RBI nudges Finance Ministry to enact law banning cryptocurrencies
The Reserve Bank of India (RBI) has urged the Centre to slap an express ban on cryptocurrencies through legislation even as digital assets like Bitcoin have suffered a massive slide in the recent months. Finance Minister Niramala Sitharaman informed Parliament on Monday (July 18) that the apex bank wants cryptocurrencies “prohibited” due to their potential adverse impact.
The government has been toying with the idea of banning cryptocurrencies like Bitcoin, but has been holding back since last year to formulate a clear road-map. Discussions have been going on at regular intervals in the last nine months, leading to capital gains tax being imposed in the 2022-23 Budget on profits from digital assets. While questions are being raised if cryptocurrencies are being legitimised through taxation, the Union government has been explaining that no clearance has been provided for trading in cryptos. Also, there is no regulatory mechanism in place to protect the interests of investors or stakeholders dealing with digital assets.
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Since there is no express ban till now on digital assets including cryptocurrencies, the RBI has informed the Finance Ministry that a legislation should be enacted to ban all digital assets. The apex bank has also warned about the adverse impact of cryptocurrencies. “In view of the concerns expressed by RBI on the destabilising effect of cryptocurrencies on the monetary and fiscal stability of a country, RBI has recommended for framing of legislation on this sector. RBI is of the view that cryptocurrencies should be prohibited,” Sitharaman informed Lok Sabha. However, she did not commit if the Union government plans to ban cryptocurrencies or will set a time-frame for the ban recommended by the RBI.
In a written reply to a question raised by Thol Thirumaavalavan of Viduthalai Siruthaigal party, she also mentioned that international collaboration was required to ban cryptocurrencies. “Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards,” Sitharaman explained. The written reply was in the form of a statement.
Why cryptos can harm economy
While the Union Government has declared that it was planning to launch a digital currency, no further details of the move have been divulged so far. The only thing that seems clear is that RBI will launch a “digital Rupee” when the government goes through with the plan that was announced in the 2022-23 Union Budget. The RBI has often emphasised that cryptocurrencies like Bitcoin are not currency and they have no legitimacy. The apex bank is also wary of the adverse impact these digital assets can have, especially since they are unregulated.
“RBI mentioned that cryptocurrencies are not a currency because every modern currency needs to be issued by the Central Bank / government. Further, the value of fiat currencies is anchored by monetary policy and their status as legal tender, however the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a de-stabilising effect on the monetary and fiscal stability of a country,” Sitharaman said in her statement.
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Tirumaavalavan had asked if the RBI had registered its concern about the adverse impact of cryptos on the economy. The Finance Minister confirmed that the RBI has indeed expressed its concern over the adverse effect of cryptocurrency on the Indian economy.
Red flags on trading in digital assets
While strongly advocating a ban on cryptos, the RBI has also been taking steps to deter unregulated trading in digital assets. However, in the absence of legislation, the apex bank was not successful in achieving this goal.
“RBI has been cautioning users, holders and traders of Virtual Currencies (VCs) vide public notices on December 24, 2013, February 1, 2017 and December 5, 2017 that dealing in VCs is associated with potential economic, financial, operational, legal, customer protection and security related risks. RBI had also issued a circular in April 6, 2018 prohibiting its regulated entities to deal in virtual currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs. The said circular has been set aside by the Hon’ble Supreme Court on March 4, 2020. Further RBI, vide its circular dated May 31, 2021 has also advised its regulated entities to continue to carry out customer due diligence processes for transactions in VCs, in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT), obligations under Prevention of Money Laundering Act (PMLA), 2002, etc. in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances,” the finance minister’s statement explained.
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Mushrooming crypto market
Meanwhile, exchanges involving in trading of cryptos have mushroomed and some have grown into entities with large turnover. The lure of quick bucks, triggered by the massive growth in value of cryptocurrencies like the Bitcoin, had attracted investors in the meanwhile, especially youth familiar with digital trading trends. With the rapid slide of the cryptos and some bankruptcies burning the fingers of investors, the enthusiasm for digital assets is waning now, blunting the “investor interest and business potential” arguments put forth when a Parliamentary panel discussed cryptocurrencies amidst expectation of a ban. The RBI’s renewed push for “prohibition” is likely to mount pressure on the Union Government to take a decision without further delay.