Regulation is key

The government’s move to introduce a Cryptocurrency Bill in the Budget session is welcome. Regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India do not have a legal framework to directly regulate cryptocurrencies, which fall in a grey area — they are neither currencies, nor assets or securities issued by an identifiable user and the existing laws are inadequate to deal with them. It will also be a progressive step if the RBI introduces a digital fiat currency, and various blockchain start-ups are backed by supportive policy.

However, the government should not go by the suggestions made by an inter-ministerial committee headed by the economic affairs secretary that all the private cryptocurrencies, except any virtual currencies issued by the state, should be prohibited in India. On a conservative estimate, Indian traders hold $1 billion worth of cryptocurrency assets — largely in bitcoin — which have been bought in rupees. They might well hold a lot more, given that it’s easy and legal to buy cryptocurrencies via an overseas trading account. It would be blatantly unfair to criminalise assets bought legally in good faith after the Supreme Court ruled that this was a legitimate activity. Indeed, banks have been supportive, offering services to the exchanges.

Reports of an impending ban have led to a peculiar arbitrage where cryptocurrencies are trading at a 20 per cent discount in India. This is causing a flight of capital: These assets are bought in rupees and sold in hard currencies for instant gains. It would be impossible to enforce a ban on future cryptocurrency investment without amending laws in such a fashion as to jeopardise broader external trade. As the law stands, any citizen can remit the equivalent of $250,000 abroad per annum. This could be invested in education, business, or financial assets by opening an account at an overseas brokerage. Most overseas brokerages offer trades in cryptocurrencies. Imposing a ban would involve putting restrictions on this movement of capital.

Moreover, these instruments are becoming mainstream. The trading volume has exploded, leading to an unprecedented rally. Many Wall Street institutions are offering managed services, creating cryptocurrency portfolios for high net worth individuals. The S&P Global is launching a cryptocurrency index. Cross-currency trades using cryptocurrencies cost a fraction of bank charges, making them attractive for remittances. Many companies already use these in swaps and cross-currency transactions. A global consortium led by Facebook is seeking to launch a stable currency to enter the remittance market. Credit card firms such as Visa and MasterCard have started issuing debit cards that handle cryptocurrencies. These work on the basis of converting cryptocurrencies into local fiat whenever a transaction is made. Tesla, which is due to launch in India, is also gearing up to accept payments in cryptocurrencies.

Banning these instruments just as they gain wider acceptance is out of step with the global economy. Countries such as Japan, Australia, South Korea, Estonia, and Finland already have legislation governing cryptocurrencies, with delineated prohibitions and tax protocols, and that should be the way to go. China has run pilot programmes in several cities with a digital currency. Trustless contracts involving blockchain could also reduce friction, given India’s poor track record in resolving contractual disputes. Carefully thought-out legislation will help in having a clear framework to regulate them; a blanket ban is not the solution.

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