Be Cautious, Not Scared, of Crypto
Give legal backing to cryptocurrencies
GoI is being cautious on cryptocurrencies. It reportedly intends to support them, maintaining a ‘middle-path’, rather than impose an outright China-style ban. A ban on all transactions linked to cryptos would go against fintech innovation and deprive Indians benefits of blockchain technology. Blockchain is essentially a distributed ledger of transactions that underpins cryptocurrencies. Throwing this baby out with the bathwater would be simply fearing innovation.
Crypto trades have grown rapidly. Over1.5 crore crypto investors in India hold digital assets worth ₹15,000 crore — but without legal backing needed to address any blowout of the crypto market. This underscores the need for GoI to swiftly enact a law on cryptos, including a clear definition and disclosure rules for all holdings. RBI must be empowered to regulate cryptos, not as fiat currency but as commodities that can perform some functions of money — make payments, store value and serve as a unit of account. Rules for peer-to-peer transfers must be laid down to address money-laundering concerns. Relevant amendments must follow in the Prevention of Money Laundering Act and Foreign Exchange Management Act. The tax treatment of cryptos should be clear. Earlier, an April 2018 RBI circular prevented any entity regulated by it from dealing with crypto transactions due investor risk. Thankfully, the Supreme Court struck it down in 2020, saying it was disproportionate to the otherwise consistent stand taken by RBI that virtual currencies are not verboten. Not all cryptos can be volatile like Bitcoin. Nevertheless, El Salvador legalised Bitcoin use for daily transactions through a State-sponsored wallet. Other types of tokens — contracts, currencies, etc — whose values are benchmarked against a basket of major world currencies can be created.
Blockchain reduces the time and cost of cross-border transactions. RBI also plans to launch a central bank digital currency of its own. That is fine. But GoI’s priority should be to give proper legal backing to cryptos.