The government has no intentions of granting private cryptocurrencies, such as bitcoins, the status of legal tenders, because it is wary of the damaging impact of any such move on financial sector stability. However, it will likely allow some space for innovation in the crypto ecosystem under a strict oversight mechanism.
While it is contemplating amendments to the Income-tax Act in the next Budget to make taxation provisions for gains and income from crypto transactions more explicit, any such change will have “only prospective effect”, an official source told FE.
A new crypto Bill, expected to be introduced in the winter session of Parliament starting November 29, is unlikely to impose a blanket ban on the entire crypto spectrum.
However, the space that is required to be open for innovations will be tightly regulated to prevent its abuse, another source said. The government is also aware of the concerns that any attempt to give legal tender status to private cryptos will severely undermine the existing monetary policy framework.
The Bill will provide a basic architecture to enable regulation of the crypto eco-system, which will leave adequate leeway for the government to intervene fast, responding to the evolving situation, the source said. It will seek to remove ambiguity over crypto’s status as an asset class and also facilitate the launch of any official digital currency. The Reserve Bank of India (RBI) is close to rolling out such a currency.
Official sources said in a meeting on November 13, chaired by Prime Minister Narendra Modi, it was decided that the cryptocurrency space wouldn’t be allowed to turn into a channel for money laundering or terror financing. Similarly, over-promising on returns and non-transparent advertising will be curbed. The government also decided to pro-actively engage with experts and key stakeholders to bolster the regulation, while taking “proactive and forward-looking” steps. At the same time, given the cross-border nature of crypto, the government will try and forge global partnership or strategy on the issue.
On November 18, Modi said that it is important that all democratic nations work together to ensure that cryptocurrency doesn’t end up in wrong hands.
Cryptocurrencies typically operate independently of a central bank. These are essentially digital currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds.
The authorities’ discomfit with crypto stems from the fact that it doesn’t derive its value from any underlying assets or earnings. Since its value depends purely on what an investor is willing to pay for it, the valuation can be easily swayed with speculative bids. Moreover, such currencies typically keep the owners’ identity anonymous, making it difficult to track their flow. This can pose serious security risks, as such currencies can be used to funnel black money or finance terrorism, etc.
For its part, the central bank has repeatedly voiced its concern over cryptos in recent years. On Tuesday, RBI governor Shaktikanta Das said there were “far deeper issues” involved in virtual currencies that could compound risks for economic and financial stability. Even stock and commodity markets regulator Sebi has expressed its reservations over such currencies. “It’s better to be safe than sorry when it comes to dealing with cryptos,” said an official with a regulator.
The Parliamentary Standing Committee on Finance, after a meeting on November 15, is learnt to have pitched for allowing crypto exchanges to function, albeit under strict regulations. “It’s better to regulate them, instead of putting a blanket ban on their transactions,” said a member of the House panel. “But we have to be sensitive to concerns over macro-stability as well. So, legal tender status should not be accorded to cryptocurrencies,” he added.
The Supreme Court last year set aside a 2018 RBI circular that had barred financial sector entities from offering services to any individual or business dealing in virtual currencies. This reflects the concern that extant laws are inadequate to deal with the proliferation of private cryptocurrencies. Solid legal and regulatory frameworks, therefore, could go a long way in removing any ambivalence over the issue.
In 2019, an inter-ministerial committee under then economic affairs secretary Subhash Garg had suggested that private cryptocurrencies be banned, and any activities related to virtual currencies be criminalised. Earlier this year, the government wanted to bring in the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to make the ban on private cryptos more explicit, among others. However, it now seeks to take a more nuanced view on the matter.