Crypto Is Here, Where Are India’s Checks And Balances?

Investments of not less than $6.6 billion till May. Over 10,000 active jobs opened up in 2021 alone. A global ranking of 11th in the race for adopting a virtual currency. Need we say India has logged into the world of cryptocurrencies with a bang? All it needs now is the password that would make it legal tender, with a transparent regulatory framework and redressal mechanisms in place. For all the misgivings that trail this paradigm-breaking (and little-understood) leap in the history of currency, the tide seems to be turning. On September 7, El Salvador became the first country to recognise Bitcoin as legal tender—one of the most significant milestones in the 12-year journey of cryptocurrencies. A small, strife-torn Central American nation with a $27 billion GDP influencing the $3-trillion Indian economy may prima facie seem a risible thought, but there is such a thing as the butterfly effect. And indeed, we see the India chapter of that story being written—and rewritten—even if with a cautious pen.

As technological changes upend finance, crypto has gone from being a byproduct of digital disruption to a $1-trillion asset class, barging into most fund managers’ blueprint for a balanced portfolio. Even if the virtual currencies on the unregulated market behave at present like a herd of stampeding wild stallions—it’s not quite an orderly derby yet, and prospective punters pretty much end up swallowing their cigar in sheer nervousness. But, as the new normal inexorably transforms the habitually risk-shy Indian investor into a class of digitally advanced millennials, crypto is making ever-bigger strides. A sustained rally in the post-Covid world had hit a roadblock with China cracking down on virtual currencies earlier this year. But crypto turned around soon and Bitcoin, the leader of the pack, boomed into the $50,000 level.

As the case for crypto gathers momentum through the last few weeks, Indian authorities seem to have begun decrypting the nation’s regulatory commandments to make way for a greater and faster adoption of the virtual coins. Finance ­minister Nirmala Sitharaman had last month said she was waiting for an approval from the cabinet on a Bill on making cryptocurrency legal tender. The bill is expected to draw up the tax treatment these virtual currencies would be subjected to and suggest how they would be classified in the book. Even if a cabinet nod for that specific bill may be difficult because it was drafted ahead of the Union Budget, the government looks to be easing up on its reservations overall.

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Still, a sense of limbo persists. “Yes, cryptocurrency mining and trading is not illegal in India today. But it is an unregulated sector, and till there are clear regulations prescribed, we will continue to operate in a no-man’s land. Do understand ­cryptocurrency is not a legal tender or a valid currency in India in the conventional sense. It is not backed by any ­sovereign guarantee,” says Sajai Singh, partner at J. Sagar Associates. Adds Avinash Shekhar, Co-CEO at ZebPay, one of the active crypto exchanges in India: “Having a clear regulatory framework around cryptocurrency will prompt investors, businesses and entrepreneurs to participate confidently in this industry. We are looking forward to the upcoming guidelines and policies.”

The yawning gap between virtual currency and fiat money in circulation is likely to be bridged by government digital ­currencies, often referred to as govcoins. RBI governor Shakti Kanta Das had indicated in late August that trials for Digital Rupee, or the Central Bank Digital Currency (CBDC), will begin at the end of the third quarter. A marked change from the more prohibitive stance reflected in its 2018 circular, when RBI had asked banks to ensure customers dealing in cryptocurrencies should not be provided banking services. That changed in March last year, when the Supreme Court got into the debate and lifted the RBI ban on cryptos, saying since there was no legislative ban on crypto trade, the central bank could not enforce restrictions on a citizen’s fundamental right to carry out what was, in effect, a legal form of trade.

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The huge success of digital payments, in tandem with the government’s dream of a cashless economy, had inspired RBI to try out CBDC, riding on the growing interest in virtual ­currencies. Now, CBDC is proposed to be different from ­private digital tenders of its kind—Digital Rupee is proposed to be legal tender in online form. Once it’s pumped into ­circulation, India will join an exclusive club, comprising the UK, China and a host of European nations that are exploring the use of digital currencies. We await clearer signs of how an official version can mediate with the heaving, breathless action on the private side, but it’s a beginning.

