The Reserve Bank of India on Thursday issued a notification prohibiting the country’s banks and financial institutions from dealing in virtual currencies, also known as cryptocurrencies, and providing services to entities dealing in them. Such services include registering cryptocurrency service providers, maintaining their accounts, sanctioning or settling loans against virtual currencies and accepting them as collateral.
The strictures came close on the heels of senior Reserve Bank officials telling the media that the central bank was looking into the possibility of introducing a virtual currency of its own. This has led to talk that the Reserve Bank is trying to clamp down on transactions through cryptocurrencies, the most popular of which is the bitcoin, by making survival difficult for entities that enable the crypto commodity ecosystem.
But experts have called it an impractical move. “It was not a practical thing to do on part of the RBI,” said Pramod Emjay, a crypto commodity consultant. “If these companies do not get an environment conducive to growth, or even survival in this case, they will move to other countries. Several of them have already done that in the past few years. There are hundreds of such companies across the globe today. For someone who wants to engage in cryptocurrency transactions and hence use services of the cryptocurrency companies, it does not matter which country the services come from.”
Indians reportedly traded in cryptocurrencies worth around Rs 22,000 crore in the 17-month period ending December 2017, following which the Income Tax Department issued notices to more than four lakh high net-worth individuals seeking details about their sources of investment. Early this year, some of the country’s leading banks reportedly suspended accounts of bitcoin exchanges, suspecting them of carrying out “dubious transactions”.
Who is affected?
Other than the miners who generate cryptocurrencies by solving complex algorithms, the ecosystem is enabled by a range of service providers, broadly called cryptocurrency companies. They help convert one cryptocurrency into another or into fiat currency, enable the payment process within the network, provide markets for buying and selling goods and services with virtual currencies, and offer wallets in which individuals save cryptocurrencies they earn or invest in. Scores of such enterprises are registered in India, mostly in Delhi, Mumbai and Bangalore. The Reserve Bank notification has hit them all.
These companies earn by taking commissions for the services they offer. “This commission will go to other countries instead of adding to the national income here,” said Emjay.
India, like most countries, has not declared cryptocurrencies illegal, but it has not framed parameters to suggest they are legal either. Since December 2013, the Reserve Bank has issued several public notices cautioning against dealing in virtual currencies. As a result, the cryptocurrency ecosystem in India has remained somewhat of an underground enterprise.
“With this move, the RBI is pushing it further underground,” Emjay claimed. “The crypto commodity ecosystem is based on blockchain. It is inherently very transparent and reflects the entire history of every virtual coin from the point it is generated. It is certain that the ecosystem shall continue without the government’s support but what will the government do if some day in the future it needs to identify transaction trails concerning cryptocurrencies? It will definitely not be able to approach companies based abroad with equal ease.”
Blockchain is a bookkeeping platform that can be accessed by anybody on the internet but is owned by nobody. It is a decentralised digital public ledger of all cryptocurrency transactions and cannot be manipulated, unless someone owns over 50% of the entire network and invests machines more powerful than a few supercomputers taken together.
Absurd contradiction
Interestingly, while the Indian government is trying to clamp down on virtual currencies such as bitcoin, it has no qualms about blockchain technology. The Reserve Bank itself has adopted the technology for various purposes and so have governments in Andhra Pradesh, Telangana and Rajasthan, largely for land registry and property documentation.
“It is absurd on part of any government to crack down on cryptocurrency on one hand and endorse blockchain on the other,” said Pavan Duggal, a lawyer who specialises in cyber security. “The government should understand that cryptocurrency is the currency of the future and thus adopt a more holistic approach.”
In fact, Duggal added, the government should frame detailed legal parameters to clarify the issues surrounding cryptocurrency. “This measure is essential to enable India to leapfrog into using blockchain as a catalyst for growth,” he said.