Inside the Indian government’s months-long struggle to curb cryptocurrencies

On trial.
On trial.
Image: Reuters/Dado Ruvic
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India may finally have a set of draft rules for cryptocurrencies by the end of the year, but not before the debate within government circles heats up further. It is, as of now, a tug of war between the stakeholders: suspicion on one side, and a stiff upper lip on the other.

A wave of panic swept the Indian cryptocurrency ecosystem last week after finance minister Arun Jaitley, once again, expressed his strong dislike for virtual currencies.

“The government does not recognise cryptocurrencies as 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 payments system,” Jaitley said in his Feb. 01 budget speech, keeping the legal status of virtual currencies in a state of limbo.

The fear of money laundering via investment in these currencies and ensuring customer protection from the price volatility and complex nature of these assets are the main reasons why the government has not been comfortable with these digital assets. The hesitation is not entirely unfounded: The price of one bitcoin, valued at over $19,000 in December, is now worth less than $7,000.

However, conversations with half-a-dozen officials reveal that all may not be lost for cryptocurrencies, despite unhelpful statements from the finance ministry and the Reserve Bank of India (RBI). A bunch of career bureaucrats and bankers are currently in the process of writing their fate. And even if they do survive, bitcoin and its peers will likely remain on a tight government leash.

India currently has around 10 cryptocurrency exchanges with five million users and monthly volumes of Rs10,000 crore ($1.5 billion), according to industry estimates from early January.

Opening round

In April 2017, the Narendra Modi government set up its first committee to look into cryptocurrencies. The panel comprised officials from the finance ministry, the RBI, and India’s market regulator, the Securities and Exchanges Board of India (SEBI). Its report submitted in July 2017 recommended slowly choking the trading platforms, an official who worked on the report told Quartz. 

“We did not recommend that one should ban it…as people are trading in it and if it is stopped one fine morning, people may lose a lot of money. So, all the trading platforms that are based in India, we should tell them to shut shop,” the official said, seeking anonymity. “After that, if it doesn’t stop, then of course, further steps can be taken for banning it.”

Although the government has not fully implemented these recommendations, its stance, including that in the finance minister’s budget speech, has so far been on similar lines, the official added.

What about regulation? ”No way,” the official responded. “Any regulation will end up legitimising them, and that is what the exchanges are asking for. They (bitcoin trading exchanges) are asking to be regulated, only so they can be legitimised.”

R Gandhi, a former RBI deputy governor and a member of the panel, insisted that stifling the exchanges was a requirement.

“They (virtual currency trading platforms) are not exchanges. Because any exchange in the country will have to take approval from SEBI. Today, they are all operating without approval. That is clearly against the law,” Gandhi said.

He added that since investors are trading via these exchanges, gullible people can be misled and, therefore, the government must come down heavily on them.

Cryptic signals

India’s aversion to virtual currencies was first displayed in December 2013 when the central bank issued a few words of caution. Since then, as a rally in prices drove hordes of people to invest in cryptocurrencies, the frequency of these warnings has increased.

However, they have done little to provide clarity to the exchanges or investors.

“The government’s recent statements show that it still does not have a clear plan on how it seeks to regulate cryptocurrencies,” said Anirudh Rastogi, managing partner at law firm TRA. “That’s the reason why they have been reiterating similar comments and warning the common investors to not go overboard.”

As bitcoin got hotter, the government began cracking down on it. In December, for instance, the income tax department surveyed India’s cryptocurrency exchanges and issued tax notices to investors based on their transaction history, causing much consternation, said the head at one such exchange.

Then, a few banks froze the accounts of some exchanges, reportedly to avoid dealing with crytpocurrency-related money. “At this point, it has caused pain and there is no doubt about it, but this is an overreach by certain banks,” said Ajeet Khurana, head of the Blockchain and Cryptocurrency Committee, a lobby of cryptocurrency players in India.

The second coming

Now, the government has decided to dig deeper.

In December 2017, the finance ministry set up a second committee on cryptocurrencies. The recommendations of the earlier panel were not fully accepted as some within the finance ministry deemed them too harsh, two officials said. Therefore, the new panel was tasked with re-examining the report in a broader global context at a time when bitcoin prices were already through the roof.

The new committee is headed by Subhash Garg, secretary of economic affairs in the finance ministry, and is working on formulating a draft law. “SEBI chairman Ajay Tyagi and RBI deputy governor B P Kanungo, along with the secretary, are looking at the recommendations of the committee and broadly at the entire issue,” a finance ministry official said, requesting anonymity.

The regulations, the official added, will broadly address two key concerns: protection of the ordinary investor and preventing the flow of black money through cryptocurrency channels. The committee will submit its report soon, he added, without giving a specific timeline. And the regulations are expected to be finalised by March 2019, Garg said on Feb. 03

Queries raised with the finance ministry and the RBI on the issue remained unanswered.

Waiting for it

Cryptocurrency exchanges have their fingers crossed, particularly after having been berated severely by the first panel.

“Initially the discussions with the government were purely educative and now it is trying to understand with a direction in mind to figure out how to prepare a framework and policies around it,” said Nischint Sanghavi, head of exchange at Zebpay, a virtual currency trading platform. “… we are hopeful that there won’t be any knee-jerk reaction from the government.”

Khurana, too, believes the government will take steps to regulate these exchanges to ensure that consumers’ interests are protected. ”Every few days we are meeting and making representations to someone from the government or the regulator and we are not getting a sense that it will be banned,” said Khurana.

In any case, a blanket ban will come with its own set of problems. ”If you encourage only peer-to-peer transactions instead of open trading via exchanges,” he explained, “then it becomes invisible and encourages an informal economy where the government won’t be able to keep track of it.”