An inter-ministerial committee of the Indian government recently made a controversial recommendation to ban all transactional, storage and mining activities related to cryptocurrencies. If the suggestions are implemented, anyone who holds or trades in cryptocurrencies like Bitcoin and Ethereum in India can be sent to jail.
Cryptocurrencies enable some level of anonymity in transactions, operate on decentralised networks outside central banking systems, and are subject to fluctuation. Naturally, consumer and market protection, and lack of accountability of users and exchanges are relevant triggers for regulation. While the recommendations elaborate on some of these concerns, they make a limited case for regulation and not a blanket ban.
Certain justifications provided by the committee merit scrutiny. Excessive power consumption for cryptocurrency mining has been provided as a reason for the ban. The total global power consumption of banks and the internet is approximately 100 TWh and 2,500 TWh per year, respectively. Bitcoin uses 66.7 TWh per year globally. Therefore, this claim appears to be conjecture and perhaps merits a separate evaluation for India. Similarly, the committee points out China as an example that has banned the use of cryptocurrencies. Recently, a Chinese court recognised cryptocurrency as digital property. While countries such as China have adopted harsher regulation in the past, their changing approach to cryptocurrencies cannot not be ignored.
The committee proposes a new form of digital currency — the Digital Rupee — which will be the only digital currency permitted under Indian law. The recommendations lack clarity on its implementation, scaling for billions of Indians, inclusion of the unbanked, and whether India possesses the necessary infrastructure for rolling out a digital currency of this magnitude.
The draft law proposed by the committee raises significant questions of implementation and enforcement. It states that all offences under the law will be investigated by the police. Any cryptocurrency-based activity is pseudonymous, decentralised and may span across borders — making it impossible to track such activity in real-time. Policymakers must first assess whether the police and traditional investigation tools are equipped to investigate crimes of this nature.
The committee notes that blockchain technology is nascent and suffers from weaknesses. It acknowledges that the technology will improve over time. At the same time, it has taken a stand to ban cryptocurrency without really understanding its architecture and associated benefits. Global experts have pointed out that cryptocurrencies are not yet a popular medium of exchange because there is very little acceptance. Even in India, the report of the Government’s Working Group on FinTech and Digital Banking (2018) suggests that the use of digital currencies does not pose an immediate threat to the economy. It acknowledges that cross-border use of such currencies makes it difficult for national regulators to enforce laws.
In order to address concerns regarding protection of users and fraud prevention, existing laws can be revisited. Cryptocurrency exchanges, users and other market players can be brought under the purview of anti-money laundering laws or KYC norms. Like the US, sectoral regulators can monitor aspects of cryptocurrency for the purpose of taxation or monitoring large transactions.
Undoubtedly, a case can be made for making reasonable regulation to ensure that blockchain-based cryptocurrencies don’t upend the existing financial security of the country, but the way forward isn’t a ban. As the government mulls its next move, it is important to consider a reasonable policy that suitably balances technological innovation and protection of users and economic interests.
Originally published – https://indianexpress.com/article/opinion/columns/cryptocurrency-india-digital-currency-rbi-5864865/