The Internet and Mobile Association of India (IAMAI) says that the government should regulate cryptocurrencies and promote its use in the country as they have many benefits. But the proposed blanket ban by the Indian government would lead to the proliferation of a shadow market, stall blockchain adoption and would restrict the government’s regulatory bodies from controlling any undesirable effects, it said in a policy paper.
The white paper prepared by the Blockchain and Crypto Committee of the IAMAI, said that a blanket ban on crypto-currencies is virtually impossible given that it is decentralised technology. Rather than a ban, the government should regulate cryptocurrencies, whether as an asset class or as a medium of exchange, to capitalise on the rise of cryptocurrencies and blockchain technology in order to advance India’s position as a global IT power.
MediaNama has seen a copy of the white paper titled The Case for Regulating the Use of Cryptocurrency in India.
“By incorporating a measured mix of international best practices, existing domestic regulatory regimes, and some new regulations, the Indian Government can promote the use of cryptocurrency in the country. In a regulated market, crypto exchanges will play a crucial role by ensuring compliance to KYC and AML guidelines, and mitigate illicit activities in digital currencies” —IAMAI White Paper on Regulating Crypto-Currencies
In a statement issued on Tuesday, the IAMAI said that the Indian crypto community consists of over 10 million crypto holders holding over $1 Billion worth crypto assets with daily trading volumes of $350 million – $500 million. The proposed ban will result in a lost to investors and could lay waste to over 300 startups in the space, which are generating tens of thousands of jobs, it said.
Policy recommendations
1) Bans lead to unintended consequences: A ban on any new technology or industry often leads to large revenue losses to the government and impacts the livelihoods of many people. Such policies often force industry participants to enter illegal markets, the paper said. It cited the example of the drone industry, wherein the government “clipped the wings of a nascent domestic industry” in 2014, and only proposed to regulate the industry in 2018. The consequence of this policy has led to Chinese manufacturers dominating the drone market globally with a 70% market share, the paper said.
“A prohibition on cryptocurrency may have similar repercussions for the digital currency industry. Due to the decentralised nature of the technology and the ease of transferring cryptocurrency using the public key, it is technically impractical to stop the inflow of cryptocurrency from abroad,” the paper said.
“Any attempt to prohibit the use of digital currencies would only hinder the growth of the domestic industry and push investors/traders into illicit markets. Besides, a sound regulatory framework can help reduce crypto related frauds. Suitable guidelines for exchanges, for instance mandatory Know Your Customer (KYC) process, can help protect against losses,” it added.
2) Ban on crypto-currency is unconstitutional: The IAMAI said that crypto-currency investors and entrepreneurs are safeguarded against the proposed ban under Article 19(1)(g), which is the fundamental right to carry out trade and business under the Indian Constitution. Further, it said that the government’s proposal must fit the test of proportionality as enumerated in KS Puttuswamy v Union of India 2017, and must also meet the reasonableness test as under Chintaman Rao v State of Madhya Pradesh 1951. The proposed ban on crypto-currencies fails on both counts, the IAMAI said.
“Any restrictions on fundamental rights must meet the test of proportionality and reasonableness. This means that a measure that limits fundamental rights must meet three criteria: (i) it must be made for a proper purpose, (ii) the measure must be rationally connected to the fulfilment of the purpose, (iii) there are no less invasive measures that are equally effective, (iv) it must be done through means that are suitable and necessary for the purpose, and (iii) it must be balanced with the harm caused by limiting the right,” IAMAI said.
The paper said that the Supreme Court in its March 2020 verdict said that individuals who buy and sell virtual currencies as an occupation and cryptocurrency exchanges can invoke Article 19(1)(g), the paper said. Further, under the Puttuswamy judgement, the Supreme Court held that “an individual’s choice to ascribe value to cryptocurrencies, by buying and selling or engaging in other transactions is protected under the ambit of Article 21,” it added.
3) Follow international best practices: The United States, Japan, Singapore, Australia and several other developed and emerging markets have begun regulating crypto-currencies by adapting existing regulations and creating some new ones, the paper said. “India should adopt a similar approach if it hopes to stay in consort with highly financialised jurisdictions and cutting-edge international practices,” it said.
“Amongst countries that have legalized and regulated cryptocurrency, the most common approach has been to categorize them as either financial assets or foreign currency, and tax them accordingly. Undesirable side effects such as terrorism financing and money laundering have been mitigated by registration with and accountability to federal authorities. Developed nations, when compared to their developing counterparts, have been more progressive and have resorted to regulate cryptocurrencies,” IAMAI said.
