Cryptocurrency conundrum: Regulators grapple with virtual currencies

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When the first virtual currency was launched in 2009 by a mysterious entity, by the name of Satoshi Nakamoto, it was meant to provide an alternative or to replace the fiat currency issued by the government. It was considered more as a payment method. But over the years besides buying and selling goods, people started to hold on to it, and later sell it for making skyrocket profits.

One of the unique selling propositions of bitcoin or any other cryptocurrency is that it is a Peer2Peer transfer that can be easily transferred from one person to another without any intermediary in between. That is why it is called a decentralised digital currency. But a decentralised currency can be quite volatile in nature. That is why big investors like Elon Musk are able to hugely influence the prices with just one tweet. Unlike fiat currency which is governed by the regulator, cryptocurrency is governed by the simple rule of demand and supply.

Given the complexities involved, there is a regulatory conundrum in the country when it comes to cryptocurrencies. The fact that there are various aspects of virtual currencies- currency, asset, utility and stock- give rise to confusion as to what part of it needs to be regulated and by whom.

Here is a low-down on what different regulators in India think when it comes to cryptocurrencies:

Reserve Bank of India (RBI)

RBI has time and again shared a cautionary note about cryptocurrency trading in India. The RBI said on February 1, 2017, that “It has not given any licence or authorisation to any entity or company to operate virtual currency schemes or deal with Bitcoin or any other virtual currency. Any user, holder, investor or trader dealing with virtual currencies is doing it at his own risk.” In December 2013 also, the RBI had cautioned people about virtual currencies and the risks they were exposing themselves to. Hence, RBI has said in very clear terms that they have not authorised or issued a regulation for any entity to deal with cryptocurrencies, and individuals dealing with them would bear all risks.

Finally, on April 6, 2018, directed that all entities regulated by it shall not deal in virtual currencies or provide services for facilitating in dealing with or settling the cryptocurrencies. Hence, all the banks that were already providing such services were told to exit the relationship within three months with the cryptocurrency trading platforms.

Supreme Court of India

On 4th March 2020, the Supreme Court set aside the RBI circular, which was issued on April 6, 2018, lifting curbs on cryptocurrency trading in India. After the Supreme Court order, several exchanges started offering crypto services again and in no times it has again emerged as a popular alternative investment avenue. But recently all banks have stopped their API services to crypto exchange,  as a result, exchanges have again been denied banking services. There has been no notification from RBI after the Supreme Court ruling in 2020. But it is said that banks were recently nudged by RBI to stop their services to exchanges.

Finance Ministry

In February this year listed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 got listed in Parliament. Though the initial signal was about a complete ban on cryptocurrencies recently Finance Minister Nirmala Sitharaman has said there won’t be a complete ban. She also said RBI will be taking a call on the regulation part. While FM’s statement was considered a positive sign by crypto exchanges, that RBI seems to be seeking a complete ban on virtual currencies.

Securities and Exchange Board of India (SEBI)

The government is considering forming a new panel of experts to study the possibility of regulating cryptocurrency in India. Earlier in 2019 an inter-ministerial committee on cryptocurrencies was formed headed by finance secretary Subhash Garg, which recommended a ban on cryptocurrency. Given the formation of this panel leading cryptocurrency exchanges in their recent consultation with the government has asked for the Securities and Exchange Board of India (SEBI) to regulate the sector, citing that cryptocurrencies are traded more as commodities than used as currencies. Cryptocurrency exchanges claim that virtual currencies such as Bitcoin and Ethereum are not currencies and, therefore, should not be regulated by the RBI. They are classified as commodities and, therefore, should fall under the purview of SEBI.

It is to be seen who will regulate cryptocurrencies in India or will there be a complete ban. With so many complexities and regulatory hurdles around cryptocurrencies, it is time to bring clarity around virtual currencies.