India’s been grappling with the regulation of cryptocurrencies for a while now, often indicating its aversion to them—yet not banning them. However, a former top finance ministry official insists that bitcoin and its ilk ought not to be allowed at all.
Shaktikanta Das, a former secretary of economic affairs who also headed the government’s first panel set up in April 2017 to understand and recommend regulations, believes regulating them would be a tough task.
“Let us accept that it would not be possible to regulate it effectively. Because they will do transactions from their houses. You cannot enter every home to check what transactions are going on. So, I think this is a serious challenge, and this should not be allowed at all,” said Das, currently a member of the 15th finance commission that has been tasked with reviewing the government’s financial situation.
The government’s aversion to cryptocurrencies can be traced back to 2013, when India’s central bank, the Reserve Bank of India (RBI), cautioned users against potential security threats. But multiple warnings, both from the finance ministry and the RBI, have failed to deter even conservative Indian investors from cryptocurrencies.
Not one, but two committees in the finance ministry have tried to understand and recommend regulations for cryptocurrencies. The first committee, set up in April 2017 when Das was secretary of economic affairs, was dead set against allowing cryptocurrencies in India. The second panel, headed by Subhash Garg, the current secretary, is still weighing its options.
Das’s opinion matters because he has held several key positions in the finance ministry, heading the departments of revenue and economic affairs. He has also been a board member of the Indian market regulator Securities and Exchange Board of India and the RBI, both of which are involved in drafting cryptocurrency regulations.
In his budget speech (pdf) on Feb. 01, finance minister Arun Jaitley had said that the government “does not recognise cryptocurrencies as legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payments system.”
The issue with cryptocurrencies, according to Das, is that there is no asset base. “Currencies have the guarantee of the RBI, on behalf of the sovereign. That is the underlying guarantee for that. Share of a company—you have an underlying asset of the company. In cryptocurrencies, what is the asset base? It is created out of vacuum, it is created out of thin air,” he told Quartz in an interview on March 07.
“In cryptocurrencies, what is the asset base?” The fact that only the RBI is allowed to issue currency also makes transacting in cryptocurrencies illegal in India, argued Das. “This (virtual money) is a parallel currency system developing and it is not legal. There is no legal provision which backs up these transactions,” he said.
“There is the danger of cryptocurrencies leading to money laundering, terror financing, and unaccounted transactions. It will pose a serious threat to the financial stability not only of India, and in fact more, in the case of the developed world,” he added. “It’s a serious challenge and threat to global financial stability.”
Some Asian countries, particularly China and South Korea, share India’s apprehensions. In 2017, the Chinese government shut down the country’s bitcoin trading exchanges, which until then accounted for nine-tenth of the digital currency’s global volumes. Earlier this year, South Korea indicated it will ban such exchanges. Japan, in contrast, passed a law in March 2017 allowing e-currency payments and declaring them assets.
So it may not be practical to write off cryptocurrencies completely, Anirudh Rastogi, managing partner at law firm TRA, said.
“That would work very well if the global financial community was moving that way, but since it is not, and, if you want to be an outlier in that regard, it is going to have an adverse impact on your (India’s) financial system,” Rastogi said. “If two or three of the largest economies are giving it legitimacy, one needs to take a hard look at it before you take a drastic step.”
Moreover, measures to curb cryptocurrencies could instead encourage illegitimate transactions.
“You will just drive these transactions from otherwise compliant exchanges, which keep records, and basically drive them underground, making it very difficult to keep track of transactions,” Rastogi said. “It would be very difficult to enforce a ban, and that is one of the reasons why various jurisdictions have kept away…but have rather regulated cryptocurrencies,” Rastogi said.
In fact, this is precisely the problem that the Garg panel is dealing with. However, his predecessor’s stance is clear.