The government of India’s plans to ban cryptocurrency are the actions of a reforming administration which is struggling to understand the forces of cryptocurrency decentralization and decentralized finance (DeFi). The proposed ban by the Indian government against private cryptocurrency also needs to be put in context of the real-world politics and economic concerns driving the legislative agenda.
Back in 2016 the Prime Minister, Narendra Modi, declared that 1,000- and 500-rupee notes would no longer be valid. This meant that around 86% of currency in circulation was no longer legal tender. And in a similar fashion to today’s proposed crypto move, its set to target tax evasion, with data from 2013 showing only 1% of India’s then 1.28 billion inhabitants paid any tax. Then in 2018 the Reserve Bank of India sent shock waves through the crypto community when it announced that financial institutions were to stop doing business with retail and business crypto users. While in 2020 the Supreme Court overturned this order as in breach of the constitution’s safeguard to free trade, it’s clear the Indian Government is still very much concerned about the welfare of its citizens, particularly young people, by take control of cryptocurrencies.
The challenge is that at a time when India is seeking to boost its attractiveness for business innovation and entrepreneurship that one of the most dynamic sectors is the rapidly growing DeFi sector. Compared to neighboring economies such as Pakistan and Vietnam, DeFi in India is not only much bigger but also a more mature sector. With India’s crypto adoption ranking second in the world in the recent 2021 Global Crypto Adoption Index from Chainalysis, the report confirmed that large institutional-sized transfers above $10 million worth of cryptocurrency represent 42% of transactions sent from India-based addresses, versus 28% for Pakistan and 29% for Vietnam, with the highest rate of crypto adoption in the world. The argument from the crypto industry is that what is needed is better regulation and education to support the estimated 15-20 million crypto investors in India, who are benefiting from using cryptocurrency to send and receive money around the world, this includes young people earning money from playing blockchain-based games such as Axie Infinity.
The continued attractiveness of cryptocurrency, despite policy shifts in the last few years, derives in part from the reality of the current equity market for Indian investors. Compared to the ease of holding crypto, an equity investment is still much more bureaucratic, with a process that can reportedly take up to four days to process from start to finish. Indeed, it’s estimated that there are as many as four times more crypto investors in India compared to equity investors, suggesting that the government’s agenda would benefit from including equity market reform.
A third challenge for the Indian Government tackling cryptocurrency is the fact that an increasing numbers of IT professionals and freelancers from the fintech through to IT sector now get paid in crypto. Indeed, these crypto savvy professionals have a good selection of decentralized exchanges for their transactions, thanks to the growth of the DeFi sector. While it’s understandable that the Government wishes to roll out their own central bank digital currency (CBDC) to facilitate payments, it needs to therefore consider the needs of India’s growing crypto and blockchain business community.
With the crypto industry in India currently seeing over 100% growth month-on-month growth, these are some of the complex challenges facing the government more so than is suggested by simplistic headline on India banning crypto. As we’ve seen recently with the all too predictable ban on cryptocurrency in China, leading to a mass exodus of the highly profitable crypto mining industry to the US, Russia and Kazakhstan, there are important economic issues to consider for India in the context of a global economy, in addition longstanding concerns about tax evasion and cryptocurrency volatility.
Despite the gradual softening of the Indian government’s attitude to crypto currency since the 2018 ban the Indian Government is reminiscent of Chinese state policy, seeing the advantages of a central bank currency, and the benefits of blockchain based innovation, but without wider decentralization. So, the question remains to what degree will the Indian Government be able to seize the opportunities provided by decentralized technologies and DeFi, faced with conflicting pressures from a global economy and crypto entrepreneurs on the one hand, and a central bank looking to take control over an unregulated cash economy on the other?
For further confirmation of the power of decentralized crypto sector in a global economy still struggling to recover from COVID-19, you need look no further than the US which recently passed the much-awaited $1.2 trillion infrastructure bill into law. In crypto circles the hype around the bill’s positive features was overshadowed by its poorly worded and ambiguous sections on tax reporting provisions that apply to digital assets. Despite intense lobbying before the bill was passed, the imperatives of the US Treasury Department won the day. Now it’s left to new amendments to the law to sort out the mess. In India where policy is guided by the best of intentions to help solve the issue of a ‘volatile’ cryptocurrency market, there are also risks in undermining a successful crypto sector that is estimated to directly and indirectly employ approximately 50,000 people.
The Indian Government is at a crossroads in terms of the development of decentralized finance and the blockchain sector. It can learn from the impact of the ban in China, and the poorly worded legislation in the US, for a country competing in a global economy. There are more pragmatic approaches to crypto in smaller territories and countries such as Singapore and Switzerland worth considering. Singapore is trying to build its own crypto ecosystem by embracing crypto exchanges and startups, and I think that is a model that India could adapt to fit its specific policy needs. After all, even for Singapore it’s still a tricky balancing act to achieve, to embrace crypto, and regulate the crypto sector to protect investors and the public at large, to be a leading hub for cryptocurrencies in Southeast Asia and globally.
It remains to be seen whether the Indian Government’s approach will work in the long run, seeking to ban cryptocurrency for payments (hence the use of the term “private cryptocurrency” in the proposed legislation), while at the same time allowing for digital assets to be regulated by the Securities and Exchange Board of India. This cryptocurrency ban is at odds with the decentralized economy where crypto payments and assets go hand in hand. Ripple in the US recently brought out its vision of public and private sector working together, in a regulatory framework that is fit for purpose. In India the crypto sector also needs to recognize the need for regulation, to unlock the potential of both crypto and blockchain to power the economy, while also protecting the estimated 15 to 20 million retailer investors, and the market as a whole.
There is certainly room for optimism regarding the Indian Government’s plans for crypto regulation, drawing on the lessons from the US and China, and the successes of crypto ecosystems in Singapore and Switzerland. But this learning curve over the last year, set against the desire for tax reform in the last five years, needs to start sooner rather than later. By the nature of a decentralized economy its not one where assets and crypto currency can be easily divided. Bitcoin is largely seen as a store of value, a digital asset to rival gold. But at the same time in El Salvador its now legal tender for payments from small to large businesses, for both citizens and government. India needs to clamp down on tax evasion, but it also needs to prioritize growing an economy for all its citizens.
It’s also true that with about 190 million unbanked adults, India is second only to China for the number of people without bank accounts or a stake in the formal financial sector, according to the World Bank. Government initiatives have worked best when in collaboration with the private sector have taken on a more decentralized approach, providing services without the need for banking and service fees. In other words, there’s already a model for adoption of decentralized crypto solutions for the unbanked. With the political motivation to see cryptocurrencies as tools to help India compete in the post-pandemic global economy, it could also help lift millions of its citizens out of poverty. Let’s hope therefore that these insights help guide the final form of the new regulation, and decentralization plays its part in the heart of the world’s largest democracy. #anndyliansays