Will India ban cryptocurrencies?

A government panel is proposing to make trading private virtual currencies illegal, a move industry analysts consider regressive

NEW DELHI, INDIA - FEBRUARY 2: (Editors Note: This is an exclusive image of Mint) Subhash Chandra Garg Economic Affairs Secretary during Mint CNBC 2018 Budget Verdict conclave on February 2, 2018 in New Delhi, India. (Photo by Pradeep Gaur/Mint via Getty Images)
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Shivam Thakral from New Delhi was concerned when he heard a government panel is proposing a ban on cryptocurrencies in India.

As the co-founder and chief executive of the cryptocurrency exchange, BuyUcoin, such a move could spell the end for his business.

“It’s quite regressive to see this kind of recommendation from the panel,” says Mr Thakral, whose platform, founded in 2016, allows users to trade cryptocurrencies such as Bitcoin.

“More than us, I’m worried about the people who have invested their hard earned money in cryptocurrency,” he said.

Like in other parts of the world, there has been a surge in interest in virtual currencies among investors in India in recent years, largely triggered by rocketing prices.

A ban would inhibit new applications and solutions from being deployed and would discourage tech start-ups.

Bitcoin prices picked up again this year, rising to about $10,800 (Dh39,667) compared to around $3,700 at the start of the year. Although it is still off its all-time high of the $20,089 it hit in December 2017.

Authorities in India have been wary of virtual currencies, even discouraging people from investing in them, citing financial and security risks.

The latest sign of their caution came last month, when a government panel proposed a draft bill to ban cryptocurrencies, with jail sentences of up to 10 years and fines of up to 250 million rupees (Dh13.2bn) for anyone dealing in virtual currencies.

The bill would make it illegal to trade any cryptocurrencies in India not regulated by the government.

Bitcoin, Ripple, and Ethereum would be among the cryptocurrencies affected, if the bill became a law.

Vikram Pandya, director of SP Jain School of Management’s FinTech programme in Mumbai, says digital currencies started falling out of favour in India because they do not have the backing of the government, with the draft bill “serving as the final nail in the coffin”.

He says "many exchanges in the past few months have closed operations, citing reasons such as unviable operations and an adverse regulatory environment".

It is not clear, however, whether the ban will come into effect.

The panel, headed by finance secretary Subhash Garg put together a report which will be studied by the government and regulators. It also suggests the creation of an official cryptocurrency, the digital rupee, to replace private virtual currencies.

In this photograph taken on April 9, 2019, Indian Defence Minister Nirmala Sitharaman speaks with an AFP reporter at the Bharatiya Janata Party (BJP) headquarters in New Delhi. - India is hopeful it will avoid US sanctions over its purchase of Russia's S-400 missile system, Defence Minister Nirmala Sitharaman told AFP. (Photo by Sajjad HUSSAIN / AFP) / TO GO WITH'INDIA-DEFENCE-SANCTION-ARMAMENT-RUSSIA-US-CHINA' INTERVIEW BY SIMON STURDEE

India’s finance minister, Nirmala Sitharaman, appears to support the panel’s report.

"If I compare several other countries where this kind of study has been done on cryptocurrencies, we have done very well," she told The Economic Times newspaper. "It's a very futuristic and well-thought out report."

But many do not agree.

India's IT trade body Nasscom condemned the proposal on Thursday, stating that "banning cryptocurrencies is not the solution".

Instead, the group says a regulatory framework must be developed to monitor and govern the sector.

“A ban would inhibit new applications and solutions from being deployed and would discourage tech start-ups,” according to Nasscom. “It would handicap India from participating in new use cases that cryptocurrencies and tokens offer.”

The group adds that “regulating cryptocurrencies would allow the law enforcement agencies to be better equipped to understand these new technologies and enable them to gather intelligence on criminal developments and take enforcement actions”.

Another concern is that if a ban is implemented, cryptocurrency trading would move into the shadows as it will "deter only the legitimate operators", Nasscom said.

India's finance ministry has made its scepticism towards cryptocurrencies clear, calling them "a Ponzi scheme" and stating they are not "legal tender". It also warned the public that prices are driven by speculation and are not backed by underlying assets, making them highly volatile.

Cryptocurrency investors in India instead believe the government's proposal is unwarranted.

One investor, who goes by the name “Gabru” and has founded an online community of enthusiasts called IndiaBits, says he is “bummed out that we do not have the right to choose what’s rights for us”. He holds cryptocurrencies including Bitcoin and Ethereum.

Gabru says he is still buying cryptocurrencies, and will wait to see what happens with the draft bill. He remains optimistic the government “will see the potential of crypto assets and regulate it appropriately”. Still, he does not want his identity revealed “during such tense times”.

A survey of 1,300 respondents in India by IndiaBits found 62 per cent own Bitcoin, making it the most popular cryptocurrency. Ripple is the second most popular token, held by 14 per cent of respondents. In response to a question about how they would be affected by a ban, around 84 per cent said they would lose a lot of money. A further 36 per cent said their work was related to cryptocurrencies and they would either lose their job or would have to shut down business.

India is not alone in its worries about cryptocurrencies. Globally, there have been concerns about the speculative nature of the investments. In 2017, China banned Bitcoin exchanges, but it is not illegal to hold the virtual currency in the country. South Korea considered banning virtual money amid a craze in the country for the tokens, but in January 2018, the government took the less extreme step of prohibiting the use of anonymous bank accounts for cryptocurrency trading to prevent money laundering.

Facebook's decision to launch a digital currency called Libra in June, has reignited discussions about cryptocurrencies globally.

India's central bank, the Reserve Bank of India, has repeatedly warned the public about the risks of investing in them and taken its own measures to curb such investments. Last year, the RBI directed Indian banks to stop dealing with cryptocurrency exchanges and traders.

"This led to a gradual decrease in cryptocurrency volumes within the country," says Mr Pandya. He says authorities in India have good reason to ban virtual currencies.

“Once money gets converted to cryptocurrency, there are no foolproof ways to ensure ‘know your customer’ compliance or trace the final end use,” says Mr Pandya. “Given the black money and terrorism threat, I don’t see cryptocurrencies getting legal backing in India.”

Kishan Sundar, senior vice president of digital technologies at Maveric Systems, a technology provider for the banking and FinTech sectors, based in Chennai, says introducing regulations would make it possible to trace any illegal activities. But given the government’s concerns, this may not be the course of action New Delhi opts for, he says.

"I believe it can go either way – bringing in regulations, or banning it altogether," says Mr Sundar. "Technology keeps evolving, and so does our ability to embrace it, which is why I can say that this ban quite possibly may move ahead, but would be subject to changes in the future as well."

Mr Thakral, meanwhile, is hopeful a ban will not go ahead but agrees regulation is needed. However, he says there has to be a limit to the amount of control authorities have over cryptocurrency, so as not to defeat its very purpose.

“Cryptocurrency’s popularity is due to its technology which enables people to have full control of their money without the involvement of any central authorities,” he says.