Government Panel Suggests Ban On Private Cryptocurrencies, Bets On Digital Rupee
A government panel advised having an open mind regarding an official digital currency in India.
The government panel constituted to regulate virtual currencies has suggested a ban on private cryptocurrencies and introducing an official ‘Digital Rupee’ in consultation with the Reserve Bank of India.
The panel, headed by Economic Affairs Secretary Subhash Chandra Garg, recommended that all private cryptocurrencies, except any digital currency issued by the state, be banned in India, as they have no intrinsic value, and cannot replace fiat currencies, according to a report released by the government.
The panel’s findings were first reported by BloombergQuint in June. The panel also recommended that all exchanges, people, traders and other financial system participants should be prohibited from dealing in cryptocurrencies.
The government may consider establishing a standing committee to take into account the technological developments globally and within the country, the report said, adding that the standing committee could revisit the issues addressed in the report “as and when needed”.
The draft bill proposed by the panel—Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019—suggested penalty or imprisonment for those who directly or indirectly mine, generate, hold, sell, deal in, transfer, dispose of or issues cryptocurrency for:
- issuing cryptocurrency-related financial products;
- issuing cryptocurrency as a means of raising funds;
- as a means for investment;
- as a payment system, whether authorised under Section 4 of the Payments and Settlement Systems Act, 2007;
- buy or sell or store cryptocurrency;
- provide cryptocurrency-related services to consumers or investors which includes registering, trading, settling, clearing or other services;
- trade cryptocurrency with Indian currency or any foreign currency as a basis of credit.
These activities, according to the report, shall be punishable with fine of up to Rs 25 crore or with an imprisonment term of one to ten years, or both. Those who directly or indirectly acquire, store or dispose of cryptocurrency for the above activities on a “non-commercial basis” shall be punishable with a fine up to Rs 1 lakh, it said.
If the bill is passed, an individual trading in cryptocurrencies, with an intention to make profits, would be punished with a penalty or an imprisonment term, or both, Sunil Agarwal, senior partner at AZB & Partners, told BloombergQuint. Use of cryptocurrencies for any purposes, other than research, without intention to earn profit, would be punished with a fine, he said.
Ajeet Khurana, chief executive officer of Singapore-based holding company that licenses Zebpay-branded cryptocurrency exchanges worldwide, told BloombergQuint it is difficult to decipher the difference between commercial and non-commercial transactions. If such ambiguities persist, it will be detrimental for all concerned, and lead to “inspector raj”, he said.
The proposed bill, according to Khurana, shuts India to the “innovation of tokens” based on decentralised public blockchains, such as Bitcoin.
The panel suggested that a group be constituted by the Department of Economic Affairs for examination and development of an appropriate model of digital currency in India. The group should have representatives from the RBI, Ministry of Electronics and Information Technology, and Department of Financial Services, it said.
The panel in its recommendations said that it would be advisable to have an “open mind” regarding the introduction of an official digital currency in India.
“It may be possible to visualise some models of future official digital currencies but as of date it is unclear whether there is clear advantage in the context of India to come up with an official digital currency,” the report said.
If, in due course of time, it is decided to issue a digital currency in India having the status of a legal tender, the RBI should be the appropriate regulator of such digital currency by virtue of its powers under Section 22 of the RBI Act, it said.
Pointing out the risks of Central Bank Digital Currencies, the panel said the proposed design of such a currency would require a thorough understanding of its implications for monetary policy transmission and financial stability. “Two key design features that have a bearing on monetary policy and financial stability are interest paid on CBDCs and the degree of substitutability between bank reserves and CBDCs.”
The report said that significant risks and issues in the implementation of central bank digital currencies depend on varying factors such as:
- The proposed design of CBDCs and its impact on existing payments infrastructure, monetary policy transmission and financial stability.
- Requirements for building new infrastructure for CBDCs based on distributed and transparent validation and transition issues.
- The degree of cash available in the market and the usage of virtual or electronic money and payment systems.
- The resilience of existing financial firms such as banks to deal with disruptions caused due to the introduction of CBDCs.
Distributed Ledger Technology
The panel has said that distributed ledger technology can be of great benefit to India in several financial areas like trade finance, mortgage loan applications, digital identity management, and cross-border fund transfers.
Distributed ledger technology allows recording, sharing and transfer of data or value without the need for a central record keeping as in the case of a traditional ledger.
“Committee is very receptive and supportive of distributed ledger technologies and recommends its widespread use in delivering financial services,” Garg tweeted after the report was made public.
The panel has recommended that the Department of Economic Affairs should identify uses of distributed ledger technology and take necessary measures to facilitate its use in the financial field. It can be used to reduce compliance costs for KYC requirements, and electronics ministry can explore the mechanisms through which customer information can be maintained on such a technology through a consent-based mechanism.