A few years ago, in 2017, the Reserve Bank of India (RBI) was reportedly planning to introduce its own cryptocurrency like Bitcoin (BTC). The digital currency was going to be called Lakshmi, who is the goddess of wealth in the Hindu mythology. There was a lot of discussion over whether or not to go ahead with the initiative, but policymakers ended up not going forward with the plan, being directly opposed to digital currencies, and going as far as outlawing the use of crypto and threatening to incarcerate the ones who hold them.

The “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” draft has declared a 10-year prison sentence for anyone who “mines, generates, holds, sells, transfers, disposes, issues or deals in cryptocurrencies”. Trading cryptocurrencies was not so much of a crime in the past, which made many enterprising individuals to invest in it. Many investors actively invested in crypto, even though its value can be extremely volatile, and even paid taxes on profits from trade. 

How are these investors going to be affected if the drafted Bill becomes a law?

Capital Flight

“In our view, the draft Bill takes an extreme position since it proposes to criminalize dealing with an asset in which lakhs of people have invested as a legitimate economic avenue. Jurisdictions like the U.S., E.U. and Japan have found ways to regulate crypto-asset activity to mitigate the risks and promote the benefits. This has also been recommended by the G20 and the Financial Action Task Force, the global anti-money-laundering watchdog,” says Jaideep Reddy, Nishith Desai Associates.

He further added that the Bill arises uncertainty as it does not give solutions for Indian investors to offload their holdings, saying:

“In view of the criminal penalty, Indian buyers will not be able to buy and the law does not mention anything about cross-border transfers through banking channels. Another point to note is that the definition of cryptocurrency under the draft Bill is open-ended and may need more precise wording.”

He also assures that there is no need to panic about the situation, as the draft Bill is only a recommendation by a committee, and not a final decision:

“The committee did not have technical experts on the technology. It is now up to the government to consider what action to take on the basis of the committee’s report.”

A few cryptoexchanges are looking to register their companies abroad to escape the adverse legislation in India.

“As a startup from India, we always wanted to serve from India, but this recent complication has made it difficult for domestic cryptocurrency exchanges to operate their businesses in India. So, we are now an Estonia-based company, and any Indian law to criminalize crypto will not impact us,” says Rahul Jain, from Growth & Marketing, Bitbns.

Exit Window

“The current Bill doesn’t have a “safe harbour” for people who bought or dealt in cryptocurrency before the law (assuming the Bill is enacted in its current form). While the Bill is unlikely to have retrospective effect, there is a real concern amongst investors and traders regarding how to exit their positions post the ban,” says Shilpa Mankar Ahluwalia, with partner, Shardul Amarchand Mangaldas. She continues saying that the Bill does not state anything against selling in cross-border market following the ban, providing Indian investors with an opportunity to exit their positions.

Even so, Bharat Sharma, from HAS Advocates, said that the draft Bill itself is not a major concern for the Indian crypto investors:

“All is not lost. Section 26 of the Bill is a transition provision. It states that within a period of 90 days of the Act’s commencement, the concerned person who possesses cryptocurrency must declare and dispose them,” he noted.

‘5 million Indians own crypto’

The CEO and founder of cryptoexchange WazirX, Nischal Shetty, said that the amount of crypto trading has been rising drastically since the past few years. The haphazard decision of criminalizing the investments in digital currency could significantly affect the economy of the country and the existing businesses, which has been progressively operating through the years, and could erode the wealth of millions of investors. 

“If the bill becomes a reality then India would be the first large democracy to ban an innovative technology such as crypto. Over 5 million Indians own crypto assets worth thousands of crores. They’ll have to simply dispose it off and lose all their wealth,” Shetty added.

A Partner at RNA Technology and IP Attorneys, Rachna Bakhru, stated that the Indian crypto investors have a valid reason to feel like they’re being treated unfairly due to the proposed legislation. The proposed 10-year prison sentence only for investing and getting involved with cryptocurrencies is comparatively higher than the punishment for money laundering itself, which is of seven years.

“In my view, the draft bill is unlikely to be passed in the present shape and form and may be modified after debate on various implications. Considering the nature of the currency, those holding and selling may be difficult to track as well,” she says.

Taxman’s loss

 The draft bill for the ban, however, is a positive influence of blockchain on the financial industry. Legitimate businesses have involved themselves in cryptocurrencies as an asset class. Additionally, the government has also received notable contributions for the crypto space. 

Bharat Sharma from HAS noted that the income generated from trading cryptocurrencies is taxed under the profits of business of profession. It should be included under the head capital profits, if it is not the main business. If there are difficulties to depict the cost of acquisition, it is to be included under the income from other sources. 

“Broadly speaking, income tax would be paid as capital gains if the buying and selling was for investment purposes. If the trading was in the course of business, it will be classified under business income. Tax will be calculated accordingly,” says Jaideep Reddy, from Nishith Desai Associates. 

With the rising amount and value of crypto trade, the loss in tax revenue to the exchequer will be substantial.

Legal minefield

The draft Bill issued by the RBI for prohibiting banks other licenses financial agencies to deal with any crypto assets has already been widely challenged in the Supreme Court. Any oppositions to the Bill, after it is passed, will widely be on the same grounds and will be combined with the existing cases. But even so, the fact that the ban is violating Article 21 of the Constitution, which is “the right to carry on a profession of one’s choice,” may not be much of a defence before the Supreme Court, says Shilpa Mankar Ahluwalia from Shardul Amarchand Mangaldas.

