Cryptocurrency is Virtual, Risks are Real – The Indian Dilemma


A cryptocurrency is a digital currency represented by an encrypted data string. A peer-to-peer network known as a blockchain oversees and organises it, as well as serving as a secure database of transactions such as buying, selling, and transferring. Cryptocurrencies, unlike actual money, are decentralised, meaning they are not issued by governments or financial organisations. Cryptocurrencies are created (and secured) by cryptographic methods that are maintained and confirmed in a process known as mining, in which transactions are processed and validated by a network of computers or specialised hardware such as application-specific integrated circuits (ASICs). The miners that run the network are rewarded with cryptocurrency as a result of this operation.

The Present Situation

Is it unlawful in India to use cryptocurrencies and virtual digital assets (VDAs)? While every investor wishes to see what lies beneath the fine lines, the short and sweet answer is that VDAs – of which cryptocurrencies are a subset – are not prohibited in India as of March 2022. VDAs, as well as cryptocurrencies, can be traded online through cryptocurrency exchanges. However, in terms of governmental regulations, the sword of Damocles hangs over the future of cryptocurrencies in India. It’s worth noting that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is still pending in Indian parliament in a terrifying form (hopefully by May 2022).  The bill intends to outlaw all private cryptocurrencies in India, but with several exclusions to promote blockchain technology. It also establishes a framework for the Reserve Bank of India to issue central bank digital currency (CBDC).

The silver lining in the cloud is India’s recent union budget, in which the finance minister defined Virtual Digital Assets (VDAs) and proposed a 30% flat income tax on capital gains from VDAs (including cryptocurrency), which many analysts have interpreted as a positive step toward a shift in Indian lawmakers’ stance. However, just a few people may be aware of what is available in the store.

The Pie’s Size

On the business front, according to coinmarketcap, the global market capitalization of cryptocurrencies as of March 09, 2022 is close to USD 2 trillion, with over 10,000 cryptocurrencies in circulation. According to a survey provided by chainanalysis, India is ranked second in the world for Crypto Adoption Index (2021). In one of their interviews, co-chairs of the Internet and Mobile Association of India (IAMAIBlockchain )’s and Crypto Assets Council (BACC) stated that approximately 15-20 million cryptocurrency users in India hold around USD 0.9 billion (INR 6.6 billion) in crypto assets, making India a potential market for cryptocurrencies and other VDAs. According to a monograph released in India, there are roughly 350 crypto start-ups and two crypto unicorns by the Observer Research Foundation.

Government Policy

The Reserve Bank of India (RBI) has taken a strong stance against private cryptocurrencies, but it is a strong supporter of Central Bank Digital Currency (CBDC). Cryptocurrencies, according to RBI Deputy Governor TR Sankar, are a danger to the country’s financial and macroeconomic stability. He also issued a warning to investors. The RBI’s circular dated April 06, 2018 expressly prohibited all regulated banks, including cooperative banks, from dealing in virtual currencies (VCs) or providing services to assist any person or entity in dealing with or settling VCs. It also prohibited banks from maintaining accounts, registering, trading, settling, clearing, lending against virtual tokens, accepting them as collateral, opening accounts with exchanges dealing with them, and transferring / receiving money in VCs.

It further said that any current relationships with such clients should be terminated within three months of the circular’s date. IAMAI challenged the circular in the Supreme Court of India, and on March 4, 2020, the court ordered the RBI circular to be set aside. The RBI issued a circular on May 31, 2021, asking banks not to use its 2018 order as a grounds to refuse banking services to customers who trade cryptocurrencies. Although numerous important developments have occurred since then, including a high-level discussion on VDAs convened by Prime Minister Modi on November 21, there has never been a genuine ban on any part of crypto currency.

The volatile nature of cryptocurrencies’ fluctuating values, the lack of a centralised authority, no explicit grievance redress mechanism, lack of transparency, and a sense of overpromise – the dangling chimaera of big profit, especially to young customers – all worry financial regulators and legislators. Financial authorities, particularly the RBI and SEBI, prioritise end-client safety. The use of renowned influencers to portray over-promise and beautiful ads hides the true extent of the hazards involved with digital assets and cryptocurrencies. With this in mind, India’s Advertising Standards Council of India (ASCI) – the industry self-regulatory organisation (SRO) – has issued advertisement guidelines for the promotion of VDAs, which will take effect on April 1, 2022, and require all VDA products and services to include the following disclaimer: “Crypto products and Non Fungible Tokens (NFTs) are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.” This is yet another step toward raising public understanding about the risks involved with cryptocurrency.

The Road Ahead 

Finally, the main question is what will happen to cryptocurrencies in India once the law is filed in parliament, taking into account business, technology, and regulatory considerations. Will the government follow RBI’s advice, despite lobbying efforts, and choose a different path? The deputy governor of the Reserve Bank of India has previously hinted at that. In a recent speech on February 14,2022, he stated unequivocally that four out of five cryptocurrency investors have ticket sizes of less than INR 10,000, with an average ticket size per account of around INR 1566, which is not a large investment at the moment, but could be large in the future if allowed. If cryptocurrencies are outlawed in India, these young investors will still be able to use them outside of the country. Raguram Rajan, the former Governor of the Reserve Bank of India and a brilliant economist, shares similar views on cryptocurrencies.

The dilemma that India’s public policy faces is whether the country’s goal, timing, and degree of maturity of end consumers are ripe for cryptocurrencies. They will go deep into the veins and arteries of this country if they are allowed openly, and given that 65 percent of our population is under the age of 35, and practically every young woman and man is connected to a digital highway through her smartphone, the repercussions could be unforeseen. Policymakers and multilateral agencies such as the IMF and the World Bank are still seeking for evidence and lessons learned from nations such as El Salvador, where Bitcoin became legal cash in September.

In India, IAMAI and BAAC may be able to persuade policymakers to enable a self-regulatory system and take an incrementalist policy approach to VDAs through persistent policy engagement. Rather than flashy ads, crypto currency service providers should engage on awareness and stakeholder education infrastructure. They must participate in, advocate for, and benefit from techniques such as the RBI’s regulatory sandbox framework. Advocacy activities must take a hybrid strategy, which necessitates co-habiting with legislators and regulatory bodies to assuage their concerns about end users’ interests, not just in big cities, but also in rural villages.

On a philosophical level, the birth of cryptocurrency is similar to an antithesis to the current financial system. The reality, on the other hand, is rather different. To live and thrive, the concept and technique may need to adapt to current realities, allowing for breakthroughs such as Decentralized Finance (DeFI), Decentralized Internet, Decentralized Autonomous Organizations (DAOs), Smart Contracts, and Enterprise use cases. In the Indian ecosystem, cryptocurrency as a medium of exchange may still have a long way to go. Crypto exchanges, experts, and lobbying organisations must remember an old adage: Slow and steady wins the race; they must not kill the golden goose in the zeal of dynamic technology.