies would smell danger for Individuals and Corporate entities. Currently, there are over 7 Million Crypto-owners in India and over $1 Billion value of crypto assets are held by Indians according to CEO of CoinDCX, Mr. Sumit Gupta. Thus, the proposed legislation could potentially wipe out a big chunk of wealth currently owned by Individuals and Corporates without them having an avenue of transferring it or saving it.
Focusing on Corporates and Businesses, the compliance hurdle faced by them would amount to a complete shutdown of their operations that were facilitated through or depended upon Cryptocurrency. Further, there would be a need to reorganise and restructure their business model to fit in with the demands and compliance standards to contemporary currency, which in the light of the fact that they have lost a sizeable portion of their wealth and capital due to the blanket ban could lead to crippling their business and could potentially send them spiralling into oblivion.
Conclusion
The Government is adamant upon wiping off Cryptocurrency as we know it, from India. This could have a drastic and adverse impact upon businesses that are completely dependent upon Cryptocurrency for facilitation of their commerce. Furthermore, there would be a considerable amount of time before the planned Indian version of digital currency can be implemented on a functional and operational level, hence, business who are partly or fully dependent currently on Cryptocurrency would have to drastically revamp themselves so as to be able to conform with the model and compliance standards of contemporary currency.
However, this initiative shows the intent of the Government to align itself with the technological and economical advancements prevalent today. Thus, India is making steps towards consolidating itself as one of the pioneers of the new-age of commerce and global interaction. The exact magnitude of change and the qualitative as well as quantitative overhauls and repercussions will only become apparent once the Bill is open for public scrutiny.
References
Mia Francis-Poulin, Electronic Payments: A Brief History – Forte Blog Blog.forte.net (2021), https://blog.forte.net/electronic-payments-history.
Andy Greenberg, Crypto Currency Forbes (2021).
Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, (2019)
Neil Borate, Government lists bill to ban Bitcoin in India, create official digital currency Mint (2021), https://www.livemint.com/market/cryptocurrency/government-lists-bill-to-ban-bitcoin-in-india-create-official-digital-currency-11611943365545.html
Press Release: RBI cautions users of Virtual Currencies against Risks, (2013).
Draft Clause 3(2) of the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
Author - Anirban Aly Mandal, Symbiosis Law School, Hyderabad.