Shortly after Arun Jaitley’s budget announcements, any search for the keywords “Bitcoin” and “India” would have turned up tens of articles spelling out similar words of doom: this was it. The Bitcoin party was over. Cryptocurrencies were illegal. They would all be eliminated from the system. Twitter was ablaze with doomsayers advocating panic selling, getting out while you still could.
Why, then, are Bitcoin and Ether still trading at values close to global prices? Shouldn’t everyone have left the market? Shouldn’t the values be at, or close enough to, zero? Why are people still actively trading it in the Indian crypto exchanges?
Legal tender and currencies
For someone listening to official declarations about cryptocurrencies for the first ever time, hearing Jaitley utter the words, “the government does not consider cryptocurrencies legal tender” might seem shocking, almost as though the sky had fallen. At the outset, doesn’t it sound like he just declared cryptocurrencies illegal?
The important distinction to understand here is that “legal tender” is not the same as simply “legal”. And considering the difficulty in even classifying cryptocurrencies as currencies vs. commodities, there is more to the legal tender statement than meets the eye.
Legal tender refers to a medium of payment recognized by a legal system (e.g. the RBI) to be valid for meeting a financial obligation (e.g. paying for groceries). What this could mean is that any business currently accepting Bitcoin or any other cryptocurrency as legal tender can no longer do so within the financial framework in the country. The status of legal tender exists for very few categories worldwide, and typically only covers government-issued currencies within each country. Take, for example, the Indian Rupee: while it is accepted as legal tender in Nepal and Bhutan, the Nepalese rupee and the Bhutanese ngultrum is not given the same recognition in India. Most countries have strict regulations on what foreign currencies, if any, can be given the status of legal tender within their borders. After all, you would not expect your neighbourhood grocery store to accept the US Dollar for payments. While some countries with progressive legislation (notably Japan and German) recognize Bitcoin as legal tender, this is not the norm even in jurisdictions where the corresponding trade or ownership of the very same asset is fully legal.
The recent budget announcements do not, in any way, cover the use of cryptocommodities as assets or investments, which is arguably the largest utility currently in the country. This is the direct reason why none of the crypto exchanges operating in the country have any plans of shutting down.
Cryptocurrencies or cryptocommodities?
The distinction between a currency and commodity might have been starkly clear a decade ago, but is hardly the case now. With the rise of cryptocurrencies, the distinction is entirely lost. Bitcoin can claim that it was always intended as a currency and a store of value, but the rest of the blockchain ecosystem is entirely different. Ether exists as a currency within its network and can be used for payments at a range of websites, but is also an asset that is being invested in through traditional commodity markets. Golem is a token serving as a currency within its network, but can also be an asset since it represents ownership in the computing clusters. The Dai stablecoin is even more of a mindbender as it is
attempting to be a currency that is directly tied to the value of collateralized debt positions (mostly comprising other cryptocommodities).
Additionally, the process in which these are created adds significant confusion to their definition. Borrowing the lexicon from the mining side of Bitcoin, the mined commodity isn’t produced or controlled by a central financial body, but simply by the capabilities of the mining equipment. If the price of an asset isn’t linked to any sort of economic framework (apart from the mining costs), how does one even bring it into currency/commodity terms? And if an asset valued at $10,000 is being created out of nothing but electricity, how should it be governed for taxes? Governments around the world have patchwork solutions to these questions (e.g. untaxed capital gains, taxed trading, untaxed mining, etc.) but most countries are making these rules up as they go.
That leaves India at something of a disadvantage. In the same budget announcement, the utility of blockchains and their usage in payment systems was emphasized as important – but what of the cryptocurrencies that are being used in the actual transfers while also being traded over exchanges? Tomorrow, if an Indian payments company is allowed to create its own token for use in blockchain-based transfers, it could very well end up being traded as a cryptocommodity. And if the government still clings to its dogmatic indecision, the significant opportunity to regulate the cryptocommodity investment sector (which is arguably required at this point) will be lost.
Furthermore, the government’s stance that Bitcoin is not legal tender is not even new. This is the same stance that the RBI has maintained every year since they spoke about cryptocurrencies back in 2013. The status quo has been the same for years now. I can recall a meeting some years back, with a senior functionary in the RBI, when they spoke of waiting for directions ‘from above’: the above has changed; the stance has not.
So, is everything legal?
Despite everything argued above, the current status is still painted with greys. Mining cryptocurrencies, buying them, selling them and owning them can all be classified as activities that are not-illegal. While this isn’t comforting for the average investor, it makes sense within the government’s impulse to stamp out illicit activity that may be financed through these means. Trading of these currencies in the Indian exchanges doesn’t really seem to have fallen significantly beyond a reduction in the typical arbitrage or premium that Indian markets displayed. The government might still choose to call for a complete ban (on activities including trading) but it appears unlikely that they will find the technical means or the public support to do so.
As mentioned earlier, not all action by the government would be bad. There are, in fact, a vast number of scams masquerading behind the guise of cryptocurrency. The solution to this, however, is more forward-thinking government oversight at the entry and exit points of cryptocurrency – not by calling for its outright ban. As it emerges over the years that the fears of Bitcoin fueling the world’s arms and drug trade have been vastly overblown, governments will find fewer excuses behind which restrictive legislation can be hidden.