India’s Complex Relationship With Crypto

A blow was struck to the crypto community in India in late April as reports circulated regarding a proposed ban on cryptocurrencies. India has a strong and passionate community of crypto enthusiasts, however, their steadfast belief in the value of cryptocurrency does not appeared to be mirrored in the diverse organs of the Indian state. Cointelegraph takes a deep dive into the latest developments in the Indian crypto sector and speaks to the experts determined to stick out this turbulent period for investors.

Ban rumor shakes Indian crypto community

In a development set to further consolidate the Indian government’s reputation for a faltering approach toward cryptocurrency, rumors circulated in late April that various government divisions are considering tabling an absolute ban on crypto in all its forms, according to The Economic Times.

The local publication reportedly contacted an official familiar with this latest attempt to ban cryptocurrency in the country. According to the official, the draft bill named “Banning Cryptocurrencies and Regulation of Official Digital Currencies Bill 2019” is currently being discussed by several ministers from a number of government divisions.

Although the draft bill has yet to be written into law, it appears that it is already garnering support from various groups attached to the government. A committee formed of — but not limited to — the Department of Economic Affairs (DEA), the Central Board of Direct Taxes (CBDT), the Central Board of Indirect Taxes and Customs (CBIC), along with the Investor Education and Protection Fund Authority (IEPFA) has allegedly aligned with the decision to outright ban the sale, purchase and the issuance of cryptocurrencies in all their forms.

In addition to the 2019 draft bill, the committee is reportedly exploring options to ban digital currencies under the auspices of the Prevention of Money Laundering Act (PMLA).

Despite the reporting conducted by The Economic Times, not all members of the crypto community are convinced that the ban is likely to take place at all. Mohammed Danish, a lawyer representing crypto-fraud victims in Indian courts and legal advisor to the crypto news content site Crypto Kanoon, notes that there has not yet been any official government statement regarding the alleged bill:

“The discussion about banning crypto in India' finds its source in few news articles and the same has not been confirmed by any official press release till date. However, let's assume that the news is absolutely correct and the inter-governmental committee is inclined to propose a ban on Crypto. The Committee appears to have based its ban proposal mainly on two major grounds viz. 'money laundering' and 'investor protection.”

Beyond the speculation enshrouding the very existence of the crypto ban bill, Danish elaborated that, even in the event that the bill does go through, it could end up being counterintuitive:

“The committee is failing to appreciate that a law can only make the crypto-activity punishable but it can never control/stop the operation/use of Crypto given to its decentralized nature. It cannot be eradicated from the grey market. A law banning crypto would only help the miscreants as on one hand it will create a dark heaven for the miscreants to defraud and on the other hand the fraud victims will be seen as complicit due to which they will hesitate in seeking redressal even in case of genuine frauds. On the contrary, if the Govt. decides to regulate Crypto in some or the other way, it will at least have some control over the activity to stop the vices. It will also help in achieving financial goals.”

Prior government committees come to completely different conclusions

The 2019 draft bill is the latest in a series of contradictory actions by the Indian government concerning cryptocurrencies in recent months. Thus, in December, at least two government committees came to diametrically opposed conclusions regarding the legalization and regulation of cryptocurrencies in India within just weeks of each other.

One committee ruled that all cryptocurrencies should be legalized. An unnamed, yet senior official that attended the committee’s cryptocurrency panel said that crypto legalization is inevitable:

“There is a general consensus that cryptocurrency cannot be dismissed as completely illegal. It needs to be legalized with strong riders.”

Only a few weeks earlier, a separate government panel meeting put forward a new legal framework within the Reserve Bank of India (RBI) advocating for a total ban on cryptocurrencies, stating that “any kind of dealing in such currencies should be treated as ‘illegal.’”

The Indian government allegedly set up the panel with the aim of establishing a series of “norms” for digital currencies. The committee was fronted by Secretary of the Department of Economic Affairs (DEA) Subhash Chandra Garg and submitted its findings in the form of a report to Indian Finance Minister Arun Jaitley.

