India is moving towards a CBDC, and is in the process of banning private crypto. An update.
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India government plans a Crypto ban - What the world does
- The story: The government of India has had a love-hate relationship with cryptos for some years now. Even as the market exploded and crores of Indians started investing, the RBI could not frame a cohesive policy on it.
- A law is coming: The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, listed for introduction in Parliament’s Winter Session starting November 29, seeks to “create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”. The Bill “seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”.
- What the world does: There is no set template at all. Policies range from a total ban to full acceptance — with a wide band in the middle.
- The stance of countries and regulators has ranged from a total ban on these financial assets, to allowing them to operate with some regulations, to the other extreme of allowing virtual currency trading in the absence of any guidelines.
- Governments and regulators remain divided on how to categorise it as a currency or asset — and how to control it from an operational point of view. The evolution of the policy and regulatory response has been uncharacteristically discordant, with no apparent coordination in the responses of countries.
- Some countries like El Salvador have approved bitcoin as legal tender, while China has imposed a total clampdown. Countries such as India are somewhere in between — still in the process of figuring out the best way to regulate cryptos after some policy and regulatory experimentation. The United States and European Union have been proactive in trying to pin down the regulatory mandate, while discussions continue.
- Specific examples: Some have detailed regulations. While most of these do not recognise cryptocurrencies as legal tender, they do recognise the value these digital units represent — and indicate their functions as either a medium of exchange, unit of account, or a store of value (any asset that would normally retain purchasing power into the future).
- CANADA - Through its Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, it defines virtual currency as - (i) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or (ii) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (i). Canada has been among the early adopters of crypto, and the Canada Revenue Authority (CRA) generally treats cryptocurrency like a commodity for purposes of the country’s Income Tax Act.
- ISRAEL - In its Supervision of Financial Services Law, it includes virtual currencies in the definition of financial assets. The Israeli securities regulator has ruled that cryptocurrency is a security subject, while the Israel Tax Authority defines cryptocurrency as an asset and demands 25% on capital gains.
- GERMANY - The Financial Supervisory Authority qualifies virtual currencies as “units of account” and therefore, “financial instruments”. The Bundesbank considers Bitcoin to be a crypto token given that it does not fulfil typical functions of a currency. However, citizens and legal entities can buy or trade cryptoassets as long as they do it through exchanges and custodians licensed with the German Federal Financial Supervisory Authority.
- UNITED KINGDOM - Her Majesty’s Revenue & Customs, while not considering crypto assets to be currency or money, notes that cryptocurrencies have a unique identity and cannot, therefore, be directly compared to any other form of investment activity or payment mechanism.
- USA - Different states have different definitions and regulations for cryptocurrencies. While the federal government does not recognise cryptocurrencies as legal tender, definitions issued by the states recognise the decentralised nature of virtual currencies.
- THAILAND - Digital asset businesses are required to apply for a licence, monitor for unfair trading practices, and are considered “financial institutions” for anti-money laundering purposes among others, according to the Thomson Reuters Institute report. Earlier this month, Thailand’s oldest lender, Siam Commercial Bank, announced a move to purchase 51% stake in local cryptocurrency exchange Bitkub Online.
- CBDCs arriving: Like India, several other countries have moved to launch a digital currency backed by their central bank. How would a Central Bank Digital Currency (CBDC) work?
- The Reserve Bank of India plans to launch its CBDC, a digital form of fiat currency that can be transacted using wallets backed by blockchain, and which is regulated by the central bank. Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state, and lack the ‘legal tender’ status declared by the government.
- CBDCs enable the user to conduct both domestic and cross-border transactions that do not require a third party or bank. Since several countries are running pilot projects in this space, it is important for India to launch its own CBDC, making the rupee competitive in international financial markets.
- While CBDC too is a digital or virtual currency, it is not comparable to the private virtual currencies that have mushroomed over the last decade. The private virtual currencies sit at odds with the historical concept of money — and they are certainly not currency as the word has come to be understood historically.
- EXAM QUESTIONS: (1) What will change once CBDCs come into picture? (2) Why are sovereign nations not comfortable with cryptocurrencies? Explain. (3) What are the various policies that governments have made related to cryptos? Explain with examples.
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