Skipping Regulation & Banning Cryptocurrency: A Lackadaisical Legislation Without Legitimate Aim?
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With the introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, India has pivoted towards a complete ban on cryptocurrencies other than sovereign cryptocurrencies; a stark departure from the traditional laissez-faire stand towards regulating cryptocurrencies.
A move towards banning cryptocurrencies without grandfathering investments made in the past, while imposing usurious taxes on capital gains from cryptocurrencies is a self-contradicting stand. If the government enjoyed the benefit of being able to tax capital gains from crypto-trading, this is an implicit acceptance of the fact that there was no prohibition on trading cryptocurrencies. It would be trite to mention that if a ban acts retrospectively, without grandfathering investments that were made in the past, it would in effect set a precedent for taxing income from an activity that was purportedly an illegal business activity, ab initio.
The exception for a sovereign cryptocurrency, also belies the legislative intent behind a cryptocurrency ban, as opposed to an attempt at regulation. The concept of a sovereign cryptocurrency is an oxymoron in itself, given that by design, cryptocurrencies were intended to be decentralized, without any reliance on a third party. The underlying blockchain technology, allows for a ‘distributed ledger’ intended to be used in a manner that every participant within the blockchain has a copy of the ledger recording transactions on the blockchain, thereby keeping each participant honest, and unable to alter the ledgers of any other participant. While this does not rule out the use of blockchain technology to speed up settlements, the usefulness to eliminate counterfeit currency would be negated unless all the currency of a country is digitized, a concept impractical in any country. It would then be mere legislative esotericism to intend to substitute a fiat currency with a cryptocurrency, without any clearly defined objectives of framing legislation to this effect. A ban of all cryptocurrencies, except state-backed cryptocurrencies, smacks of an homage to the Licence Raj, albeit this time, without any apparent enforcement mechanisms to crack down on illegal crypto trading.
This has not been the first move to banning crypto products in India. In 2018, the Reserve Bank of India prohibited regulated entities to in dealing with or settling cryptocurrencies thereby cutting off the interface between the regulated banking system in India and cryptocurrencies. While severing the flow of funds to and from cryptocurrencies was a move that was purportedly to safeguard banks from the risks associated with dealing with such virtual currencies, it pushed cryptocurrencies outside the purview of regulatory oversight and ring-fenced the economic market in India from the rest of the world. This inadvertently caused a capital flight from the Indian economy by driving retail investors to send money offshore for deployment in cryptocurrencies in jurisdictions with less usurious tax and greater regulatory certainty.
This current pivot towards a ban would also run contrary to the general tenor of the Supreme Court of India’s decision, which found that a blanket ban was disproportionate when it struck down the direction by the Reserve Bank of India prohibiting regulated financial entities from dealing with cryptocurrency exchanges.
The legislation banning cryptocurrencies is likely to have been promulgated to fit the nuances of the order of the Supreme Court, since it specifically stated that a ban on cryptocurrencies “is a matter of legislative policy and must arise from legislation, and not by a notice issued by an executive authority, such as a regulator”. However, when assessing this at a more fundamental, policy level, the dichotomy between India’s approach and global trends, coupled with the oscillation between banning cryptocurrency, and having no legislative framework at all, is glaringly apparent.
If the legislative intent of banning cryptocurrencies in India is to prevent money laundering, suppression of terrorist financing or unsupervised flow of funds, a move to ban cryptocurrency runs squarely contrary to this intent. It is not just an opinion, but an empirically backed view of the Financial Action Task Force, that prohibiting cryptocurrency payment activities could drive it underground, where crypto-trading and payments would continue to operate without anti-money laundering controls or regulatory oversight.
While the government may state that the intent of the ban is not to discourage other blockchain products, in the absence of a regulatory framework that provides legitimacy to blockchain products, enforcement agencies are likely to adopt a ham-fisted, shoot-to-kill approach for all products that remotely resemble cryptocurrencies. Excluding specific exemptions for other blockchain-based products used from a blanket ban on all crypto-based products, deals a death blow to innovation in the blockchain industry. While an exemption exists for ‘distributed ledger technology and for ‘experimentation or research’ it would be remis not to point out that all of India’s fiscal, insurance and securities market regulators have introduced the concept of a regulatory sandbox, to test use cases of new technologies, and assess risks that could not be pre-empted by legislation. Herding untested technologies into the regulatory sandbox would be a far more palatable and invocation-friendly approach. Where a technology sits in a grey zone, neither specifically banned nor envisaged or intended to be regulated, the regulatory sandbox would provide the guardrails for such products to be tested. Banning cryptocurrencies after years of regulatory inaction would now push an industry inherently designed to avoid centralized regulation, beyond the realm of enforcement, rendering a ban toothless. Without a clear legislative objective being outlined and in the absence of public consultation, attempts to safeguard consumers and the financial system from unforeseen risks can neither justify banning an industry overnight nor legislating for the exception rather than the rule.