Crypto dilemma: Ban needed or regulation?

By Umang Poddar

In recent weeks, discussions about cryptocurrency have been everywhere. Decentralised digital currencies secured by cryptography were the subject of a prime ministerial meeting, a statement by the Reserve Bank of India governor and were featured in a barrage of advertisements during cricket matches. On November 23 came the news that the Lok Sabha is set to table a draft legislation on cryptocurrencies.

There has been a great deal of speculation about whether the law will prohibit cryptocurrencies or merely attempt to regulate them. Already, in March 2020, a Reserve Bank of India ban on cryptocurrencies was overturned by the Supreme Court Supporters of cryptocurrency say that digital currencies lower the cost of transactions and bring more transparency to the financial system. But sceptics say they are wary about the lack of governmental control over such instruments and that they could be used to finance illegal activities.

What is happening?

Last week, the Lok Sabha bulletin listing the agenda for the winter session of the Parliament said the government will introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The Bill aims “to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India”.

“The Bill also seeks to prohibit all private cryptocurrencies in India,” the bulletin said. “However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.” Officially, this is all that is known about the Bill. But news reports have speculated about what it could contain. Some suggest that while the government might not be in favour of an outright ban, the Reserve Bank of India is. Some reports say that a few cryptocurrencies may be allowed and that cryptocurrency gains may be heavily taxed.

Another report suggests that the government will ban all cryptocurrencies and lay down an exit period for those who currently possess cryptocurrencies.

What is cryptocurrency?

A cryptocurrency is protected by cryptography. This refers to a method of encrypting communication using a code so that it can only be accessed by people for whom it is intended. Cryptocurrency is produced by “mining” it: powerful computers are deployed to break these codes, for which they are rewarded with the currency.

This is done without any central authority or intermediary, by using blockchain technology: “a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network”, explains technology giant IBM. Each block contains only some information. Once data is added to one block, it becomes extremely difficult to change it, since all subsequent blocks are connected and would have to be changed too. As a consequence, cryptocurrency is considered to be almost impossible to duplicate.

The blockchain ledger is distributed across the nodes of a computer network. No single person has the information about the chain of blocks. Rather it is stored in a peer-to-peer network, which everyone has access to. At its core, cryptocurrency is valuable because users consider it to be valuable, just like the paper money in a wallet.

Why did the Supreme Court reverse the ban on cryptocurrency in 2020?

In 2018, citing risks associated with virtual currencies, the Reserve Bank of India issued a circular that prohibited banks and financial institutions from dealing in virtual currencies or providing services to any person or entity dealing in virtual currencies. This, in effect, banned the use of cryptocurrency in India.

Two years later, the Supreme Court struck down this circular on grounds of proportionality. While it acknowledged that the Reserve Bank has the power to regulate virtual currencies, which would include cryptocurrencies, the court said that the regulation has to be proportionate to the risk of damage posed. In this case, since the government had also not been able to decide on the legality of cryptocurrency, the Reserve Bank’s blanket ban should be struck down, the court held.

This judgment may also become relevant in testing the legality of the 2021 Bill.

Have there been other attempts to legislate cryptocurrencies?

The Reserve Bank ban is not the only step that has been taken to regulate cryptocurrency. In 2018, an Inter-Ministerial Committee drafted a Crypto-Token Regulation Bill, which allowed for the regulated sale and purchase of cryptocurrency.

However, in 2019, the same committee issued its final report, along with a proposed law titled Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, which