In 2021, new cryptocurrency disclosure rules were enacted in India. Any business dealing in cryptocurrencies must now report their entire crypto assets to the government as a component of the financial reports, starting today. There are more than 200 blockchain startups in India, with most of them focused on cryptocurrencies (fun fact – ItsBlockchain was one of the earliest blockchain startups in India!). Despite reports of a possible ban on cryptocurrency in India, policymakers who recognize the vast worth of cryptocurrency and its effect on our economy should acknowledge a variety of use cases. Those of India’s well-known crypto startups have recorded a 400 percent rise in trading volumes and user signups since the ban was lifted.
Origin of Cryptocurrency and Its Rise in India
Despite the fact that Bitcoin was created in early 2009, the first rumblings in India began in 2012, when freelance software developers in India began receiving Bitcoin payments from their employers in the United States or other countries to escape high transfer fees. Due to reasons such as intrinsic security, lower transaction fees, absence of central bank intervention, ease of access and use, and universal acknowledgement, cryptocurrencies are raising grounds in India.
Cryptocurrency exchanges initially appeared in 2013, and the first approach to cryptocurrencies took the form of RBI alerts to the wider populace about the risks that involved in cryptocurrencies within several months. The RBI has consistently issued similar alerts to consumers, holders, and traders of digital currencies through years.
However, after the government’s focus on digital payments led to alternatives to conventional online transactions such as cryptocurrencies pushing their way into the mainstream conscience, transaction rate and acceptance of cryptocurrencies in India finally rose only after the demonetization of greater currencies in November of 2016, with the government’s focus on digital payments contributing to substitute for conventional digital purchases.
As a result of this surge in popularity, a range of cryptocurrency exchanges opened in India between 2012 and 2017, offering the Indian cryptocurrency market with required depth and scale. Famous exchanges like Zebpay, Coinsecure, Unocoin, Koinex, Pocket Bits, and Bitxoxo were among them.
As for crypto regulation in India, the Indian government was expected to outlaw cryptocurrency while also announcing a sovereign digital currency. This came amid several industry objections and an effort put by the Reserve Bank of India (RBI) to impose a ban in 2018 by prohibiting banks from dealing with cryptocurrency. In March 2020, the Supreme Court ruled that India’s crypto ban unconstitutional.
Any business that “has exchanged or invested in cryptocurrency or digital money during the financial year” is now required to report all cryptocurrency holdings, total gains and losses, and transactions or rewards earned from anyone trading or investing in cryptocurrencies, per the Ministry of Corporate Affairs (MCA), an Indian state regulatory authority on corporate affairs.
Emergence of CBDCs and Cryptocurrencies
In a financial industry, a central bank digital currency is the digital form of cash. As a central bank could never get out of the money it issues, it inherently provides a high degree of reliability. The Reserve Bank of India (RBI) admitted in early 2021 that it is looking into the possibility of issuing a CBDC for India. CBDC is not really a new topic of discussion. Recent events, notably the growth of cryptocurrencies and stable coins, as well as a willingness to compete a contributing role in the global CBDC debate, have amplified CBDC research in several countries.
CBDC must be differentiated from other types of private funds, such as e-money (money deposited in digital wallets) and deposit accounts, which can be transferred electronically via cards or mobile wallet apps. Private entities, such as banks or non-banks, issue such capital, which is not a responsibility of the central bank.
Unlike CBDCs, which would be the central bank’s responsibility, cryptocurrencies have no such liability, and their worth is based on the assumption that they will be purchased and would be used by others. Given the limited usage and price fluctuations, such currencies often become a failure to fulfil the duties of currency.
CBDC growth is driven by policy goals such as coping with the reduction in cash usage and fostering innovation, competitiveness, and resilience in the payments system in advanced jurisdictions where virtual payments adoption is elevated and cash use is decreasing. Financial inclusion continues to be a key factor in developing economies with limited digital payment penetration.
CBDCs can be issued in one of three ways:
Direct: distributed by a central bank to banks and to customers; the central bank is responsible for CBDC payments.
Indirect: Where banks issue digital currencies to customers; the bank or market participants are liable for CBDC payments.
Hybrid: Market participants aboard customers and distributed CBDCs; the central bank has a position on payments.
Other difficulties include the burden on a central bank’s operational capacity to issue a CBDC, security threats, and reputational concerns to central banks, among others. Major adoption of privately issued currencies, or perhaps even global CBDCs, might endanger a central bank’s ability to carry out its monetary policy and economic security functions.
CBDC distribution in India, on the other hand, may not be seen as a response to cryptocurrencies or secure coin plans, but instead as a concerted attempt to use technology to achieve public policy goals.
