The government’s announcement that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will be introduced in the upcoming winter session of Parliament has sparked a market uproar. According to the 2021 Chainalysis’ Global Crypto Adoption Index, India’s digital currency sector was valued $6.6 billion in May, compared to $923 million in April 2020.
“Create a facilitative framework for the formation of the official digital currency to be issued by the Reserve Bank of India,” according to the bill. The bill also aims to “prohibit all private cryptocurrencies in India; nevertheless, it provides for specific exclusions to encourage cryptocurrency’s underlying technology and applications.” This would be India’s first step toward cryptocurrency regulation.
In a recent speech at the Sydney Dialogue, Prime Minister Narendra Modi encouraged cooperation across democracies to guarantee that cryptocurrencies do not fall into the wrong hands. Countries have previously expressed alarm about the use of cryptocurrency in organised crime, citing it as a threat to national security and sovereignty.
In 2017, the Indian government established a high-level inter-ministerial committee, chaired by Subhash Garg, Secretary, DEA, to evaluate the concerns surrounding virtual currencies and recommend specific actions. The committee submitted a draught Bill for the prohibition of bitcoin in its July 2019 report.
All cryptocurrencies, according to the committee, were developed by non-sovereigns and are thus fully private entities. These private cryptocurrencies have no inherent value since they lack all of the characteristics of a currency. The research also stated that cryptocurrencies have experienced substantial price volatility since their beginning and are incompatible with the core functions of money/currency, implying that private cryptocurrencies cannot be used to replace fiat currencies. “All private cryptocurrencies, excluding any cryptocurrency issued by the government, should be prohibited in India,” the committee recommended.
China’s regulators outlawed all cryptocurrency transactions and mining in September, and the country launched its own digital currency, the e-CNY. The Reserve Bank of India (RBI) might develop a strong and legal regulatory framework around its own Central Bank Digital Currency, taking into account the economic potential of digital currencies (CBDC). The CBDC Principles were recently adopted by G7 leaders, with more than 80 countries undertaking CBDC-related initiatives.
El Salvador is the only government that allows them to be used for official purposes, and it also plans to establish a Bitcoin City. The International Monetary Fund (IMF) has advised El Salvador that Bitcoin should not be utilised as legal cash because of the serious threats it poses to consumer protection, financial integrity, and financial stability. The IMF also advised the Central American country to tighten its newly developed payment ecosystem’s regulation and oversight. Private cryptocurrencies are not recognised as legal tender, according to a survey of worldwide best practises.
The RBI’s ruling prohibiting regulated institutions such as banks and NBFCs from dealing with virtual currencies was rejected by a three-judge bench of the Supreme Court of India in the Internet and Mobile Association of India v RBI case in 2020. “It is not possible for us to hold that the impugned measure is proportionate,” the court said, “when the RBI’s consistent position is that they have not banned Virtual Currencies and when the Government of India is unable to take a call despite several committees coming up with several proposals, including two draught bills, both of which advocated exactly opposite positions.” The Indian government, on the other hand, has chosen a proactive stance.
The unregulated structure of India’s cryptocurrency system poses a direct threat to one of the country’s most basic sovereignty norms: “monopoly over money.”
When the government validates a currency, it becomes valid. State control is threatened by a rival currency ecosystem that operates anonymously and behind pseudonyms without the approval of the government.
According to reports, virtual currencies “allow transnational criminal organisations to quickly transfer illicit proceeds globally,” and the accompanying risks of terrorism, money laundering, and other kinds of financial crime necessitate state supervision of cryptocurrency.
Because of the existing high number of crypto investors who have moved to the Dark Net, the proposed ban could be difficult to impose. It’s also possible that the crypto returns will be treated as capital assets for tax purposes.
The government’s latest Bill can also be interpreted as India’s first symbolic move toward exercising sovereignty over digital currency.