Earlier this week, Khaitan & Co, CREBACO and BlockOn organised a webinar titled ‘Cryptocurrency in India: What the future holds’. The webinar featured Mr Subhash Chandra Garg, former Finance Secretary and head of the inter-ministerial committee on virtual currencies constituted by the Government of India. Joining him in the discussion were Nischal Shetty (Founder, WazirX), Sidharth Sogami (Founder, CREBACO) and Sanjay Khan Nagra (Partner, Corporate and Commercial Practice, Khaitan & Co). It was a fairly informative discussion that witnessed a variety of opinions, perspectives, and a healthy viewership as the panelists engaged with each other.
The concept was introduced by Ms Rashmi Deshpande, who explained cryptocurrencies, which are digital or virtual currencies secured by cryptography for secure payments online. They are backed by powerful blockchain technology and therefore, operate on a decentralized ledger. As of now, cryptocurrencies exist outside of government or central bank control. In India, they began to gain popularity from 2017 as multiple exchanges and startups came up, such as WazirX, MaticNetwork, CoinDCX, Unocoin etc. As of July 2020, the global market size is over USD 260 billion, expected to rise to USD 1.5 trillion by 2025.
As evidenced by the chart, Bitcoin’s value hit a record high of approximately $19,500 in December 2017, but crashed to a low of nearly $3,200 only a year later. 2017 is also the year when Bitcoin popularity reached its local peak in India.
Despite the fluctuations, the market has shown maturity in the past year. As of March 2020, there are over 5.5 million users of virtual currency in India. Moreover, there has been a tenfold increase in Bitcoin trading volumes post the COVID-19 lockdown. More recently, WazirX (Binance) has launched a $50 million investment fund in India during the pandemic.
Key Developments in the Indian Crypto Space
The Indian crypto ecosystem has been trying to navigate the legal questions around cryptocurrency. There have been some key developments in this sphere.
- 2013 – 2017: RBI issues several warnings on the risks associated with digital assets
- 2017: Ministry of Finance issues a warning
- 2018: RBI issues a circular to prevent regulated entities from providing services to digital asset services
- 2019: RBI notifies regulatory sandbox framework excluding digital assets
- 2020: Supreme Court declares RBI ban unconstitutional under Article 19(1)(g)
In June 2020, media reports alleged that a new bill has been floated for inter-ministerial consultations.
“it (Private Cryptocurrencies) can never be a common man’s currency”Subhash Chandra Garg
Previewing the Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019
In 2019, the inter-ministerial committee headed by Mr Subhash Chandra Garg proposed the Draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill. The bill proposed the banning of cryptocurrency in India. The key highlights of the bill are:
- The Draft Bill defines cryptocurrencies and seeks to prohibit all trading and use of cryptocurrencies in India.
- Under this, issuing, mining, selling, transferring, use, or holding of cryptocurrency is punishable with a fine, or imprisonment of up to ten years, or both.
- However, the draft bill permits the use of any underlying technology for experiment, research or teaching.
Keynote Address by Subhash Chandra Garg
In his keynote address, Mr Subhash Chandra Garg put forward two broad points:
- Mr Garg first spoke of the issue of cryptocurrency as currency, the evolution of currencies, and the purpose they serve.
- Blockchain is an extremely important innovation in the digital space as many services can be created using this, particularly in the financial technology domain.
A currency is a medium of exchange, and unlike metal currencies, “which have intrinsic value”, Mr Garg said, “modern-day paper currency’s value is maintained by the central bank” of countries across the world. The value fluctuates based on various factors, such as the international exchange rate, and also has an impact on inflation.
With innovation in technology, currency came to be exchanged via digital means as well, but the fundamental base for online rupee transactions is still paper currency.
Cryptocurrencies, therefore, are somewhat different. They have been designed and issued by private innovators and are valuable in their own right, for example, as an asset for investment.
However, when cryptocurrencies begin to “serve the function of means of payment,” Mr Garg said, “that is where… we should evaluate very carefully, the options for making digital currency.” He proposed dematerialised currency from central banks as a good solution to the need for digital currencies. He recommended that private cryptocurrencies (like Bitcoin, Ethererum which aren’t controlled by government or companies) be outlawed, adding that “it can never be a common man’s currency” because the common person would not have the extensive resources required to adopt and transact using them. He also noted that its lack of regulation was the biggest issue. “If anyone could issue currency, there would be no value to it.”
Moreover, he was in favour of describing cryptocurrencies as crypto assets, the value of which ‘lies in the eyes of the holder’. According to Mr Garg, the crypto asset as a commodity should be regulated as a commodity, and there is a need to protect the gullible citizens from possible Ponzi schemes.
“(India has) an efficient banking system”Nischal Shetty, CEO – WazirX
A Panel Discussion by Industry Experts
A panel consisting of leaders and experts from the Indian crypto ecosystem discussed the questions regarding cryptocurrency and the new Draft Bill.
