India must democratise cryptocurrency; deals face FEMA compliance, investor identity, and other legal hurdles

In India, crypto transaction volumes are swelling and 8mn investors now hold 100bn rupees ($1.4bn) in crypto-investments.(File Photo)

By Rajesh Mehta and Uddeshya Goel

13 years after being invented by Satoshi Nakamoto, Bitcoin(BTC) is bigger than ever in 2021. The combined market cap of cryptocurrencies has been on a tear as institutional investors like Morgan Stanley, Grayscale, MasterCard dabble in crypto as a way to boost returns on cash in a world of near-zero interest rates. Countries like the US, UK, Canada, Singapore, Switzerland have already mass adopted the idea of the nascent industry and its benefits, creating better regulation and functions for crypto both as an asset and utility. Several crypto-friendly banks like National Bank of Canada, Barclays, USAA and crypto-accepting companies like Microsoft, Starbucks, Tesla, PayPal have also emerged giving confidence to the long-term stability of the instrument.

However, recently, the government of India reaffirmed its position on private cryptocurrencies by invalidating them as legal tender and announced to take measures to eliminate the use of crypto-assets in financing illegitimate activities or as part of the payment system. Although being optimistic about blockchain technology in the financial system arena, the Ministry of Finance has proposed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, criminalising possession, issuance, mining, trading, and transferring of crypto-assets.

In India, crypto transaction volumes are swelling and 8mn investors now hold 100bn rupees ($1.4bn) in crypto-investments, with new registrations up 30-fold from a year ago. Millennials, who have logged 300% plus returns, are already embracing Bitcoin as a mainstream investment class and as a new digital gold. The government fears that the big spur poses a major threat to the currency stability and financial sovereignty of the country. Currently, under the Liberalised Remittance Scheme(LRS) of the RBI, a person is allowed to invest only $250,000 per year in overseas investment instruments to keep a check on the current account deficit and the forex reserves. However, cryptocurrency creates an anonymous identity of the investor and makes it impossible for the government to track the quantum of intercountry cash flows.

In India, catalysed by the Covid-19 pandemic, payments worth almost $60bn are now taking place every month via wireless devices online, clocking a growth of 76% in one year. With this rapid adoption, India witnessed three times more cyberattacks than in 2019. The use of Crypto’s distributed ledger technology allows faster, direct transactions by the users, with no central institution in between. According to experts this will keep a track of every digital transaction and make it impossible for any third party to breach the system, making the transaction virtually secured. Adoption of Crypto in payment systems can enable seamless calculation of credit score of the borrowers, helping the lenders in clearing credit applications.

Recently, $ 2.2mn in donations in crypto assets were raised by a Covid-Relief fund for India. Prominent personalities like Ethereum creator, Vitalik Buterin, former Coinbase CTO, Balaji Srinivasan, and Australian cricketer, Brett Lee. However, there are many legal hurdles in the conversion process of the crypto into INR, before it can be put into use. The transactions must comply with the Foreign Contribution Act, 2010, and the Foreign Exchange Management Act, 1999, which is quite uncertain keeping in mind the government’s stance on cryptocurrencies.

Emulating China, India should also deliberate in launching its own Central Bank Digital Currencies (CBDCs), a digital payment instrument utilising the same crypto technology, denominated in the national unit of account that is a direct liability of the central bank. If successful, the currency will improve targeting of monetary and fiscal policy, promote financial inclusion and universality, reduce cost and improve security in domestic payments. A sovereign digital currency also provides a functional alternative to the dollar trade settlement system and dilutes the impact of any sanctions or threats of exclusion both at a country and company level.

Although the Sage of Omaha, Warren Buffet has proclaimed crypto as a “zero value instrument”, the fundamental utility of the digital coin can be an inflection point in the working of the money network, integrating the global financial ecosystem. India has an inbuilt IT powerhouse, with robust human capabilities to harness the benefits of this new-age technology. Instead of outsourcing the same knowledge to foreign countries, an indigenous stage must be formed to foster talent in the crypto space. Currently, India needs a farsighted, proactive and open-ended policy that can liberalise the use of cryptocurrencies, fabricate a permissive crypto infrastructure and at the same time protects the financial sovereignty of the country. India has to democratize crypto sooner or later, to be in line with the world, so why not now?

(Rajesh Mehta is a leading consultant and columnist working on Market Entry, Innovation & Public Policy. Uddeshya Goel is a financial researcher with specific interests in international business and capital markets. Views expressed are authors’ own)