Legal Constructs Reviews: A Timeline of Crypto Regulation in India
2013 – The first example of skepticism against cryptocurrency dates back to December 24, 2013, when the RBI issued a press release warning consumers, holders, and traders of virtual currencies (VCs), such as Bitcoins, litecoins, bbqcoins, dogecoins, and others, about the possible financial, administrative, legal, consumer safety, and security risks they face.
2015 – At the point, R Gandhi, the RBI’s deputy governor, expressed concern about cryptocurrencies, claiming that they could be used to finance illegal activities like money laundering, terrorist financing, and financial fraud.
2017 – The Reserve Bank of India has issued a second warning, this time warning consumers, holders, and traders of digital currencies. Later, the Digital Assets and Blockchain Foundation of India was established by crypto-firms. The government establishes an Inter Disciplinary Committee to investigate crypto-currencies and their development.
The report of the Inter-Disciplinary Committee has been submitted. The report wasn’t really released to the public. A petition to the Supreme Court has been filed to regulate crypto-currencies.
2018 – The Ministry of Finance contrasts crypto-currencies to Ponzi projects and warns consumers not to invest in them because they are not legal tender in the nation. The Reserve Bank of India has issued a circular prohibiting banks from trading with crypto-firms and cryptocurrencies. According to a Right-to-Know request, the RBI’s April 6, 2018 circular prohibiting banks and other controlled entities from interacting with digital currencies was not supported by public or independent study. The Supreme Court has refused to issue an injunction against an RBI circular prohibiting all controlled entities from trading in digital currencies.
2019 – RBI forms an inter-departmental committee to investigate the viability and desirability of implementing a CBDC. The Finance Ministry’s virtual-currency committee proposes that India ban cryptocurrencies and establish a digital rupee. Shaktikanta Das, the Governor of the Reserve Bank of India, says it is too early to comment on CBDCs.
2020 – On the basis of proportionality, the Supreme Court of India overturns the Reserve Bank of India’s April 2018 circular.
2021 – The Indian government is proposing to bring in a new bill called “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021,” which would outlaw private cryptocurrencies in India with other exceptions in order to encourage cryptocurrency’s proven technologies and trading, as well as provide a basis for the development of an authorized digital currency issued by the RBI. As per proposed amendment to Schedule III of the Companies Act, 2013, the Government of India has ordered that companies report their investments in cryptocurrencies beginning with the recently started financial year.
Crypto Policy Suggestions for India: A Timeline
2017 – Central banks would have to understand not only customer expectations for privacy and potential productivity benefits – in terms of transfers, clearing, and settlement – but also the risks it may entail for the financial system and the broader economy, as well as any consequences for monetary policy, according to a paper released by the Bank for International Settlements (BIS).
2018 – BIS publishes a comprehensive analysis on CBDCs. As per the BIS’s annual study, the proliferation of crypto-currencies adds complexity for regulators and can necessitate new techniques and skills.
2019 – The Cambridge University Centre for Alternative Finance has released a report on the global regulatory landscape for crypto assets. Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers is published by the Financial Action Task Force.
2020 – Legal and Regulatory Considerations for Digital Assets is a report published by the Cambridge University Centre for Alternative Finance. The Bureau of Industry and Security (BIS) has released a paper on technology requirements for retail CBDCs. Former finance secretary restates his viewpoint on private crypto-currencies, claiming that rather than blockchain-based technology, generating a Digital Rupee through digital wallets might be more cost efficient.
Ripple Inc. has released a policy paper on the control of crypto assets in India. The G30 Working Group on Digital Currencies and Stablecoins has released a report on the subject. The BIS publishes a paper outlining the criteria and principles that central banks should adopt when creating CBDCs.
2021 – The third edition of Blockchain and Crypto-currency Regulation for 2021 is published by Global Legal Insights, which examines regulatory approaches and market innovations. In India, CREBACO and Khaitan and Co. have published guidelines for controlling crypto properties. The advantages of cryptocurrency were illustrated in the Ministry of Electronics and Information Technology’s Draft National Strategy on Blockchain, 2021.
Crypto Regulation in India: What’s Next?
As a generation, we will undoubtedly see more technological advancements, and each development will bring with it new threats. It is important to keep updating the legislation in order to keep it up to date with new innovations. A well-structured cryptocurrency legislation with regard to crypto trading exchanges and blockchain technology is the need of the moment, and as a result, such regulation requires further focus.
Hitesh Malviya is the Founder of ItsBlockchain. He is one of the most early adopters of blockchain & cryptocurrency enthusiast in India. After being into space for a few years, he started IBC in 2016 to help other early adopters learn about the technology.
Before IBC, Hitesh has founded 4 companies in the cyber security & IT space.
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