#1 Nischal Shetty, Founder and CEO of WazirX
Mr Nischal Shetty, CEO and founder of WazirX, presented the case for India’s crypto ecosystem. He clarified that the crypto industry is not looking to replace the Indian rupee. Rather, they are looking to “enable new transactions that have not been possible today via traditional currencies”. For example, Nischal added, “we have the Ethereum blockchain. Where the payment to run the code in the Ethereum blockchain network is possible via cryptocurrency only.” Another example is that of micro transactions, say 1 paisa, which will be possible with cryptocurrencies without paying higher fees.
Therefore, accessing new technologies will be made possible with cryptocurrencies, and it may be possible to try out new business models. India has “an efficient banking system”, Nischal said, and the crypto industry is not looking to enter that zone.
Another aspect is that the tokenization of assets will be made possible. For example, capital will be able to freely flow around the world, something that could possibly allow people to say, take loans from outside India. Nischal Shetty believes that if given the opportunity to innovate, then we could see all of these innovations and more.
#2 Sidharth Sogani, Founder and CEO of CREBACO
Mr Sidharth Sogani, founder and CEO of CREBACO, believes that cryptocurrency being a new technology needs to be understood better. He gave the example of the Wright brothers not having a pilot’s licence when they invented the aeroplane. A license was only issued after a few years.
Similarly, Mr Sogani said, cryptocurrency should also be given “a chance to prove its relevance, and only then, once it reaches a state of maturity, regulators should come in” and drive things in the right direction and help the ecosystem develop.
Mr Sogani said that the industry has evolved over the years and solutions have come up to solve the problems associated with cryptocurrencies, such as money laundering. He took a stand against the banning of cryptocurrency. “The government must understand that these solutions are there to solve problems [while] at the same time [to] let the industry grow,” Mr Sogani concluded.
#3 Sanjay Khan Nagra, Partner, Corporate and Commercial Practice, Khaitan & Co
Mr Sanjay Khan Nagra, Partner, Corporate and Commercial Practice, Khaitan & Co. believes that regulating innovation is the most challenging task. It gives rise to something called regulatory arbitrage. “It is important to understand what problems we’re trying to solve,” said Mr Nagra, and proceeded to explore the perspective of the industry.
Cryptocurrencies as an asset are one of the pillars that we can aim for, according to Mr Nagra. Any regulation of this sort will be transient, not exclusive to India. He put forth the argument that regulators may have a thought process for banning it, but crypto is out there and “just looking the other way… is probably not the solution”. Rather, coming up with a solution (like Japan and the US, where both the entry and the exit points are regulated) is a better solution.
#4 Further Discussions
Mr Garg further commented on these discussions. He argued that since the global development of the crypto community has been about making extensive use of payments, therefore, there is a need to confine crypto as assets and not as currencies. It should not transgress into the territory of conventional currencies. Regarding the ways to transact, other digital currencies may also be used. But cryptocurrencies being used for transactions within the crypto community would not actually be currency according to him. Mr Garg said that privately issued currency cannot have a controlled value.
On the topic of accessing international loans or funds via cryptocurrencies, he said that it would not be permissible. Moreover, he argued that crypto-based solutions would not be cost-effective. He reasoned that the draft bill has stringent measures for holding cryptocurrency because it is much like counterfeit currency, and is treated like that. There’s an absolute need to ensure, he said, that “it’s not infringing the territory of currencies”.
#5 Other Points of Engagement
The panel also raised many other points and gave insightful information regarding the crypto world.
- Mr Shetty observes that for the crypto community, business has become easier since the Supreme Court declared the RBI circular unconstitutional. The lockdown particularly has led many new investors to enter the arena and learn more about cryptocurrencies and become early investors. Many banks are also taking an interest in this technology.
- Mr Sogami gave his observations on what the G20 nations are doing in this regard. Banning was not an option for many since anyone with the internet can still access it and therefore enforcement of such bans would be difficult. Other nations are allowing such technologies to evolve. He also points out that cryptocurrency is not counterfeit because it has exclusive ownership and its value comes from consensus.
- Mr Garg pointed out legalities regarding counterfeit currency. The RBI takes guarantee for the currency that is declared legal tender but what is the equivalent for cryptocurrencies? He raised concerns regarding the use of cryptocurrencies for criminal activities. The idea, he said, is to protect gullible people.
- Mr Sanjay also talked about how the funding scenario has changed over the years. It is important to take advantage of the technology, say, by creating a sandbox. This would also help to attract the world’s attention. Regulation could also happen in a manner that only qualified investors be allowed.
The webinar ended with closing remarks from Mr Jagdish Pandya, who is the chairman of BlockOn Capital. He remarked that cryptocurrency is here to complement fiat currency, not compete with it. He also spoke about having crypto as a tokenized asset, sharing viewpoints from the recent G20 meet.
As the crypto ecosystem grows and evolves, the need for regulation is greater than ever. The webinar brought together leaders and experts and facilitated a dialogue that gave both perspectives of the issue. The Draft Bill on the same seeks to ban cryptocurrency but India’ crypto community has its arguments regarding the same. Being a new technology, the task of reaching a conclusion will not be easy. Needless to say, discussion and debate is the way forward.
Watch this video as we discuss Crypto Regulations with India’s top Crypto Youtuber Aditya Singh who runs Youtube channel Crypto India.