The Finance Ministry has proposed a legislation that bans the use of cryptocurrency in India, and makes violations punishable with a fine or with one to ten years of imprisonment. Called the “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019” (see below), the bill states that “cryptocurrency shall not be used as legal tender or currency at any place in India”. It also makes promotion, advertising, Andy abetment in participation of use of cryptocurrency punishable with a fine, or prison term of upto 7 years. It makes a repeat offence punishable with a prison sentence of 5-10 years along with a fine.
The bill was drafted by an inter-ministerial committee chaired by Subhash Chandra Garg, secretary of the Department of Economic Affairs under the Finance Ministry. Created on November 2nd, 2017, the committee’s other members were MeitY Secretary Ajay Prakash Sawhney, SEBI Chairman Ajay Tyagi, and RBI Deputy Governor BP Kanungo. While banning cryptocurrencies, the committee said it would be “advisable” to have an “open mind” about introducing an official digital currency in India, and a group with DEA, RBI, MeitY, and DFS should examine the development of an appropriate model of digital currency, which would be regulated by the RBI, if it comes at all.
The committee met thrice: November 27, 2017, February 22, 2018, and most recently on January 9, 2019. The meetings saw representation from MeitY, Ministry of Corporate Affairs, and CBDT.
Here’s the committee’s rationale for banning cryptocurrencies:
1. They’re not money at all: Cryptocurrencies do not have sovereign backing, nor do they have a formal, verified backing of bullion. “These private cryptocurrencies lack all the attributes of a currency.” Such currencies are extremely volatile as value is directly tied to demand, without any central bank intervention. “Unsurprisingly, there is some evidence to show that most of the interest in non-official virtual currencies arises out of an interest in speculation.” They’re decentralised with no central authority, and transactions are irreversible.
2. Their value is unreliable: The market potential of the functional benefits of cryptocurrencies is subject to technological and behavioural changes, and the scope of financial investment that the they can raise.
3. It’s harmful to consumers: Private cryptocurrencies can be used to defraud consumers, particularly unsophisticated consumers, citing the GainBitcoin scam in India. Consumers’ money could be put at risk if miners can collude to earn more revenue by “forking” a currency (“forking” means a kind of software upgrade) or changing the programming protocol to benefit themselves. If a private key of a virtual currency wallet is lost, the money held in the wallet in permanently lost (see this example). It’s difficult for law enforcement to track down people involved in illegal activities around cryptocurrencies since they provide a level of anonymity.
4. Mining cryptocurrencies require high amount of electricity, the committee said, citing that some cities in US and Canada buy power since bitcoin miners use a lot of power. Such diversion of power can have unfavourable long-term economic consequences. This needs to accounted with the data localisation requirements in the Personal Data Protection Bill, 2018. The requirement to store data locally, cryptocurrencies “could potentially take up an enormous amount of energy in an already power-starved India”.
5. Cryptocurrencies can interfere in monetary policy and regulation of money supply. “… cross-border transactions with non-official virtual currencies can violate limits on the inflow and outflow of money, particularly as such transactions happen irreversibly. This compromises an- other important lever of monetary policy.”
All hail blockchain: Regulators should examine use cases
While effectively banning cryptocurrencies, the committee recommended that the DEA should promote the use of blockchain, or what it calls distributed ledger technology in the financial system. It said that even regulators such as RBI, SEBI, IRDA, PDRDA, and IBBI should evolve regulations for use of blockchain.
The committee said blockchain can be beneficial to India in several financial and non-financial areas, and particularly beneficial in areas of trade financing, lowering costs of personal identification for KYC related issues, and improving access to credit.
Here are its recommendations on blockchain:
- RBI should examine use of blockchain systems for a faster and more secure payment infrastrcuture, particularly for cross-border payments.
- MeitY should consider a blockchain system for a low-cost KYC system.
- Banks and financial firms can use it for loan-issuance tracking, collateral management, fraud detection and claims management in insurance, and reconciliation systems in the securities market. Financial regulators should examine these.
- SEBI should examine this for blockchain for IPOs and FPOs, and if depository systen cab move to blockchain systems.
- State governments should examine it for land records management.
Data localisation can impact use of blockchain in India
Localisation requirements in the Draft Data Protection Bill, 2018, may inhibit the uses of blockchain in financial services being offered to Indian consumers, the report said. Global blockchain services (in trade financing, reinsurance, etc.) may not be available to Indian consumers if their data cannot be part of a regional or global blockchain-based service. “This may affect the ability of Indian manufacturers and consumers to benefit from the benefits of global supply chains and international services infrastructure in the medium to long-term.”
The committee recommended that data localisation requirements may need to be applied carefully, including storage of critical personal data so Indian firms/consumers who can benefit from use of blockchain aren’t adversely impacted
The Garg Comittee report, and Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019: