An inter-ministerial committee headed by finance secretary Subhash Chandra Garg on virtual currencies has made the following recommendations:
- Banning of private cryptocurrencies by enacting a law and imposing fines and penalties for carrying on activities related to such cryptocurrencies.
- The committee has proposed a draft bill Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019.
- The committee has recommended the government to keep an open mind on the government launching an official digital currency.
- The committee has proposed that setting up of a standing committee to revisit the issues addressed in the report as and when required.
- The committee has suggested the use of distributed ledger technology (DLT) or blockchain technology by banks and other financial firms for processes such as loan-issuance tracking, collateral management, fraud detection and claims management in insurance and reconciliation systems in the securities market.
- The committee identifies the potential use cases for blockchain technology in areas such as payments systems including cross-border and small value payments; data identity management or know-your-customer requirements by various financial entities; insurance; collateral and ownership (including land) registries; loan issuance and tracking; e-stamping; trade financing; post-trade reporting; securities and commodities and internal systems of financial service providers.
Why a ban on private cryptocurrency was proposed?
Even though the technology used in virtual currencies has immense potential, without a central regulating authority, they can have numerous downsides. The concerns expressed by the Subhash Chandra Garg committee on private cryptocurrencies are:
- The very non-official nature of virtual currencies can be used to defraud consumers especially digitally unsophisticated consumers or investors. The committee has also cited the example of Rs 2,000 crore scam involving GainBitcoin in India where investors were duped by a Ponzi scheme.
- Lack of official control may also lead to excessive volatility. For example, Bitcoin was selling at $20,000 per coin in December 2017 but in less than a year, it was trading at $3,800 per coin. Since lakhs of traders would get involved in such currencies, this could have huge implications on the economy.
- Virtual currencies such as Bitcoin requires humongous processing power. The scaling up of such a currency system over a large population would require crippling levels of energy resources. A report by the Bank of International Settlement notes that Bitcoin processing is already using as much energy as is used by Switzerland; it called this an environmental disaster.
- Allowing private cryptocurrencies to function as legal tender would result in RBI losing control over the monetary policy and financial stability, as RBI would not be able to keep a tab on the money supply in the economy.
- The anonymity nature of private digital currencies make them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult.
- As all transactions are irreversible, building a grievance redressal mechanism in such a system would be difficult.
Why the recommendations are criticised?
- Private Cryptocurrencies poses challenges of consumer and market protection and lack of accountability of users and exchanges. This makes a case for regulation and not a blanket ban.
- The committee calls for the government to keep an open mind on the government launching an official digital currency. The recommendations fall short in giving lack clarity on its implementation, scaling for billions of Indians, the inclusion of the unbanked, and whether India possesses the necessary infrastructure for rolling out a digital currency of this magnitude.
- The draft bill Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 proposed by the committee states that all offences under the law will be investigated by the police. It fails to recognise the fact that cryptocurrency-based activity is pseudonymous, decentralised and may span across borders — making it impossible to track such activity in real-time. The committee did not give consideration to the fact whether the police and traditional investigation tools are equipped to investigate crimes of this nature.
- While recommending the ban on private cryptocurrencies the committee did not consider the report of the Government’s Working Group on FinTech and Digital Banking (2018) which suggested that the use of digital currencies does not pose an immediate threat to the economy while acknowledging that cross-border use of such currencies makes it difficult for national regulators to enforce laws.
These recommendations are in line with the observations made by the Union Finance Minister in the 2018 budget speech. The Minister had stated that “The government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system. The government will explore the use of blockchain technology proactively for ushering in the digital economy.”
There is a need for reasonable regulation to ensure that blockchain-based cryptocurrencies don’t upend the existing financial security of the country, but the way forward isn’t a ban. While going forward it is important for the government to consider a reasonable policy that suitably balances technological innovation and protection of users and economic interests.