The Indian government must not permanently ban cryptocurrency
(also referred to as ‘token’ or ‘coin’ or
‘digital currency’). Any permanent ban on cryptocurrency
would only reflect a lack of understanding of the positive impact
the technologically powerful cryptocurrency can create on the
Indian economy. Many governments have expressed fear over tokens as
there is no central authority to regulate the value or oversee the
exchange of tokens. The fear stems from an inability to regulate
the crypto market or monitor the valuation or track the transfer of
cryptocurrency. With fiat currency, governments can do all of the
above. Most central banks world over, in conjunction with their
respective governments, pass monetary policies each year. The goal
of the monetary policies is to specifically control the global
value of money. The government through its monetary policies
regulates employment, spending, investments and inter alia controls
investment. The Indian government can mitigate the above threat by
issuing Central Bank Digital Currency (“CBDC”). CBDC
shall be backed and controlled by the RBI. CBDC would have
legitimacy and would encourage the public to purchase/trade. It
would have the ability to become mainstream (as it is backed by the
Central Bank) and help to push India towards a cashless
society.

CBDC can help a significant population group to access the
financial system without access to the banking system. Further, if
CBDC became popular, the government could adopt it as a mechanism
to monitor payments to public officials.

Many nations such as China, Sweden, Canada, Switzerland, and
Singapore are engaged in developing a pilot of their own CBDC. CBDC
can help develop the digital economy and provide for more financial
stability once it has the full backing of the government. Moreover,
there may be more trust in the financial systems as there shall be
less volatility while conducting transactions through CBDC. A CBDC
shall also help reduce the shadow trading or the black
cryptocurrency markets and the RBI shall be able to control cash
supply more effectively. A CBDC shall provide effective competition
to private cryptocurrencies such as Libra. Moreover, money
laundering issues can be solved if there is a central backing to a
digital or crypto rupee. Concerns regarding the security in dealing
with cryptocurrencies can be suitably dealt with. Cryptocurrency is
backed by blockchain technology protocols, which means that every
transaction is recorded as a part of Distributed Ledger Technology
(“DLT”). DLT simply means that the transaction shall be
validated by several computer networks before the transaction is
recorded on the DLT. DLT is known to be a foolproof technology and
an individual’s cryptocurrency wallet cannot be hacked like a
traditional online wallet. If the Indian government were to release
CBDC, such cryptocurrency could bear two layers of protection
– with one layer through the DLT technology and another
through its own centralised system.

The development of cryptocurrency business i.e. Initial Coin
Offerings (“ICOs”), Security Token Offerings
(“STOs”), cryptocurrency exchanges, the exchange of
cryptocurrency for goods and services, and the creation of CBDC
would collectively help in building blockchain technology platforms
which can have a variety of use cases in other fields. For example,
transfer of land, when migrated to a DLT platform, would create
transparency on all land transfers and potentially reduce
litigation on matters concerning illegal land grabbing. Most
importantly, it would eliminate all forms of manipulation of
land-related documentation, as the transactions are recorded on
DLT. Moreover, land and real estate tokenisation will increase
liquidity as the value and ownership can be digitised and put into
fractional tokens to be distributed around the globe. This gives
investors the right to own a portion of real estate, thereby
increasing liquidity of the underlying asset. This ultimately could
open yet another avenue to draw in foreign direct investment in
real estate.

Banning cryptocurrency negatively impacts early-stage startups
from raising funds. The ongoing COVID-19 pandemic has caused
widespread recession across India. Early-stage startups are likely
to struggle in raising funds. An Initial Coin Offering
(“ICO”) is one such way for early-stage startups to raise
funds. In an ICO, the issuer publishes a white paper with details
about the project for which money/investment is intended to be
raised from the public. Subject to conducting a risk assessment of
the proposed project, interested members of the public may
subscribe to the tokens offered on the ICO with either fiat
currency or other tokens of repute (e.g., bitcoin).

Moreover, crowdfunding activities could be carried by the
introduction of a token and associating the rights to it as a
normal share would have. Hence, the ban on cryptocurrency would
impact such effective alternative sources of funds for early-stage
startups.

The government’s position so far seems to be that, in an
ICO, there is the potential of laundering money to fund projects
and also the inability to track the source for the payment for the
purchase of coins in an ICO. However, the government’s
reasoning is flawed.

The RBI in India regulates payment systems. It is therefore
capable of tracking all coin purchases in an ICO by regulating it
within the framework of a payment system. Further, the Indian
government can adopt regulations to regulate an ICO. Some measures
can include: Limiting the investment amounts in an ICO for each
individual investor; Requiring the tokens being issued through an
ICO to be under the purview of the Securities Exchange Board of
India (“SEBI”) and amending the SEBI (Listing Obligations
and Disclosure Requirements) (“SEBI LODR”) to regulate
cryptocurrencies issued under an ICO; Mandating the ICO issuer to
publish their project on SEBI website; and Bringing the purchase of
coins through an ICO under the Prevention of Money Laundering Act,
2002. As far as STOs are concerned, the issue associated with it is
the volatility in the value of such STO and the ability of the
government to regulate the same. The government could treat such
STO as any other security and can amend the Securities Contract
Regulation Act, 1957 to bring STOs under the framework. As stated
above, issuers of STOs may be mandated to make disclosures as
required under the SEBI LODR. STOs may be deemed to be an
unregulated deposit under the provisions of the Banning of
Unregulated Deposit Schemes Act, 2019 (“BUDS Act”), and
therefore may entail a monetary penalty of up to Rs 10 lakh, and
imprisonment up to five years as per Section 21 of the BUDS Act.
Accordingly, SEBI would do well to take note of the nature of STOs
and regulate them, providing comprehensive classification on how
STOs be deemed as securities. One of the main sources of business
in the crypto-asset markets is cryptocurrency exchanges. While
cryptocurrency exchanges are currently deemed legal in India,
commercial and scheduled banks have been reticent with regard to
offering their services to cryptocurrency exchanges and their
customers.

To give comfort to banks, the government and the RBI could pass
regulations to obligate cryptocurrency exchanges to conduct
comprehensive KYC procedures on their end customers/holders of
cryptocurrency. Such KYC norms will help the government to track
cryptocurrency traders and their source of funds.

Moreover, crypto assets may be regulated under the Prevention of
Money Laundering Act, 2002 (“PMLA”), by way of making an
amendment to include cryptocurrency businesses as “designated
businesses and profession” within Section 2(a) of the PMLA,
and this would also bring crypto businesses under “client due
diligence requirements” as given by Rule 9 of the Prevention
of Money Laundering (Maintenance of Records) Rules. Globally,
cryptocurrency is slowly moving into the mainstream. A failure to
regulate the cryptocurrency market would not have the effect of
halting the cryptocurrency sector but rather have the effect of
taking it underground, bringing into life all of the
government’s fear concerning cryptocurrency. Cryptocurrency can
be a way to raise public funds and create productive commercial
activity within the economy. Therefore, the government should
strive to understand the immense potential and the use of
cryptocurrency and take initiatives to regulate the cryptocurrency
market rather than impose any form of prohibition. A note has been
moved by the Ministry of Finance for consultations, post which it
shall be sent to the cabinet. The note is most likely to introduce
the Banning of Cryptocurrency and Regulation of Official Digital
Currency Bill, 2019 to the parliament. If a Bill banning
cryptocurrency is passed, it would cause a huge shock to the
fledgeling cryptocurrencies, crypto exchanges, investors and the
DLT market space, which is avoidable at best.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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