The Reserve Bank of India (RBI) can have complete visibility on fiat-to-crypto currency transactions in the country if it opens the proposed digital currency to crypto-exchanges, industry experts told MediaNama. India’s crypto-entrepreneurs see the governments’ decision ban crypto-currency trading and investing in India as a sign that regulations are coming.
Two weeks ago, the government announced that it would introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will ban “private” crypto-currencies while at the same time providing the RBI with the requisite legal powers to develop a central bank-backed digital currency (CBDC), according to an official Lok Sabha Bulletin Part II for the Budget Session 2021 of Parliament.
As part of proposed legislation, the government plans to give existing investors a window of three to six months to square their holdings. The law will ban all ‘private’ crypto-currencies which will impact crypto investors, exchanges and any firm dealing with cryptos, according to reports by NDTV and Bloomberg Quint. The reports says that the government will legitimise a ‘state-backed’ crypto-currency or CBDC.
Citing an unnamed Finance Ministry official, BloombergQuint reported that the new law will also include a ban on transacting in cryptos directly through foreign crypto-exchanges. But the ban on ‘private’ crypto-currencies will not be implemented overnight, which means investors will have some time to liquidate their holdings. There has been a 700% increase in crypto-investing in India with over 7 million Indians hold over $1 billion worth of cryptos, NDTV said citing official estimates.
While the government wants to promote the use of blockchain across various use-cases, it has decided to enter the global race of digital currencies or CBDCs while at the same time banning “private” crypto-currencies like Bitcoin and Ethereum among others. This is similar to model pursued in China, where regulators banned crypto-trading and crypto-firms in 2017 to make way for its CBDC, which is still undergoing testing.
Digital Rupee can act as liquidity and monitoring tool, says industry
Three crypto-entrepreneurs told MediaNama, that the government could come up with specific regulations for crypto-exchanges and coins in the coming months, while the current bill is expected to define what ‘private’ crypto-currencies are and what the proposed CBDC is intended for.
According to Shivam Thakral, founder and chief executive officer, BuyUCoin, if the government creates a CBDC which is backed by Indian Rupees, it can act as a liquidity and monitoring tool.
“Today, exchanges allow investors to use their fiat currency to buy crypto-currencies. The government could ask crypto-exchanges or investors to buy crypto-currencies with the CBDC. So this means that investors deposit Indian Rupees in an account and in return they will get CBDCs. Using the CBDCs they can buy crypto-currencies through the exchanges. This will give the government complete visibility on crypto investing, who is buying cryptos and where the money is flowing,” Thakral said.
“Based on the Finance Minister’s comments, the thrust of the bill is to ensure that crypto-currencies are not treated as legal tender which is similar to the approach by most regulators globally. We are hopeful that the government and Parliament, through deliberations with the industry, will be able to clarify the definition of crypto-currencies,” said Ramalingam Subramanian, head of brand and marketing, CoinDCX.
“While the RBI can track all Rupee-based transactions through their banking partners, crypto-to-crypto transactions are trackable on blockchain. Today, the RBI is dependent on banks to control and monitor Rupee transactions, through policies and regulations. Ideally, the government will come up with guidelines for crypto-exchanges where rupee to crypto conversions can also be tracked. A Digital Rupee on the other hand will give RBI better control over INR,” Subramanian said.
Earlier this week, Nischal Shetty, founder and CEO, WazirX told MediaNama that the governments’ announcement should be seen as a positive step as it signals the governments’ intention to start regulating the industry, even though there will be a short-term negative impact. He believes the government will consult the industry and may even send the Bill to a Standing Committee to have deeper discussions on the right way to regulate the industry.
“I think this is how it starts. You start with something. Either there’s a 50% chance it might have a positive shock or negative, and that’s okay. The government wants to minimise negative impact, and that’s fine. But you cannot just think about how to minimise the negative impact, we also have to see how to maximize the positive impact,” Shetty said.
MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.