It’s also important to note that RBI executive director Ganesh Kumar took part in discussions with representatives from G-20 countries calling for the taxation and regulation of cryptocurrencies in order to minimize their use in illicit activity.

Where does the indecision surrounding crypto in India stem from?

Although the country has a chequered past regarding openness to cryptocurrencies, it could be argued that the debate regarding either banning or legalizing them began in earnest in April 2018, when the RBI announced its decision to sever ties with those dealing in cryptocurrencies.

In the bank’s release entitled “Statement on Developmental and Regulatory Policies,” published on April 5, the RBI outlined its support for the technological innovations supporting cryptocurrencies as having “the potential to improve the efficiency and inclusiveness of the financial system. [...] Virtual Currencies (VCs) [...] raise concerns of consumer protection, market integrity and money laundering, among others.”

Despite this initial glimpse of positivity, the RBI soon laid bare its animosity toward cryptocurrencies themselves, stating that it had issued warnings to individuals involved with the crypto industry about “various risks.” The bank further commented that it viewed the risks seriously enough to rescind their offer of services to involved individuals or businesses:

“In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time.”

Speaking at a press conference on April 5, RBI Deputy Governor Bibhu Prasad Kanungo outlined his view that cryptocurrencies could potentially have the power to “endanger financial stability”:

“Internationally, while the regulatory response to these tokens are not uniform, it is universally felt that they can seriously undermine the AML (anti-money laundering) and FATF (Financial Action Task Force) framework, adversely impact market integrity and capital control. And if they grow beyond a critical size, they can endanger financial stability as well.”

CEO and co-founder of Indian Unocoin Sathvik Vishwanath told Cointelegraph that the RBI’s stance has had an adverse impact on both Indians and cryptocurrency usage:

“The present stance of RBI has not only reduced the number of transactions that happening for buying and selling of cryptos but it also has hurt the sentiments of Indians. To get more adoption and acceptance of crypto, initially the government should first clear its stance about crypto followed by the lifting the banking ban for these transactions and finally coming up with the suitable regulations for both trading and payment systems of crypto.”

India’s digital currency development – on pause

In addition to the RBI’s damning comments regarding cryptocurrencies, the bank announced on Jan. 1 that it would pause its plans to develop and release a digital currency. Initially due for release in April of this year, the RBI confirmed in August that the digital currency would be backed by the rupee in an effort to combat the rising cost of printing paper and the popularity of digital coin usage.

A report published by Indian business news outlet The Hindu Business Line quoted an unidentified source who said that the government had had a change of heart:

“The government doesn’t want the digital currency any more. It thinks it is too early to even think about a digital currency.”

Despite an unstable crypto environment in which any potential fintech advancement could help bring about wider adoption, not all members of the crypto community were on board with the digital currency initiative to begin with. The founder of local cryptocurrency exchange Belfrics, Praveen Kumar, said that now was not the time for the launch:

“It is premature for RBI to launch crypto-rupee, as more understanding of the crypto economy need to be achieved. It is a right decision to delay the process and see how the publicly traded peer-to-peer economy is shaping up.””

This was not the first instance in which India’s financial institutions made clear their aversions to cryptocurrencies, a prime example of this being the Indian Finance Ministry’s criticism of bitcoin as having a lack of intrinsic value. Prior to this, Indian banks began to limit the functionality of crypto exchange accounts. The atmosphere darkened for Indian crypto enthusiasts to the extent that false media rumors regarding a country-wide ban in early February 2018 led to a drop in crypto markets at the time.

Why is crypto dividing opinions in India?

With the government’s indecision regarding cryptocurrencies ostensibly representing the most significant hurdle for adoption and usage in India, it appears that the quantity of theories seeking to explain the government’s position on crypto are as numerous as the committees set up to decide its fate.

