Report of the Inter-Ministerial Committee on Virtual Currencies: A missed opportunity for India

Recently, an Inter-Ministerial Committee (IMC) constituted by the Ministry of Finance, Government of India released a report recommending a law to ban cryptocurrencies in India. The proposed law criminalises carrying on any activity connected with cryptocurrencies in India, including mining, buying, selling or storing cryptocurrency, and the use of cryptocurrency as a means of raising funds or for investments. Criminal sanctions proposed by the draft law may extend to imposition of fine up to INR 250 million or imprisonment up to 10 years. The IMC reasons that such a ban is necessary since private cryptocurrencies (as opposed to digital currency issued by the State) lacks attributes of a currency, are subject to price fluctuations and cannot replace fiat currency.

Other concerns highlighted by the IMC in its report include pseudonymity associated with these currencies that make them susceptible to illicit activities, misinformed investments by consumers, market fraud and consumption of high amounts of energy resources to mine virtual currencies (VCs). The recommendations appear to conform with the earlier directions of the Reserve Bank of India (RBI) (India’s central bank) prohibiting entities regulated by RBI (banks, payments systems, etc) from dealing in VCs or providing services for facilitating any person or entity in dealing with or settling such currencies. Despite the proposed ban, the report expressly recognises the benefits of distributed ledger technology and its uses especially in the areas of trade financing, lowering costs of KYC and improving access to credit.

Interestingly, the IMC report comes a month after the G20 Leaders’ Declaration at Osaka wherein the world leaders acknowledged that crypto-assets do not pose a threat to global financial stability and that there is a need to monitor the developments and remain vigilant to the emerging risks. The cryptocurrency industry and the technology on which it is based is still evolving. Perhaps, this is why many jurisdictions are still considering and evolving possible ways to regulate such currencies with a view to leverage the potential of such cryptocurrencies and the underlying technology, while at the same time keeping in mind the financial stability implications and consumer interest. Against such developments, India’s stance on cryptocurrency appears to be premature.

The IMC report and the proposed law fail to make a compelling case for a complete ban on cryptocurrencies in India. Any deliberation on the regulatory approach for cryptocurrencies is contingent on how it is treated under law. Broadly, existing framework tends to divide crypto-assets into three main categories—(1) payment tokens that are primarily used as a digital means of payment or exchange; (2) utility tokens that grant holders access to a current or prospective service; and (3) security tokens that represent an investment similar to traditional securities. Interestingly, the IMC report notes that most of the countries studied permit some kind of trading or exchange of cryptocurrencies. For instance, while jurisdictions like Switzerland, Thailand, Japan, etc permit VCs to be used as a mode of payment, jurisdictions like Russia, Switzerland, Thailand, etc permit its usage for investment purposes and China prohibits all kinds of transaction in such currencies. The IMC’s proposed ban, based on the observation that cryptocurrencies cannot be used as a legal tender, fails to consider other possible use cases of cryptocurrencies for India. Further, alternative approaches to regulation of cryptocurrencies including regulation through the anti-money laundering framework (AML) (Australia, Canada, Switzerland), securities law (Singapore, Malaysia, etc) and payments services/payment systems law (Singapore, New York, etc) have not been considered by the IMC.

Another area of concern with the IMC recommendations is the actual enforcement of the proposed ban, which may drive businesses engaged in such crypto-assets underground, thereby pushing them further away from enforcement agencies. The report itself notes that despite the regulatory crackdown in China, trading in cryptocurrencies still continues and many traders use VPNs to circumvent the website ban. Notably, the record of discussion of the first meeting of the members of the IMC (as appended to the IMC report) notes that the committee itself acknowledged that the ‘banning option is very difficult to implement’. In fact, the record of discussion of the first IMC meeting indicates that the initial approach of the IMC was not towards a complete ban, but merely a restrictive regulation. Ironically, after proposing a law to ban cryptocurrency, the IMC recommends that the Government may consider establishing a Standing Committee to revisit these issues taking into account global developments.

The proposed law also highlights broader issues of legislative processes in India such as the need for an evidence based legislation with a more consultative process, involving stakeholder consultation, that was missing in the instant case. Before enacting a law to criminalise any activity involving cryptocurrency, there is a need for an in-depth study of the crypto-assets market in India to understand the crystallised and potential risks associated with cryptocurrencies for the financial market, consumers and investors in India.

In light of this, there is a case for Indian policymakers to reconsider the proposed law and extend the regulatory oversight to issuers, exchanges, and related intermediaries. The regulatory prescriptions through the AML framework, securities or payments law framework, or a bespoke regulatory framework need to be considered. The legal status of crypto assets and its tax treatment will need clarity. Regulatory sandbox approaches under close regulatory supervision may also be explored. This will require RBI to reconsider its draft regulatory sandbox guidelines which excludes products, services, and technologies associated with crypto-assets from sandbox testing. Given that the crypto-assets and the technology are still evolving, it is worthwhile to keep an open mind towards it through a meaningful regulatory framework as opposed to a premature ban.

Shehnaz Ahmed is a Senior Resident Fellow at the Corporate Law and Financial Regulation vertical of Vidhi Centre for Legal Policy, a New Delhi based independent think-tank.