Should India Ban Cryptocurrency?

Created on 20 Mar 2021

Wraps up in 6 Min

Read by 5.4k people

Updated on 26 Mar 2021

Crypto guys are getting skeptical! The reason being, India is considering new regulations that would ban cryptocurrencies, and penalize anyone who holds, buys or mines bitcoins and other digital currencies! But why?

Well, before we jump into the issue, you should realize the magnitude of these regulations. Just so you know, this will be the toughest of such regulations worldwide. For instance, China, too, has banned the mining and trading of cryptos, but not the possession. If the proposal becomes a law, possession of cryptos will also be banned in India!

But why is India going so harsh on Cryptocurrencies? And who stands to lose more if this regulation goes live? And at the outset, what things do we know about the proposal yet? Wanna find out? Then, read on.

Government's proposal to ban Cryptocurrencies in India

If you believe the hearsays of the proposal, this will be a blanket ban, meaning all digital currencies will go unoperational in India once the proposal becomes a law. And what's more is that if you hold, mine or buy digital currencies beyond the effective date of the regulation, you would be penalized. And this penalty may, as per a 2019 government panel, carry upto 10 years of imprisonment!

However, you'll have a buffer period of upto 6 months to sell-off all your crypto-holdings. Notwithstanding this, you may be put behind bars.

FYI, this isn't the first time such a proposal is being planned. In fact, there have been a series of setbacks and improvements in this direction. In the Union Budget of 2018, the then FM, late Shri Arun Jaitley, declared Cryptocurrencies as NOT being a legal tender. (if you aren't aware, legal tenders are coins or notes that allow you to buy stuff in that country, for eg: Indian Rupees). So, basically, Cryptos are only allowed to be held as assets and not to be used as currencies. Or better, you could call them "Crypto-assets".

In the same year, the RBI banned banks from dealing with crypto exchanges. In contrast to this, in 2020, the SC overturned the RBI's ban and allowed crypto platforms to get back into the business. In Feb 2021, FM Smt Nirmala Sitharaman reiterated the government's plan to ban crypto-assets and launch a RBI-backed digital rupee. And this weekend, a harsh version of the proposal went rife in the news again! So, there you are.

Anyway, what prompted the government to ponder over this matter so much? Well, let's discuss.

Why is the government planning to ban cryptos?

Let's think about currencies. Imagine one day, $1 equals Rs. 80 and in an hour, the same $1 begs only Rs. 70. You will have a lot of difficulties transacting with international peers. And when the rates are changing so frequently in matters of seconds, none of your hedging technique will work. Ultimately, the country will have to lose precious money. Luckily, that isn't the case yet. However, with cryptos as currencies, which are 10 times as volatile as the $-Rs pair, you can't keep volatility issues at bay! Even there have been instances when prices of Bitcoins jumped over 3000% in a matter of just 3 months! And can you trust such a volatile currency for your international trade settlement? NO, right?

So, the government's feelings are in line with what you feel now. They are well aware of the volatility of cryptos, which makes it unstable. They also feel that acceptance of cryptos as currencies will hurt our fiat currency, Indian Rupees. Moreover, they fear that the anonymity of cryptos could also facilitate it to be used to fund illegal activities.

And hence, the use of cryptos as currencies has already been eliminated by them on the grounds of national security risks. Instead, they want to enable the RBI to develop a framework for an official desi crypto, or as they call it, 'a digital rupee'.

So, why not use it as an asset, you ask? Like why not let investors buy and hold bitcoins, square-off at record highs, and reap humongous returns? See, however lucrative it may seem, you must know that cryptos aren't backed by any tangible asset. So, you can't be sure of whether a price rally is really a rational rally or just a bubble waiting to burst. It only runs by demand and supply. And you can't blindly bet on it, the way noob investors are doing now.

Even ace investor Rakesh Jhunjhunwala calls Bitcoins as the "speculation of the highest order". And truly so, an asset class that's so volatile is exposed to risks like difficulty in price discovery, market manipulation and vulnerability to hacking. Thus, the government wants to ban the trading and possession of bitcoins as well.

And what if it really does?

What do we lose if cryptos are banned?

So, as it seems, the government wants to ban cryptos but not blockchain! Just think about it, allowing blockchain without cryptos would be like letting a car run without fuel! Because almost all blockchain companies require cryptographic tokens to validate the information and power the process. So, as it is evident, blockchain loses its existence if cryptos are banned. And then, you would have to let go of this decentralized triple-entry system of tomorrow.

Talking of the national security issues, the government says that cryptocurrencies are used to fund criminal activities and, thus, should be banned. So, if people use US$ for criminal activities, will you ban it? Does it make any sense? Why not regulate it, instead? And by the way, according to a Chainalysis' 2021 report, in 2019, criminal activity represented only about 2.1% of all cryptocurrency transaction volume. So, do you think it's a real threat to national security?

Look at it from a business and employment perspective. A ban could eliminate investments in Indian blockchain startups. Venture Capital firms like Sequoia are investing in Indian blockchain startups, and banning cryptos would make them shut down and move overseas. Moreover, these over 300 Indian blockchain companies employ many software developers and also pay taxes to the government. Banning cryptos would essentially mean mass unemployment and loss of revenue for the government.

Consider crypto-assets from an investment perspective... Okay, we agree that they're highly volatile. But does that mean you should straightaway ban it? See, new sectors and asset classes are often volatile. But you can reduce the risk with some kind of SIP cost-averaging strategy. All you need is some planning, regulations and awareness. A blanket ban is not a viable solution.

Anyway, even if you go about banning it, what do you think, people won't try and find leeways? The truth is, they will. They'll go on their own terms. The crypto mechanism will go underground, and fake exchanges will emerge. After all, you can't hold Indians back from boarding the global tech train.

And talking of the 'digital rupee', what does the government aims to achieve out of it is unclear. India would not be the only one proceeding with its national digital currency. Eventually, each country will come up with its own, and things will be the way they used to be because the digital rupee is not the solution to India's collateral problem of sustaining its imports and exports to support India's population. And by the way, India already has the best payment system -- UPI. Why would the government want to conflict with its own successful payment system? This does not make much economic sense.

Eventually, banning cryptos would mean confiscating over Rs.10,000 Crores from 75 Lakhs people! And how much this makes sense, who knows?!

The bottom line

Look at the international scenario, and you'll know almost every large economy is having a more embracing attitude towards cryptos. Whereas due to regulatory uncertainty, India's participation in this tech revolution is comparatively very low. Meaning, there is a huge potential for India to explore and build a competitive advantage.

And here's what Balaji Srinivasan, former CTO of an American crypto exchange platform, has to say about the impact of the ban on the Indian economy - "India could get 20% poorer from what it could have achieved over the five-year term. It is almost like banning the internet for 5 years."

Hence, it's clear that the proposed blanket ban would actually be detrimental to India's cause, and what we need is regulations instead. We know you would call us pro-crypto, but that doesn't change the facts. And if you ask us what the government is gonna do, we don't have an answer for you.

But this we can say... don't ban cars for causing pollution. Instead, make the engines more efficient. Eh, gotcha?

Anyway, what do you think? Ban it or regulate it? Tell us in the comments below.

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Abhishek Sahoo

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Abhishek has a love for numbers and words alike. With a passion for finance and interest in writing, he’s blending both as a Finance Content Writer at Finology. He writes to simplify the toughest of the technical stuff for readers and tries to make the reading exercise interesting. He is a CA Final candidate and aims to pursue a management degree from a top-notch b-school.

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