4) Encourage blockchain unicorns: Globally, there are 11 blockchain unicorns with a combined valuation of $40 billion, the paper said. The IAMAI said that government should “leverage its position as the third fastest growing hub of technology startups to build a strong ecosystem for innovation and entrepreneurship” in the space.
“The Indian crypto industry was valued at nearly $13 billion in 2017 before the RBI banned the use of cryptocurrencies. Since the ban was lifted in 2020, leading crypto startups grew more than 400% in terms of trading volumes and users. Another ban will distort the industry and adversely affect the startups in India,” IAMAI said.
5) Make crypto-currency investments safe: While most people believe crypto-currencies are unsafe becuase of their volatility, crypto-investments offer superior returns to stock market investments on a risk-adjusted return basis, the paper said. There can be various tools to keep crypto-investments safe such as derivatives, stop limits on orders and greater investor education, it said.
“Introducing regulation will also lead to the development of more exchanges. This will help provide reliable information to investors and increase liquidity in cryptocurrency which would further protect investments,” IAMAI said.
Financial benefits of crypto-currencies
1) Enabling international payments and trade facilitation: Crypto-currencies can improve cross-board payments and trade as they reduce the turnaround time for transactions, improve transparency between parties and reduce the time and cost incurred by parties to conduct due-diligence. Further, crypto-currencies have negligible foreign exchange transactions costs compared to cross-border services offered by traditional financial companies.
“Banning cryptocurrency will therefore, preclude India from the larger benefits of public/permissionless blockchains in facilitating international trade. Global interventions to capitalise on this opportunity are already underway,” the IAMAI said.
2) Generate additional revenue for the State: A blanket ban on crypto-currencies can result in economic losses to the government in terms of lost licensing revenue, capital gains tax, and/or transaction charges, the paper said. If crypto-currencies are treated as a medium of exchange, the government can impose a transaction charge on all the payments made through digital currencies, it added.
“If treated as an asset, the government may impose a licensing fee on crypto exchanges, to ensure that they make a credible commitment to complying with rules like KYC, AML, etc. The government can also impose a capital gains tax on sale of cryptocurrencies, similar to what Australia does. A capital gains tax on crypto is better than taxing essential commodities like fuel, which create inflationary pressures in the economy without growth,” IAMAI said.
3) Cryptocurrency can promote financial inclusion: Crypto-currencies can help the governments’ financial inclusion policies by enhancing financial services, through lending and storage products, the paper said. While the micro-finance industry has been crucial in driving financial inclusion in the country, the business model is burdened by high operating costs, slow transaction resolution and a lack of transparency.
“With transparency, speed and low transaction cost forming the core of cryptocurrencies, they are well-positioned to address these concerns and make microfinance more accessible to the people. Cryptos can also revolutionise peer-to-peer lending, further bringing down the cost of credit…Due to instant transfer of funds and low transaction charges, cryptocurrencies offer a great alternative to send and receive remittances in India, and improve access to financial services in the country’s rural areas,” IAMAI said.
Other benefits of crypto-currencies
1) Unlocking digital innovations using tokenization: The paper said that crypto-currencies are essentially a form of tokenziation, which allows information and assets to be stored, transfered and managed through a unique code on a blockchain. Tokenization effectively incentivises the growth of a blockchain platform, facilitate the operations of decentralised applications and can be used to create public goods. It is an integral part of blockchain development and adoption, the paper added.
“The move to ban cryptocurrencies will adversely affect tokenization. The draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 defines cryptocurrencies as “any information or code or number or token not being part of any Official Digital Currency.” If the same understanding persists in the new Bill, any ban on cryptocurrency will also bring tokenization to a close,” IAMAI said.
2) Blockchains can lead to hardware and software development: Crypto-currencies like Ethereum can create blockchain-based applications in finance, gaming, identity management and other areas, which have better transparency and security compared to regular web applications which are managed by a central authority, the paper said. “In 2019, India stood sixth in the number of patent approvals in the blockchain space,” it added.
“Cryptocurrency has contributed to the evolution of computer hardware in order to accommodate the computationally intense work of generating codes, which is now done at data centres. This creates an opportunity for India to develop into a global data centre hub, as envisioned by the Ministry of Electronics and Information Technology,” IAMAI said.
3) Cryptocurrency can revolutionise philanthropy: Charitable donations made in traditional currency are less transparent, costly and have high transaction charges, the paper said. Crypto-currencies or digital currencies can improve transparency since all funds have a unique coded identify and can be traced and since they are decentralised they do not involve high processing and any foreign exchange fees, it said. This means that charitable organisations have the ability to directly receive funds from the donor, without the an intermediary.
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.
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