India’s status as a crypto hub in serious threat from RBI and a pending crypto bill
India will struggle to jostle among Asian nations for being the region’s crypto hub as the Reserve Bank of India favours a complete ban on cryptocurrencies even as uncertainty persists about the outcome of the proposed legislation.
The bill is not only delayed but, at the moment, lines up with the central bank’s notion in its current form.
The RBI made clear its recommendation for a complete ban on cryptos in a detailed presentation to its central board last week. The central bank in the report highlighted concerns relating to macroeconomic and financial stability from virtual currencies, the challenge of exchange management, monitoring and regulating such assets.
While there is no official data available currently on cryptocurrency investments and transactions in India, analysts said there are around 20 million investors with roughly USD 6 billion in holdings, which is a conservative estimate at best, and a large market base yet to be tapped into.
That vast potential of the country’s investor base and the staggering growth of the digital assets market had underscored India as a frontrunner among Asian countries to become the region’s crypto hub.
But that status is in serious threat from the RBI’s repeated messages against cryptocurrencies and the proposed legislation.
“Given the concerns of the RBI on cryptocurrency, I do not think India will be a foremost player in the crypto market. We need to deal with those elements of uncertainty regarding alleged money laundering and risks associated with the cross-border transactions”, said Lekha Chakraborty, Professor at the National Institute of Public Finance and Policy, New Delhi.
The Cryptocurrency and Regulation of Official Digital Currency Bill aims to ban all private coins as a payment method in India, barring a few to promote underlying technologies, even as it allows the RBI to set up an official digital currency.
Defining digital assets
The government had previously said it aims to promote underlying technologies such as blockchain; however, the proposed draft will deal a blow to its use and the non-fungible token (NFT) market in India.
Non-fungible tokens can digitally represent any asset, including virtual-only assets. Some of the examples of NFTs are digital artwork, including in-game items like avatars, digital and non-digital collectibles, domain names, event tickets, and tangible assets such as real estate.
A few members of RBI’s central board have sought a more nuanced view on digital assets, keeping in mind the technological developments and their broader implications on financial markets.
Industry experts, too, opine that reforms to the bill with more comprehensive consultations can take India to the forefront of blockchain tech.
But India’s regulatory proposal in its current form seeks to ban virtual currencies as a payment gateway and also levy hefty penalties for enthusiasts who break the law.
Violating the cryptocurrencies law would be treated as a criminal offense, with offenders arrested without bail and subject to a USD 2.65 million fine and jail, according to India’s financial watchdog’s proposal.
The draft also suggests a crackdown on cryptocurrency advertisements, which authorities say mislead the public.
No end in sight
But there is no end in sight to the uncertainty for cryptocurrency investors. The government has delayed the discussion again on the bill, which has been in the works for over a year now, in parliament again.
“Of course, the delay in the regulatory framework on cryptocurrency may hurt the asset markets, because we need to pre-empt the ‘bad lemons’ from the market, and strengthen trust in crypto markets. So, regulate, but do not ban cryptocurrency”, said Chakraborty.
“The decision to ‘ban crypto or not’ depends on the policy coordination – the fiscal and monetary policy coordination. The political economy of the RBI and the North Block is crucial”, she added.
The government is reportedly considering changes to the proposed bill.
While the legislation had been listed for the ongoing winter session, which ends on December 23, it has still not been introduced. Finance Minister Nirmala Sitharaman stated that once it is approved by the union cabinet, the bill’s details will be made public.
There was no response to a request for a comment from the Finance Ministry.
The legislation was also listed in the budget and monsoon sessions earlier this year.
While the number of crypto investors has surged in India, the widespread uncertainty surrounding the government’s decision on cryptocurrencies sparked a market-selling frenzy. Several investors exited with significant losses.
What has not helped is warnings from former RBI chief Raghuram Rajan, who said most cryptos would perish because they have no permanent value and only a handful would survive as a cross-border payments system.
Rajan, a chief economist and director of research at the International Monetary Fund, previously stated the regulation would hurt crypto investors, and the value of most cryptos is increasing only because there is demand from investors who do not understand the assets’ workings.
While the narrative for Indian crypto investors is negative, most are still hopeful and expect the final bill to provide more flexibility rather than a complete ban.
Investors and top cryptocurrency exchanges currently operating in India also welcomed the plans to regulate the crypto market and formally help develop underlying technologies.
“Crypto is a financial innovation. Provided a reasonable regulatory framework, crypto legislation should boost investor’s confidence. The ease in transactions can strengthen entrepreneurial confidence and catalyse trade and investment”, said Chakraborty.
“My hunch is the new crypto bill will focus on the regulatory framework, rather than a blanket ban”, she added.
Only time will tell. But the uncertainty on the governments’ indecisiveness after flagging its plans adds further woes in the interim for investors in India.
That at a time when crypto-related activities in the fast-growing economies across the Asia-Pacific region have soared.
Next year is already looking like it will be another roller-coaster for digital currencies in India.
2022 will be a big year on the regulatory front, with more scrutiny forthcoming, not just in India but around the world, with regulators expected to look for the soundness of underlying collateral and leverage.