The Indian government will introduce a new bill to ban trading and investments in crypto-currencies during the Budget session of Parliament. At the same time, the proposed bill will provide the Reserve Bank of India (RBI) with the necessary legal powers to develop a central bank-backed digital currency (CBDC), according to the official Lok Sabha Bulletin Part II.
While the government wants to promote the use of blockchain across various use-cases, it has decided to enter the global race of digital currencies or CBDCs while at the same time banning “private” crypto-currencies like Bitcoin and Ethereum among others. This is a similar approach to that of China, which banned trading and investments in crypto-currencies prior to developing its CBDC, which is still being tested.
“To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” — Lok Sabha Bulletin
The government’s decision to introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 comes a week after the RBI said it had begun exploring the possibility of issuing and developing a digital currency or digital Rupee. This is a reversal of the RBI’s position. Back in December 2019, RBI Governor Shaktikanta Das said that it was very early to speak on CBDCs. “Some discussions are going on. Technology has yet not fully evolved. It is still in very incipient stage of discussions and the RBI we have examined it internally,” Das said.
Indian crypto founders are taken aback by this news, but still hope that the government will work with the industry to ensure that there is some legality to their operations going forward.
How has crypto-currency regulation developed?
Prior to the RBI issuing a circular in April 2018, which barred the banking system from providing services to crypto-firms in India, the crypto-industry was fairly un-regulated and represented a ‘free market’ in many respects. Once the RBI circular came into play, several companies facilitating crypto-trading had to shut down or move abroad. Those that continued to operate moved to a Peer-2-Peer settlement system to facilitate trading, since formal banking and payments companies would not do any business with them.
In 2019, A Finance Ministry committee on virtual currencies prepared a draft bill banning crypto-currency issuance, trading , investment and other activities in the country, punishable with fine of up to ₹25 crore or with an imprisonment term of one to ten years, or both. This legislation was never approved by Parliament.
The industry, under the aegis of the Internet and Mobile Association of India, went to court challenging the RBI’s direction and in March last year, the Supreme Court struck down the circular stating that its regulatory action was ‘disproportionate’. Thereafter, banks and payment companies began opening up their services to crypto-exchanges and other firms in India as the RBI did not issue a fresh circular or direction surrounding the efficacy of crypto-currency trading.
Between March and December 2020, trading volumes across the top 4 Indian crypto-exchanges grew by 500%. While the exchanges now have payments and banking partners, the Supreme Court verdict has also facilitated the growth in acceptance of decentralised financing options and platforms within India.
Can the Indian government ban crypto currencies?
Legally, nothing bars the executive and legislative branch of the government from banning trade or investments in specific financial instruments. Regardless of whether the government was inspired by the Finance Ministry committee’s recommendations, or routine speculation in crypto-market trading that requires investor protection, or the race by global central banks to develop CBDCs, it has the authority to ban trading in crypto-currencies.
However, what is more interesting is the timing of the move. While China could officially roll-out its CBDC in this year or the next to all of its citizens, other leading central banks, from the Bank of England, European Central Bank to the United States’ Federal Reserve, are also working on developing a digital currency. If the government wanted to provide its digital currency an advantage over private crypto-currencies, banning the latter while the former undergoes development is one way to do it.
To enable the RBI to issue digital currencies or a CBDC, necessary amendments would be required in the Reserve Bank of India Act of 1934, the Banking Regulation Act of 1949 and the Payment and Settlement Systems Act of 2007. However, with a ban on crypto-currency trading and crypto-firms in the country, it is possible that much of the activity would move underground without any regulatory oversight.