Sathvik Vishwanath told Cointelegraph that this hesitant approach is not atypical of the Indian government regarding new technology:

“India is a conservative country. In the past it has only taken the stance of encouraging a technology after it being able to fully regulate. India also has the history of taking knee-jerk reaction when they’re not capable of understanding the pros and cons at hand. We hope crypto industry don’t become prey.”

Evan Luthra, an entrepreneur and blockchain expert, outlined his view in an interview, saying to Cointelegraph that India’s large geographic size, bureaucracy and population all play a part in the shaping of the government’s inconsistent approach to regulating cryptocurrencies:

“The problem with India and cryptocurrencies is that India is a billion people. It’s a lot of different states that are working with blockchain and cryptocurrency. There are different levels and there is the state government which is also responsible for setting out how the currencies are regulated and how cryptocurrencies are regulated in India.”

Luthra also said that it’s important to note that crypto’s existing association with illegal activity is admittedly hard to shake off, though outweighed by the potential benefits that could be brought about in future: 

“While we see a lot of progress happening in India and multiple state governments pressing forward with blockchain and blockchain based solutions, India has also been the leader when it comes to scam projects. This is because every time an industry grows so fast, there is bound to be scams around it.

“In a cash rich economy like india, cryptocurrency has the highest potential to make a big impact. But before we get to that level to see that positive impact, there are definitely going to be a few bad players. And to remove them there’s going to be a rollercoaster ride, involving many ups and downs. We’re going to have to wait for the government officials to understand this technology and these cryptocurrencies.”

Although instances of crypto crime in India are well documented, Danish believes that the reputation of cryptocurrencies can weather the storm:

“The fact that Crypto is packed with the power of decentralization, it is impossible for it to get rid of this ascription. However, it is pertinent to note that no law has been able to achieve 100% result ever. Despite having in place many strict laws, no crime has ever been extinguished completely. We have cases of murders despite Section 302 IPC prescribing life imprisonment for its commission. The best which can be done is to rein crypto in such a manner that the ease provided by it to the wrong doers can be curtailed considerably.”

What could happen?

Although the government appears to be set on either finding a thorough method of regulating cryptocurrencies or banning them altogether, many members of the Indian crypto community are firm in their belief that, as understanding of the technology grows, adoption and acceptance is sure to follow. Thus, Evan Luthra says that, despite any regulatory measures, cryptocurrencies will survive, and it’s up to governments to decide which side of history they want to be on:

“As they understand it better every day, regulation will change. As the regulation keeps changing, that will bring the volatility and the hostility that we see right now. The best way for the government to move forward is to accept that fact that cryptocurrencies are not going anywhere. Either they can join the bandwagon or they can be left aside and cryptocurrencies will survive, with or without the government anyways.”

For Danish, education and awareness are the two key factors that will shift the current government impasse in India. Danish also explained that the imposition of a blanket ban on cryptocurrencies wouldn’t be a one-trick fix — as without education, members of the public would still be vulnerable to “crypto-crimes” and instances of fraud:

“I think there is a need for running general awareness programs about Blockchain, Crypto and Crypto frauds. Illiterate and non-tech savvy people are more prone to fall prey to the ponzi schemes which falsely promise higher returns. I would emphasize that if at all the Govt. decides to ban it, it must make provision for Crypto education so that the people are capable of protecting themselves from the crypto-crimes and criminals in the post-ban era as both these things are going to survive the ban. A Crypto ban can only kill innovation but not the crypto-crime.”

With the government’s track record of changing its attitude toward crypto several times in quick succession, it looks like crypto is set to have a complicated path toward acceptance in India, should it ever get to that point. With the upcoming general election set to conclude on May 23, India risks a completely new government and, potentially, a completely new approach to cryptocurrency. With mixed signals from the current government and the spectre of a potentially damning new bill lurking in the shadows, the future of crypto in India remains to be seen.