“The current definition of ‘cryptocurrency’ in the Bill is very broad, and seeks to ban – perhaps unintentionally – all stored value units whether or not meant to be an alternate form of currency. The far-reaching implications of the Bill will probably face challenge and merit a review by the Supreme Court,” she added. 

The whimsical stance will dramatically add to the case burden that Indian courts are already facing.

Domestic cryptoexchange agencies that have been free from any allegation of financial wrongdoing are banking on the profits gained over the years. 

 “Older clients have not had chance to complain because of the trust which we have built in the last couple of years. We have been communicating to our clients the implications of the new regulations and the measures taken to counterbalance them. But yes, when it comes to new clients, we have to explain the current market scenario in light of the new regulations, and also how the P2P model works better with current RBI restrictions,” says Rahul Jain of Bitbns.

The rupee will not be affected

Bharat Sharma believes that the stakeholders will take action due to the proposed legislation:

“The Bill does recognize concepts of digital rupee and foreign digital currency. In these cases, they are not outlawed once the Bill becomes an Act.” 

A partner of Shardul Amarchand Mangaldas, Amit Singhania, said that the tax argument is crucial for regulating and understanding cryptocurrencies.

Even though the trade and usage of cryptos have increased over the last few years in India, it still only holds a minute fraction in the country’s digital transactions pie chart. 

“For miners the tax issue is more significant because they would have typically made huge investments in technology and super computer infrastructure. It is unclear whether such investment in hardware will be witnessed if a ban is enforced,” Singhania adds.

The government has been constantly researching about blockchain-based cryptocurrencies for a while. However, skeptics opine that these deliberations are not comprehensive. 

The RBI circular has a lot of shortcomings due to the fact that the committee had no subject expert. The crypto industry was not consulted. We are always ready to help. Due to these limitations, the report wrongly makes a blanket statement that cryptocurrency is not a currency. The fact is that the crypto community does not see them as currency either. These are digital assets with very specific use cases built into the platforms where they exist. They aren’t meant to be used as a currency. There is no threat to the rupee here,” Shetty says.

Industry impact

The initiative by the legislation against cryptocurrencies will undoubtedly have a downstream effect for the economy and many businesses, as well as millions of investors. It will destabilize the current infrastructure of the business industry which is involved with the digital tokens.

“The move will hurt not just the exchanges. There are tens of thousands of traders who earn a living through trading in crypto assets. There are YouTubers and influencers who earn a living teaching people about digital currency and crypto trading. There are thousands of developers who are building apps on public Blockchain platforms such as Ethereum. What happens to their future?” objects Shetty of WazirX.

Furthermore, he said that the government’s mistrust in digital assets would step down the country from its plans for adopting applications based on implementing the distributed ledger technology (DLT). 

Switzerland allows its residents to pay for the utility bills through digital currencies while the Monetary Authority of Singapore (MAS) has a blockchain-based interbank system.  The Department of Work and Pensions in the UK distributed payments to pensioners via a blockchain-based mobile application. The public sector of India, on contrary, has been unsure about implementing blockchain technology, with start-ups being active participants of blockchain technology. However, the state of Maharashtra announced a pilot testing for applying blockchain in various industries last month. 

As per a blockchain consulting firm based in London, Dappros, India has become a home to nearly 19,700 blockchain developers, which is successfully the second largest hub in the world following the US. Most of this section works on creating blockchain financial services on the blockchain, which is a field that will become limited to a few applications if cryptocurrencies were to be criminalized.

Mining in the dark

The cryptocurrency mining is also being done in India, but Shetty believes that if the government is to ban crypto, it will be a fatal loss for investors who spent on setting up the mining rigs, involving specialized computers with high processing power. 

“Should entrepreneurs be punished for being the innovators in this country? Why should they be penalized for being the early adopters of a cutting-edge technology that has provided the highest return amongst any asset class in the last 10 years?” he questions.

“The government may take a more balanced view keeping in mind the future of digital economy in India and interests of society and come up with some regulations or midway to govern digital currency as opposed to making it completely illegal. Also, Facebook’s plan to launch crypto currency linked to its platform can change the landscape in future,” says Rachna Bakhru. She believes that the government will ultimately climb down from the progress it made with crypto, after giving in to the demands of the stakeholders. 

Future-proofing finance

Given that governments around the world are advancing and transferring their essential services on to a blockchain, India is risking the opportunity to outshine them.

The RBI had previously announced that it was testing the introduction of a rupee-backed digital asset. The draft Bill about criminalizing cryptocurrencies will drastically damage India’s good reputation of being a technology hub in the world, and also risking its stand in the Ease of Doing Business Index. 

As of now, India’s blockchain space has received $5.3 million in venture capital funding, as per a report by Incrypt. Additionally, the World Economic Forum envisions that almost 10% of the global GDP rate will be stored on blockchain platforms by the year 2027. 

The Indian government criminalizing cryptocurrency will significantly harm the country’s crypto infrastructure, and make criminals out of millions of determined investors. 

“Our clients are worried about the proposed legislation. Being a country largely reliant on the services sector, India will lose its edge as a technological power if the ban on crypto is enforced. Shunning this industry will mean massive job losses and brain drain. India cannot afford to lose money and talent. Crypto is predicted to be a USD 10 trillion industry in the next five years, and if we are to achieve our Prime Minister’s goal being a USD 5-trillion economy, then crypto is integral to that vision,” Shetty said.