SynopsisCrypto asset traders, investors and entrepreneurs have been concerned ever since GoI announced that it would consider passing the Cryptocurrency and Regulation of Official Digital Currency Bill in Parliament.
Crypto asset traders, investors and entrepreneurs have been concerned ever since GoI announced that it would consider passing the Cryptocurrency and Regulation of Official Digital Currency Bill in Parliament. The aim of the Bill, according to the Lok Sabha Bulletin, is to ban all ‘private’ cryptocurrencies and facilitate a framework for the creation of an RBI-backed digital currency.
The Bill will reportedly incorporate recommendations made by the inter-ministerial committee, which not only proposed a ban on ‘private’ cryptocurrencies but also suggested mining, generating, selling or even holding any cryptocurrency be made illegal. While the fine print of the Bill is yet to be revealed, the proposal to ban all crypto assets while promoting ‘the underlying technology of cryptocurrency and its uses’ — distributed ledger technology (DLT) — shows that lawmakers still haven’t got over the misconception that ‘blockchain is good, but Bitcoin is bad’.
The world’s first cryptocurrency has two parts: the token that is Bitcoin (BTC), and the decentralised, distributed ledger that is blockchain. The belief that the token part is ‘useless’, and that the two parts can be separated to reap the benefits from the underlying ledger technology has crumbled, something the Garg Committee recommendations that came out in July 2019 fail to capture.
The problem with the committee’s definition of ‘private’ is that it paints every digital asset with the same brush, and includes public blockchain tokens like BTC and ether (ETH) — which are decentralised, distributed, public, open source and not owned by a single entity — as private cryptocurrencies. It also failed to recognise that not all tokens are made to act as a currency like BTC or litecoin (LTC), and that a blockchain-based token derives its function depending on its purpose.
Such a vague definition will prove to be the death knell for the industry, as it restricts the innovation playfield to a very small subset of tokenless digital ledger solutions, which are nothing but glorified databases, and sovereign digital currencies. Regulating crypto assets has been a headache for regulators around the world. How do you regulate something that is by design deregulated and is built so that it cannot to be controlled by a central authority?
In 2019, the committee looked at seven countries and the different ways in which they were dealing with cryptocurrencies. While the report mentioned Japan recognising BTC as a means of payment as well as the ban on virtual currencies by China, it chose to follow the latter’s model. Japan grants licences to cryptocurrency exchanges to operate, and allows them to create additional regulations for themselves through a self-regulatory association certified by the Japanese government. It has also defined initial coin offering (ICO) tokens as securities, and allowed for the establishment of a self-regulatory organisation for those who want to raise money with ICOs.
This has created a safe space for Japanese crypto ventures to operate and grow. At the same time, it has provided customers with protection by bringing rules on separation of user and company funds. India should learn from the Japanese model.
The Garg Committee came to its conclusion after three meetings over more than a year and without the involvement of industry participants. If its draft recommendations are implemented, it will hurt growth and innovation. GoI should take a step back, consult industry participants and hold public consultations that can lead to regulation, rather than outlawing of ‘private’ cryptocurrencies.
Like the internet, regulators can’t control or ban tokens like BTC and ETH that are on a public blockchain, but they can regulate the businesses built on top of this technology. While RBI hasn’t presented much data till now backing its claim of illicit use of cryptocurrencies, it is cognisant of the fact that at present there are 342 digital currency products and services in India, including BTC. The existence of these businesses, and a booming sector, are in jeopardy if half-baked regulations are implemented without proper consultation.
As a country that aspires to be a technology superpower and self-reliant, India cannot afford to ignore new technologies when the world is fast embracing them. GoI should realise that regulatory excess kills innovation, and disruptive technologies cannot thrive in an atmosphere of fear.
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