The government of India’s plans to ban cryptocurrency are the actions of a misguided and ill-informed administration which fails to understand that you cannot stop the move to decentralization. That said the proposed ban by the Indian government against private cryptocurrency 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 to be legal tender. And in a similar fashion to today’s proposed crypto move, while this was put forward as a move to combat bribery and terrorist financing, its clear the real target was 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 looking to take control of its currency, and cryptocurrencies in particular.
The irony 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 is not only much bigger but also more mature. 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. Instead, 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, through to earning money from playing blockchain-based games such as Axie Infinity.
The second irony of this debate within the Indian government over legislative control of currency is the reality of the current equity market in the country for investors. Compared to the ease of holding crypto, an equity investment is much more bureaucratic, with a process that can reportedly take up to four days to process from start to finish. So, it’s not altogether surprising that it’s estimated that there are as much as four times as many crypto investors in India compared to equity investors.
A third significant factor that complicates the Indian government’s seemingly tough stance against crypto investors and startups is the fact that as a favorite location for outsourcing from global businesses, that increasing numbers of IT professionals and freelancers from the fintech through to IT sector now want to be paid in crypto. And thanks to the government’s previous attempts to crack down on crypto, these professionals now have a good selection of decentralized exchanges to use, further reinforcing the growth of the DeFi sector. To ban cryptocurrency as part of a wider strategy to crack down on cryptocurrencies and to roll out their own central bank digital currency (CBDC) will therefore seriously undermine Indian’s growing crypto and blockchain business community.
With the crypto industry in India currently seeing over 100% growth month-on-month growth, this is a more serious conundrum for the government than suggested by headline grabbing reports on 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 set in the context of a global economy beyond its longstanding intra-national concerns about tax evasion.
What is clear despite the gradual softening of the Indian government’s attitude to crypto currency since the misguided 2018 ban is that in many ways India is aping Chinese state policy, namely they see the advantages of a central bank currency, the benefits of blockchain based innovation, but don’t want this to happen without tight control and regulation from New Delhi. So, the question remains to what degree will the centralized government mindset, rooted in Victorian-era colonial bureaucracy, be able to seize the opportunities provided by decentralization faced with conflicting pressures from a global economy and crypto entrepreneurs on the one hand, and a government bureaucracy and 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 badly worded and ambiguous sections on tax reporting provisions that apply to digital assets, so including NFTs as well as cryptocurrencies. 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. You can easily see a similar policy momentum taking place in India, where despite the best of intentions to help solve the issue of a ‘volatile’ cryptocurrency market, as Modi pitches it in the media, it ends up crippling the crypto sector which its estimated directly and indirectly employs around 50,000 people.
The Indian government is at a critical crossroads in terms of the development of decentralized finance and the blockchain sector, therefore. It needs to look and learn from the impact of the ban in China and what the clumsy legislation in the US means to a country competing in a global economy. Instead of throwing the baby out with the bath water instead it should look in detail at the more pragmatic approaches to crypto in smaller territories and countries such as Singapore and Switzerland. 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 learn from. But even for Singapore it’s still a tricky balancing act to achieve, trying to both embrace crypto, and regulate the crypto sector to protect investors and the public at large, if it’s to be a leading hub for cryptocurrencies in Southeast Asia and globally.
The core problem with the Indian state’s approach is that driven by its understandable tax reforming agenda, is that its 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. That all makes perfect logical sense to the New Delhi mindset, but it’s 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 recognizes the need for regulation, to have your cake and eat it – unlocking the potential of both crypto and blockchain to power the economy, while also implementing protection for 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, if it can learn from the mistakes of US and China and draw on the successes in Singapore and Switzerland. But this learning curve over the last year, set against the desire for tax reform in the last five years, could be a case of too little too late in my view. 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. It appears India is at a macro level not so different from other so-called ‘BRIC’ countries, Brazil, Russia, and China. Where the policy imperative is to control currency, rather than empower its citizens. To clamp down on tax evasion rather than prioritize growing an economy for all its citizens, not just the well-connected elites with their easy access to global banking services.
It’s also true that with about 190 million unbanked adults, India is second only to China for the number of people who don’t have bank accounts or participate 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. What’s lacking is the political motivation and imagination to see cryptocurrencies as tools to help India compete in the post-pandemic global economy, and to help lift millions of its citizens out of poverty. Let’s hope therefore that common sense prevails with the final form of the new regulation and decentralization takes its rightful place at the heart of the world’s largest democracy.
V1 of the article written for Anndy Lian. An extract of the V2 ‘toned down’ version was published on The Sunday Guardian on 27 November, 2021. The full toned down version appeared on 9 December, 2021 in Securities.io.