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Will 2021 Be the Year When India Finally Clarifies Laws Around Cryptocurrencies?
Massive post COVID-19 global liquidity injected by central banks has, in part, recently boosted the valuation of Bitcoin and with it, the dilemmas for Indian regulators who have shown distinct discomfort with the cryptocurrency in the past.
There is some evidence to show that cryptocurrencies have emerged as a hedge against the uncertainty raised by COVID-19. In India, the lockdown saw investors re-engage their interest in virtual currencies – apparently enough to have the income tax department reportedly take another close look at crypto investors.
There is a lack of clarity over the status of cryptocurrencies in India.
While the Supreme Court struck down the RBI ban early in the year, cryptocurrency regulation is still prohibitory, besides being difficult to comprehend. Cryptocurrencies are not legal tender in India, and while exchanges are legal, the government has made it very difficult for them to operate.
For too long, concerns with respect to money laundering and terror financing have dominated the discussions surrounding cryptocurrency transactions. With an estimated 1.7 million Indians trading in digital assets, it is time to finally appreciate its potential for the economy and formulate appropriate legislation for its regulation, provisioning for consumer protection and for concerns about its usage in money laundering and terror financing.
The Indian government has been skeptical of cryptocurrency, vacillating between wanting to regulate cryptocurrencies and banning. While the government wishes to actively encourage blockchain technology, it has been resisting popular usage of cryptocurrency because once the unit of account of one of these transactions changes from rupees to any cryptocurrencies, then the possibility of recovery of tax would become farcical. So, if the government wishes to reap the revenues from blockchain transactions, it will have to recognise cryptocurrency, and not just INR, as a unit of account.
Money launderers and terror financers
A serious problem associated with crypto-transactions is that, because of the anonymity that it provides, it becomes a haven of sorts for criminals, enabling them to finance all manner of malicious activities. A certain BTC wallet that belonged to the Islamic State or ISIS received around $23 million in one month at the height of its expansion in 2015. This trend is likely to increase in the future. With increasing law enforcement scrutiny on hawala transactions and formal banking systems, terrorists are likely to gravitate towards the anonymity of virtual currencies.
Red flag indicators that financial institutions use to detect suspicious money laundering and terrorism financing activity do not exist for illicit transactions in the BTC blockchain. Worldwide cryptocurrency scammers raked in $4.3 billion worth of digital money in 2019. Between 2017 and 2019, Indian investors are estimated to have lost more than $500 million in cryptocurrency scams. Many initial coin offerings have turned out to be scams. Crypto scammers also engage in creating fake crypto wallets or fake altcoins, which are not even genuine cryptocurrency.
Recently on December 11, a scam of nearly Rs 1,000 crore involving cryptocurrency trading through multiple exchanges came to light when the Enforcement Directorate (ED) arrested a cryptocurrency trader, who is a resident of Bhavnagar, Gujarat, and was being investigated in connection with an online betting racket involving Chinese operators.
In September this year, it was discovered that Delhi-based cryptocurrency platform Pluto Exchange, which had launched of India’s first mobile application for transacting in virtual currencies with much fanfare in 2017, has in fact, duped as many as 43 investors of more than $272,000 and the director of the company had collected more than $6.8 million for the cryptocurrency business, besides shifting surreptitiously from India to Dubai without notifying its clients.
After a string of frauds were unearthed after the 2016 demonetisation move, the RBI, by way of a circular, prohibited any entity from providing banking services to anyone dealing with virtual or cryptocurrencies in April 2018. Photo: Richard Patterson/Flickr (CC BY 2.0)
In his 2018 budget speech, the late Arun Jaitley stated that the government will do everything to discontinue the use of bitcoin and other virtual currencies in India, but will focus on the distributed ledger system or blockchain technology that allows organisations to record and authenticate transactions without the need of intermediaries.
Around the same time Facebook, in a policy decision, announced that it would not promote any advertisements related of “financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency,” in an effort to fight scams.
After a string of frauds were unearthed after the 2016 demonetisation move, the RBI, by way of a circular, prohibited any entity from providing banking services to anyone dealing with virtual or cryptocurrencies in April 2018.
In the face of plummeting trade volumes, cryptocurrency exchanges filed a lawsuit in the Supreme Court and won the case in March 2020. A three-judge bench of the Supreme Court overturned the central bank ban, noting that the RBI had not presented any empirical evidence that virtual or cryptocurrencies have negatively impacted the banking sector or other regulated entities. The ruling stated, “RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none.”
There is no denying that a robust interest in India for crypto-assets. Despite government efforts to reign it, the demand and popularity for cryptocurrencies has grown steadily In India. Soon after the RBI lifted the ban, multiple domestic cryptocurrency exchange platforms and trade markets came up. Besides, many international crypto-exchanges also set up shop in India.
WazirX grew 400% in March 2020 and 270% in April 2020 on month-on-month basis. Between January to May 2020, Paxful reported 883% growth from around $2.2 million to $22.1 million. Sequoia-backed CoinSwitch Kuber, which allows virtual currency purchases in Indian rupees, was launched right in the midst the coronavirus outbreak. In these few months it has added over 200,000 users, reporting volumes of about $200-300 million.
With expanding internet infrastructure in terms of equipment, speed and connectivity, India will witness a relational rise in the usage of bitcoins.
Lack of regulatory protection for investors
Around the world, governments are still trying to comprehend the implications of virtual currencies, and to ascertain the worldwide regulations surrounding them. While some countries have banned or restricted Bitcoin, or other related crypto instruments others have explicitly allowed its use and trade. Most are grappling with regulatory protection for cryptocurrency investors.
In an environment of severe economic slowdown, cryptocurrency assets with promises of high returns has become a magnet for many Indian investors. Unless there is clear legislation regulating the cryptocurrency, the chances of scamsters stealing investors savings amid job losses brought by the coronavirus pandemic increases. Adequately respond to the challenge presented by the bitcoins is certainly a major concern for the counter-terrorism community across the world.
Cryptocurrencies carry huge potential to make the financial system genuinely global. The speed and simplicity of paperless crypto-transactions, which are unregulated by any banking system, makes them a genuine asset to the vast population which is underserved by the banking system.
Varied dynamics, ranging from security concerns to garnering acceptance from the market and customers will influence the potential usage of cryptocurrency in India. While there are a lot of complexities related to cryptocurrency on an immediate basis, proper legislation relating to it is needed to eliminate every risk related to the use of crypto assets. Some Indian crypto exchanges like BuyUCoin, had themselves suggested making crypto earnings taxable, in order to bring them under the purview of investigating authorities, thus encouraging more user participation.
Several reports indicate that the federal cabinet is considering a a cryptocurrency bill. Credit rating and audit firm for blockchain and cryptocurrency, Crebaco Global and Indian law firm Khaitan and Company are, in fact, poised to submit their recommendations for concrete cryptocurrency regulations to the finance and law ministries by December end.
Legislation rather than focusing on a ban should ensure that effective levels of verification are processed to determine a crypto-transfer’s money laundering or terrorism financing risk. Even supposing suitable legislation is drafted for cryptocurrency, its regulation will require agencies with cyber savvy cadre to discern these transactions. Negative concerns associated with Bitcoin or other cryptocurrencies can then be properly comprehended and shaken off to make it more popularly accepted token in India.
Vaishali Basu Sharma has worked as a consultant with the National Security Council Secretariat (NSCS) for several years, and is presently associated with the New Delhi-based think tank Policy Perspectives Foundation. She tweets at @basu_vaishali.