A new era for India’s cryptocurrency market – one of the largest in Asia and the world – is unfolding.
On November 29 the government began a process for implementing a new law that proposed banning most private cryptocurrencies. The law will also create a framework for a central bank-backed digital currency, while allowing investment in crypto’s underlying technology blockchain, a decentralised ledger that tracks and records transactions.
But India’s privately owned NDTV news channel reported December 2 that private cryptocurrencies will be regulated rather than banned, citing a cabinet note from the Prime Minister’s office to be shared with ministers for debate and discussion. The note suggests cryptocurrencies are to be classified as assets, not currencies, and that they will be regulated by the Securities and Exchange Board of India.
India’s crypto market has boomed since the country’s Supreme Court overturned a previous ban in April last year, growing more than 600% over the past year, according to research by Chainalysis. India has more than 100 million cryptocurrency owners, the most in the world, according to broker comparison website BrokerChooser.
“We want to make sure there is a window available for all kinds of experiments which will have to take place in the crypto world,” Finance Minister Nirmala Sitharaman told CNBC-TV 18 earlier this year. “It is not as if we are going to look inwards and say we are not going to have any of this. There will be a very calibrated position.”
India has had a roller-coaster relationship with crypto, as officials fret about its impact on consumers and even financial stability. Prime Minister Narendra Modi said last month that cryptocurrencies present a risk to younger generations and could “spoil our youth” if it ends up “in the wrong hands.”
It’s with such concerns in mind that India is becoming the latest emerging economy in Asia to crack down on cryptocurrencies and clear the way for one, dominant central-bank-backed digital currency. If all goes to plan, the new law will be passed before the winter session of parliament ends on December 23.
Why Is Crypto Regulation Needed?
Crypto investments in India skyrocketed to over $10 billion in November 2021, from just $900 million in April 2020, according to Credit Rating for Exchanges Blockchains and Coin Offering.
The surge alarmed the central bank, which is tasked with maintaining financial stability. The government also believes that an unregulated crypto market, operating anonymously, is a challenge to the sovereign control of its finances.
“India needs regulation to prevent serious problems, ensure the avoidance of misuse of cryptocurrencies, and protect unsuspecting investors,” says Nischal Shetty, founder of Wazir X, which claims to be India’s largest cryptocurrency exchange.
Regulation would help ensure the sector eliminates scammers, money launderers and even terrorist connections, he adds.
What Is India’s Cryptocurrency Strategy?
The Reserve Bank of India says cryptocurrencies pose a risk to financial stability and even questions claims that they have “market value.’’ It does not want to see investors “lured” by the promise of returns on crypto coins.
The new law is likely to have been motivated by the government’s desire to launch a pilot test of its Central Bank Digital Currency in early 2022, and to legalise a digital rupee, says GlobalData, an information tracking agency.
“RBI does not want cryptocurrency to emerge as a currency or an alternative for the fiat currency,” says Shivam Thakral, founder of BuyUcoin crypto exchange, adding that the central bank wants cryptocurrencies to be classified as a separate asset class.
What the India Cryptocurrency Critics Say
Crypto industry players say the law risks hurting Indians invested in private digital currencies and will stunt innovation, according to Ashish Singhal, the founder and CEO of Coinswitch.
Singhal, who is also co-chair of the Blockchain and Crypto Assets Council, an industry think tank, is concerned that a ban will drive crypto entrepreneurs to relocate elsewhere in Asia, as well as “wipe out the entire asset investing class that has developed in India.”
He fears that a comprehensive ban would prevent Indians from setting up infrastructure service companies “and we will once again miss the opportunity of enabling innovators to innovate [online] infrastructure companies.”
Because India is a late bloomer in Asia’s digital scene – the country is still largely on 4G telecom services, pushing ahead on cryptocurrency adoption and blockchain technology could give the country an advantage due to its demographics.
“India has the largest number of young people who are tech-savvy and comfortable with technology and for them crypto investing is an expression of freedom,” Thakral said.
What’s The Future For Cryptos in India?
Shetty of WazirX says the central bank will succeed in stopping crypto from being used for payments, and that it will thus be treated as a different asset class for investment.
As parliament began its winter session on Monday, Finance Minister Sitharaman said the government is not ready to accept bitcoin as part of a payment system. “There is no proposal to recognise bitcoin as a currency,” the minister said.
That sounds like a sign of things to come.
• Indrajit Basu
This report was updated with additional material on December 2.