Following Facebook’s announcement to launch its own cryptocurrency ‘Libra’, the global debate on cryptocurrency regulation again gained momentum. While globally policymakers are still grappling to understand the underpinnings of the technology and the implications of cryptocurrencies on the economy, India is considering a total ban on it. A report from an Inter-Ministerial Committee headed by the Secretary of the Department of Economic Affairs, Ministry of Finance, has recommended a law to ban cryptocurrencies and has prescribed strict criminal sanctions.
This development comes soon after the G20 Leaders’ Declaration at Osaka, wherein world leaders acknowledged that crypto-assets do not pose a threat to global financial stability and there is a need to monitor the developments and remain vigilant to the emerging risks.
The Committee notes that virtual currencies (VCs)/cryptocurrencies lack the attributes of and cannot replace a fiat currency, are subject to fluctuations, have no scope for control by the central bank and provide a degree of pseudonymity to participants, making them susceptible to being used for illegal activities. Accordingly, it recommends prohibition on any use or deal with cryptocurrencies.
While the ban appears to be primarily based on the Committee’s observation that private VCs cannot be used as a legal tender, it fails to consider the regulatory approach for other possible use cases of VCs, such as utility tokens and securities. Therefore, this complete ban, without the consideration of alternative regulatory approaches, appears to be premature and not in line with the global precedents that the report itself discusses. Given that the cryptocurrency industry and the underlying technology is still evolving, several jurisdictions have refrained from adopting a stringent approach without first assessing the size of the domestic crypto market and its impact on the economy.
Globally, different regulatory approaches are emerging — some countries recognise VCs as a payment method (Canada, Switzerland, Thailand), some regulate it as investment tokens (Russia, Switzerland, New York) while China has imposed a complete ban on it. The report itself notes that most of the countries studied permit some kind of trading or exchange of VCs.
However, it goes on to recommend a complete ban without explaining why these alternative regulatory approaches are not suitable for India. Notably, the report relies on a Financial Action Task Force guidance which acknowledges that US may decide to prohibit cryptocurrency.
Sadly, it fails to discuss the other measures referred to in the guidance, ie regulation through the anti-money laundering (AML) framework or through registration requirements. While the degree of pseudonimity associated with VCs has often been a concern, there are technological measures to link such transactions to identify users, including linkages through IP addresses. The report itself notes that linking address clusters of the sellers or buyers on the cryptocurrency network to real-world identities has been possible.
However, arguing that such technologies are still evolving, it stops short of exploring such measures in the Indian context.
Interestingly, while suggesting a law to ban cryptocurrencies in India, the report recommends that the government may consider establishing a Standing Committee to revisit these issues, taking into account global developments. An outright ban on VCs is likely to drive such transactions underground, thereby pushing them further away from the ambit of enforcement agencies.
The minutes of the Committee’s meeting indicate that it did acknowledge that a ban is difficult to implement. A review of the minutes also gives an impression that the initial approach of the Committee was not towards a complete ban.
Hence, there is merit in exploring other regulatory approaches for dealing with the perceived risks of VCs. The possibility of shifting the focus towards placing onus on issuers, exchanges and related businesses to meet the regulatory prescriptions and to ensure that they implement adequate security protocols, comply with AML requirements and ensure greater transparency through reporting and disclosure requirements may be considered. Legislative action should be proportionate, so that it addresses the risks without stifling innovation.
Despite this, a positive takeaway from the report is its express recognition of the distributed ledger technology and its uses, especially in the areas of trade financing, lowering costs of KYC and improving private and confidential access to credit. One can only hope that the government similarly keeps an open mind towards a meaningful regulation of VCs in India.
The writer is Senior Resident Fellow, Vidhi Centre for Legal Policy. The views are personal.
Originally published – https://www.thehindubusinessline.com/todays-paper/tp-opinion/article29129727.ece