“We are pleased to see the government is pressing for crypto legislation,” WazirX COO Siddharth Menon was quoted as ­saying recently. WazirX is India’s largest crypto exchange, founded by Nischal Shetty. These exchanges are the only places where cryptos could be traded. “El Salvador’s move ­further legitimises crypto, and I’m confident it will have a large impact in the long run and will eventually push more countries towards crypto acceptance,” he says. To be sure, lenders have started softening their stand on cryptos, and more and more overseas crypto exchanges are homing in on India. US-headquartered digital currency exchange CrossTower was the last on board a flight to India—its trading platform was part of the check-in baggage. CrossTower India has hired 35 people and plans to increase the headcount to 100 in six to nine months. The company is following in the footsteps of market leader Binance, which entered India in 2019. “India will play a pivotal role and we plan to use the country as a hub to expand into other geographies,” Kapil Rathi, co-founder and CEO of CrossTower, was quoted as saying.

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The Indian market hopes to see cryptocurrencies being classified as an asset class and have laws in place on their taxation, just like the other financial markets. There are thousands of cryptos in the market with different use cases that work on ­different blockchain platforms. ZebPay’s Shekhar hopes ­policymakers will look into how they can be used both as an asset class and also take advantage of the underlying blockchains for their use cases to help infrastructure in various ­industries. “Crypto assets are still in their early stages and with clear regulations, we hope to see more Indian investors confidently taking the benefits of an early market,” he says.

It is not an easy task, though, to tame a wild stallion. In its present form, cryptocurrencies are anonymous, which makes it susceptible to money-laundering. “A transaction cannot be reversed because both sides are anonymous in a crypto deal. There is significant third-party exposure and very little scope of recovery in the absence of a centralised clearinghouse ­guaranteeing the validity of a transaction. Laws against money laundering are also hard to enforce when you have a plethora of participants such as senders, receivers (possibly launderers), processors (mining and trading platforms) and currency ­exchanges,” elaborates Singh of J. Sagar Associates. A ­regulatory mechanism would require transparency in the books. The Union corporate affairs ministry requires ­companies to disclose trading and investment activities in cryptocurrencies during a financial year. “This may lead to these assets being taxed. Lack of KYC is a major cause for ­concern…gains here could be channelled into anything: terror financing, illegal activities, stockpiling black money,” he says.

Transparency, via regulation, is therefore crucial. Sitharaman has allayed fears of bringing back a blanket ban on cryptos at a time of exciting breakthroughs in the fintech space. India doesn’t seem to want to be left behind as the world embraces the technology more openly. It’s not just the crests and troughs in valuation, nor even the lack of control over the money, that’s the concern now—it’s lack of faith in people who handle it. “Money is a matter of belief, even faith: belief in the person…­issuing the money…. Money is not metal. It is trust inscribed. And it does not seem to matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display,” Niall Ferguson wrote in The Ascent of Money: A Financial History of the World. But the technology backing crypto is a genuine leap, and trust in it is slowly getting inscribed in an abstract place that matters the most: the mind. 

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Cryptos and 5 Facts

1. The Budget Speech for 2018-19 stated that “the government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system”.

2. A high-level inter-ministerial committee constituted under the chairmanship of secretary (economic affairs) to study the issues related to virtual currencies and propose specific actions to be taken in this matter recommended in its report that all private cryptocurrencies, except any cryptocurrency issued by the State, be prohibited in India.

3. RBI, through its circular on customer due diligence for transactions in virtual currencies dated May 31, 2021, has, inter alia, advised that banks as well as other regulated entities may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer, ­Anti-Money Laundering, Combating of Financing of Terrorism and obligations of regulated entities under Prevention of Money Laundering Act, 2002, in addition to ensuring compliance with relevant provisions under the Foreign Exchange Management Act for overseas remittances.

4. In August, finance minister Nirmala Sitharaman said that the proposed legislation on cryptocurrencies had been tabled before the cabinet headed by PM Narendra Modi and its approval is awaited.

5. A media report (Economic Times) last week said the Indian government is planning to define cryptocurrency as an asset/commodity for all purposes, including taxation and as per use cases like payments, investments or utility.

(This appeared in the print edition as "To Tame a Wild Stallion")