There is an impression that the RBI has banned Bitcoins. Is this correct? There is a misunderstanding that crypto-assets like Bitcoins are illegal in India. No doubt, crypto assets are not ‘legal tender’, but this does not make them illegal. The fact that they are not ‘legal tender’ only means they are not recognized as Indian currency. However, they can be classified legally as digital goods. The RBI circular prohibits its regulated entities such as banks from facilitating the buying and selling of virtual currencies, including Bitcoins.
This
makes trading in crypto-assets impractical since it cannot be done through
banking channels. On a policy note, no major democratic country has banned
crypto assets. If India chooses to do so, the entire block chain ecosystem,
which has huge benefits to the country, will move out.
This
exodus has already begun after the RBI circular. Crypto assets are an integral
part of the block chain technology. Throughout history, regulation has always
been found to be a more effective than prohibition. An outright ban on
crypto-asset activity should not be considered for several reasons.
Crypto-assets are essential to block chain technology, which has the potential
to be one of the next major growth drivers for the software ecosystem in India.
Many
experts agree that crypto-assets are essential to block chain technology, which
is a new and disruptive technology that presents both benefits and risks.
Crypto assets bring benefits such as disinter mediation, which in many cases
leads to reduced transaction costs and greater transaction integrity. Examples
from history (electricity, railways, telecommunications, motor vehicles,
aircraft, mobile phones, and the internet) have taught us that, despite initial
regulatory skepticism, disruptive and complex technologies should be regulated
and not banned.
Banning
crypto-assets is likely to have counter-productive effects. The approach of the
G20, the Financial Action Task Force, and advanced economies like the EU, the
US, Japan, and Singapore, a balanced regulatory approach should be taken to
promote the various benefits of the technology and mitigate the risks. A recent
study by In-crypt, which surveyed Indian block chain software developers, found
that block chain has the potential to be one of the next major growth drivers
for the software ecosystem in India, and that allowing crypto-asset transaction
is an integral feature. A prohibition would nip this opportunity in the bud.
Crypto asset
businesses could be brought within the Prevention of Money Laundering Act by a
simple central government notification. This would bring them within a
well-established regulatory regime and tackle one of the main concerns
expressed about them.
Crypto asset
businesses should also be licensed in order to protect consumers and avoid
fraud and systemic risks. There are already regimes being considered by the
finance ministry to regulate commodity spot exchanges and other unregulated
exchanges. Crypto-asset exchanges can be brought within these regimes too. Laws
such as the Consumer Protection Act, the Foreign Exchange Management Act, the
Securities Contracts (Regulation) Act, and NBFC laws can enable the government
to frame specific regulations for various aspects of crypto-assets business
activity.
It
is also worth noting that all crypto-assets are not alike. There are over 2,000
of them and the implications of each should be assessed on a case-by-case
basis. There can be three different categories of crypto-assets to facilitate
analysis.
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