Global interest in cryptocurrency has revived this week, with Elon Musk making headlines by investing more than $ 1, 500, 000 $ in Bitcoin. In India, however, cryptocurrencies (such as bitcoin and ether) are currently trading at a discount.
This is largely because cryptocurrency is operating in a regulatory gray area. In 2013, the Reserve Bank of India expressed concern over the potential financial, operational, legal and consumer protection risks emanating from cryptocurrencies. In 2018, the central bank issued an order stating that banks and financial institutions would not deal with crypto-related businesses, and that all regulated entities within the purview of the RBI would stop providing services to such platforms. The Supreme Court struck down the provisions that literally banned crypto-trading in 2020.
Meanwhile, the government has demanded the introduction of a draft bill to regulate / prohibit cryptocurrency. The ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ is to be presented before the Lok Sabha in this session. The latest Bill is looking a bit more positive and forward looking than the previous one, titled ‘Ban on Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’. It seems that instead of outright ban, the government wants to regulate cryptocurrency.
Although the text of the proposed 2021 Bill is not yet out, the gist of the regulations available on the Lok Sabha website highlights that this is not actually the case as only the RBI will have the authority to create an official digital currency under the 2021 Bill. The fate of cryptocurrencies such as Bitcoin and Ether is questionable as the 2021 bill seeks to prohibit private cryptocurrency’, although it is unclear what would be considered as ‘private cryptocurrency’.
India has always been a cautious player when it comes to adopting new revolutionary technology. It is even more so when it relates to technologically advanced financial products. In this space, RBI has always followed a conservative view that some argue that innovation in the fintech space has suppressed, while other states are a necessary evil.
In developed economies such as the United Kingdom, Australia and the United States, cryptocurrency is not banned but regulated to varying degrees. In the United Kingdom, the government is currently consulting to understand how to regulate crypto-assets to ensure consumer protection, financial stability and market integrity. From a tax perspective, they are treated as an asset and profit, if any, subject to capital gains tax.
In Australia, the government regulates everyone involved in the life cycle of crypto-assets from issuers, middlemen, miners, exchanges and trading platforms. From a tax perspective, it is considered an asset similar to the UK. The United States has been a leader in cryptocurrencies, and the government controls them to a limited extent. From a tax perspective, cryptocurrency is considered an ‘asset’ similar to the UK and Australia.
Currently, there are only a handful of countries that have banned cryptocurrencies (such as Morocco), and even in those countries, the ban has not prevented individuals from trading in cryptocurrencies due to its decentralized nature.
Therefore, a one-time ban on cryptocurrency by the Indian government may not be the most viable option as it will not only suppress innovation in this space but will also fail to prevent Indians from investing and trading in cryptocurrencies in offshore jurisdictions (as in foreign exchange Was the case with derivatives because offshore investment would fall into a gray area).
Regulation of cryptocurrency will be a middle ground and it will provide the regulator with oversight in the operation of players and will also help protect consumers and prevent money laundering concerns.