It would appear as though a decision to ban cryptocurrency in India has been all but made. With the introduction of a scathing inter-ministerial committee (IMC) report vilifying cryptocurrency and companion legislation now under review by the Indian government, it is all but certain that private cryptocurrencies like Bitcoin and Litecoin will be illegal in India in short order.
The turn of events in India is especially unfortunate when you read the report and understand the reasons behind the government's action. What Indian regulators believe about cryptocurrency shows they do not truly grasp its capabilities or benefits. Furthermore, the fact that the Indian government seems intent on creating its own digital currency makes the decision to ban private cryptocurrencies suspect.
Of course, an official ban is not yet in place. And if one is enacted, we do not yet know how closely it will resemble the recommendations made in the IMC report. But things do not look good for private cryptocurrencies in India at this point.
Government action no surprise
Those who follow cryptocurrency regulations around the world are not surprised by the developments in India. As early as February 2018, India's finance minister, Arun Jaitley, made it clear that the government was no fan of crypto. He said during a budget speech that the government does not recognize cryptocurrencies as legal tender and that regulators had every intention of preventing it from being a tool for criminal activity.
As things currently stand, there is no specific law in India prohibiting the use or development of cryptocurrencies. The only action the government could take against a cryptocurrency user would have to be related to some other sort of unlawful behavior.
Knowing what we know about regulators and their penchant for control, it seems impossible that they would come up with a way to target illegal activities, like money laundering and drug trafficking, while leaving legitimate cryptocurrency users along. The easiest and most effective way for them to wash their hands of the entire thing is to just ban cryptocurrencies outright.
Six reasons for the ban
Knowing what regulators in India think about cryptocurrency is highly instructive to the rest of the world. It is certainly instructive to cryptocurrency buyers and investors, especially in countries where their own regulators are taking similar action. To that end, the six reasons cited by the IMC for recommending a cryptocurrency ban are discussed below:
1. Non-sovereign creation
Cryptocurrencies, in the purest sense, are created by private persons or entities. They are not created by sovereign nations. This is an issue for Indian regulators in that they believe non-sovereigns should not be in the currency business.
2. Lack of underlying value
Private cryptocurrencies do not have an underlying value tied to the full faith and credit of a government issuer. While this seems good to people opposed to government centralization, it is not good to Indian regulators. They assert that a lack of underlying value makes private cryptos completely valueless.
3. Lack of fixed value
Regulators contend that private cryptocurrencies lack a fixed nominal value. Likewise, they claim that digital assets are not a true store of value. This one particular point drives home the fact that regulators do not even understand how their own fiat works.
4. Price fluctuations
Being skeptical of cryptocurrency due to its price fluctuations is the one point we can give Indian regulators credit for. Cryptocurrencies are not perfect, and one of their biggest weaknesses is the lack of price stability.
5. Lack of purpose
Indian regulators are also firm in their belief that cryptocurrencies cannot serve the same purpose as a fiat. As such, they cannot perform the essential functions of what regulators consider actual money. Once again, this demonstrates a lack of understanding of fiat.
6. Not legal tender
Hand-in-hand with lack of purpose is the reality that cryptocurrencies are not considered legal tender anywhere in the world. This is a legitimate problem. Legal tender is a distinction imposed by government on a particular asset that makes it legally recognized as a way of settling debts. The fact that crypto is not legal tender could create a myriad of complications should people try to use it as such.
What's most remarkable about the government's position is their failure to understand many of the similarities between fiat and cryptocurrency. Their argument of cryptocurrency's lack of purpose is a shining example. They say that cryptos cannot replace money, but why not?
Money is just a representation of value used to exchange goods and services. India's rupee can be used to buy things because both buyer and seller agree to its value. The rupee holds no intrinsic value beyond that. Likewise, buyer and seller could agree to a given value for any cryptocurrency. If they choose to transact business among themselves using that cryptocurrency, the asset itself has done exactly what the rupee does.
Distinguishing between digital and crypto
Fully understanding the government's motivation for banning cryptocurrency might not be possible with the little information we have. But there might be a clue in the IMC's distinction between digital and cryptocurrencies. How they view the two tells us something about their thinking.
The Indian government, via the IMC report, has defined cryptocurrency as "any information or code or number or token not being part of any official digital currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchange with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes."
In plain English, that means any digital asset not created, issued, and controlled by government. India's definition is starkly different from Australia's: "currency that only exists in digital rather than physical form (not coins or notes, for example) and can be exchanged for goods, services or physical currency and is not issued by or under the authority of a government."
It is clear that Australia views crypto as a monetary asset while India's definition includes any and all digital assets not officially recognized by the government. That leads us to the fact that Indian regulators are planning to launch their own digital currency.
Regulators do not refer to their future token as a crypto. They refer to it as a digital currency. This may seem like splitting hairs, but it's really not. Indian regulators are clearly setting themselves up to be the only ones allowed in the digital asset business in that country. All others will be excluded if the IMC's recommendations actually become law.
Investors, traders, exchanges, etc.
Let us assume India's ban will become official in short order. What then? What happens to cryptocurrency investors and individual traders? What happens to cryptocurrency exchanges?
The language of the IMC report seems to indicate that the proposed ban would be a complete ban from top to bottom. Indian banks that do business with the country's central bank are already prevented from dealing in cryptocurrency transactions. But with the ban in place, no businesses of any kind will be allowed to transact with crypto.
Cryptocurrency exchanges would not be allowed to operate in India. It is possible that online and mobile payment systems that offer both fiat and crypto payments would either have to nix the crypto portion of their businesses or in some way guarantee that crypto transactions do not take place in India.
As for everyday users who only hold a nominal amount of coin, it is unclear whether they will have the opportunity to liquidate their assets before the ban takes effect. Larger investors with significant holdings probably already have the means to move their assets so they are not affected by the ban.
Where it leaves Facebook
It is interesting, but probably coincidental, that the IMC report was released a little more than a month after Facebook's Libra announcement. Needless to say that a cryptocurrency ban in India will have a significant impact on Facebook plans to leverage its Asian market as the main means of support for its stablecoin.
Facebook made it clear that they plan to target India, Indonesia, and a number of other Asian countries as early adopters of Libra. With hundreds of millions of users in those countries, they expected the Asian market to get things rolling in earnest. Success in Asia would make it easier for Facebook to push Libra hard in Europe and the Americas.
Those plans may now be subject to change. If Libra is not legally allowed in India, Facebook loses out on an exceptionally large audience. Would it be enough to completely derail the company's plans? We will have to wait and see. However, it is entirely possible that Libra will not gain any traction in Asia if Indian Facebook users cannot access it.
All indications suggest that Indian cryptocurrency users are about to lose access to their digital tokens. If the IMC has its way, the Indian government will ban all private cryptocurrencies as well as any and all transactions relating to them. Any digital currencies developed in the future will be issued and controlled by the government.