"CRYPTO-LESS INDIA"- PROPOSED BAN BY RBI

Union Finance Minister Nirmala Sitharaman on Monday announced that the Reserve Bank of India (RBI) is in favor of banning cryptocurrencies. “In view of the concerns expressed by RBI on the destabilizing effect of cryptocurrencies on the monetary and fiscal stability of a country, RBI has recommended for framing of legislation on this sector. RBI is of the view that cryptocurrencies should be prohibited,” she conveyed to the Lok Sabha in a written reply to a query on this matter. 

The Finance Minister added that effective legislation on this matter is possible only through international collaboration. “Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage”.

The RBI also registered its concerns over the adverse effect of cryptocurrency on the economy, she said. “RBI mentioned that cryptocurrencies are not a currency because every modern currency needs to be issued by the Central Bank/Government. Further, the value of fiat currencies is anchored by monetary policy and their status as legal tender, however, the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a destabilizing effect on the monetary and fiscal stability of a country,” she said.

Cryptocurrency Operation and Block Chain Technology

A cryptocurrency is a digital currency, an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. Most cryptocurrencies operate without the backing of an authority, such as a central bank or government. Instead of governmental guarantees, the way cryptocurrencies work is underpinned by something called Blockchain Technology.

The blockchain is essentially a public ledger where a record gets distributed across numerous computers and cannot be tampered with or changed retrospectively. According to supporters of cryptocurrencies, blockchain transactions are more secure than traditional payment mechanisms. New units of the currency such as Bitcoin are produced on the blockchain through ‘mining’, which requires huge volumes of computing power and thus uses significant amounts of energy. Environmentalists have warned that the proliferation of cryptocurrencies could have a significant impact on global attempts to reduce energy consumption.

Apex Court on the Ban

The Reserve Bank of India (RBI) released a circular in April 2018 prohibiting the financial institutions from providing services to businesses engaged in the exchange or trading of cryptocurrencies, throwing the Indian cryptocurrency trading industry into disarray. Various crypto-trading companies filed writ petitions questioning the validity of the circular in the Supreme Court. The Supreme Court, in its considered opinion, overturned the circular in the Internet and Mobile Association of India v. Reserve Bank of India [2020 SCC OnLine SC 275].

The court had then rejected the contention of petitioners that excessive power had been used by the RBI. The court held that the action of RBI was in “public interest, interests of depositors and interests of the banking policy”. The court had based its decision upon the contention of the denial of the right to carry on any trade or profession under Article 19(1)(g) of the Constitution. However, the court stated that there are three distinct categories of people who deal with cryptocurrency, and this decision is applicable to only one of them.

Regulations on Cryptocurrencies

The current legal status of cryptocurrencies varies considerably from one country to another. For instance, the new European Union’s Markets in Crypto-Assets (MiCA) rules, require cryptocurrency businesses to operate with a license and mandate that stablecoin issuers hold reserves like those banks have, and moreover, crypto service providers will be liable in case they lose investors’ assets and will be subject to European market-abuse regulations, including those on market manipulation and insider trading.

While the use of cryptocurrencies is unfettered within the European Union, specific countries, such as Turkey, have banned the payments made in cryptocurrencies. In Australia, cryptocurrency is legal but largely unregulated. Many crypto-assets and other digital assets are commonly not considered to be financial products so the platforms where an Australian buys and sells crypto may not be regulated by the corporate regulator, the Australian Securities and Investment Commission (ASIC).

·       Upcoming Australian Crypto-Road Map

The Australian Prudential Regulation Authority (APRA), which regulates the AUS financial services industry, has plans for a policy roadmap for financial entities engaging in the crypto activity. A draft standard is expected in late 2022. Ensuing are the objectives of APRA regarding the upcoming policy:-

1.  Crypto-activities: to consult on requirements for the prudential treatment of crypto-asset exposures in Australia for ADIs, following the conclusion of the Basel Committee’s current consultation. The consultation in Australia is expected to be undertaken in 2023, and APRA will consider the need for initial prudential guidance in the interim;

2.   Operational risk: to progress new and revised requirements for operational risk management, covering control effectiveness, business continuity, and service provider management. While these requirements will apply to the entirety of an entity’s operations, many will be directly relevant to the management of operational risks associated with crypto-asset activities; and

3.  Stablecoins: to consider possible approaches to the prudential regulation of payment stablecoins. These stable coin arrangements bear similarities with Stored-value Facilities (SVFs) and APRA, in conjunction with peer agencies on the Council of Financial Regulators (CFR), is developing options for incorporating them into the proposed regulatory framework for SVFs.

Currently, cryptocurrencies are unregulated in India and the government is in the midst of consultations to draft legislation regulating them. RBI has been apprehensive about cryptocurrencies because of their cryptic nature and absence of intrinsic value.

Conclusion

Cryptocurrency is borderless and unregulated with the possibility of profit or loss in tons of millions without any liability. Supporters of Cryptocurrency compare the possible ban to the “License Raj” in the 1970s and 80s where Indians could only hold foreign currency for a specific purpose and with a permit from the central bank.

Supposedly, if a businessman bought foreign exchange to spend over two days in Paris and one in Frankfurt, and instead spent two days in Germany, the Reserve Bank of India would demand to know why he had deviated from the currency permit. Violators were routinely threatened with fines and jail time of up to seven years.

Contentions are that ordinary Indians would be deprived of the genuine benefits of cryptocurrency. The ban would prevent Indians from capitalizing on crypto-asset appreciation, which blockchain evangelist Balaji Srinivasan has called a “trillion-dollar mistake.” India receives the highest inflow of global remittances and using blockchain networks could save Indians billions in transfer fees.

The moot question of banning cryptocurrency in India has its pros and cons as any other financial matters that have arisen earlier. It is upon the legislators to form an independent regulation or collaborate internationally to meet the needs of its citizens and to pace with advancing technology.