What Can Prohibition of 'Private Cryptocurrencies' Mean for Investors?

The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 seeks “to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India," the government notification says.

(Photo: The Quint archives)

It's been a few angsty days for India's crypto owners as the government indicated its plans to introduce a bill in the upcoming winter session of the Parliament to regulate all private crypto currencies.

The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 seeks “to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India," the government notification says.

The bill also intends to "prohibit all private cryptocurrencies in India" with "certain exceptions to promote the underlying technology of cryptocurrency and its uses".

Promptly, the prices of all all major cryptocurrencies, including the two big ones – Bitcoin and Ethereum – crashed by nearly 15 percent on 23 November in the Indian cryptocurrency exchanges, only to recover the next day.

But Wait...What Are 'Private Cryptocurrencies' Exactly?

India's crypto market has been swarming with a lot of young investors with numerous ads promising easy returns.

In fact, the country has become one of the world's largest crypto markets with at least 10 crore cryptocurrency investors investing over $10 billion dollars, according to crypto research and intelligence business CREBACO.

But with the draft of the government's bill still being unavailable in the public domain, a lot is left to interpretation as to what the full impact of it could be on those crypto investments.

While the bill says it would prohibit all "private cryptocurrencies", it doesn't go onto defining what that entails exactly.

One definition of "private cryptocurrencies" mean those which allow one to hide the transactional details from the public.

The two most highly-valued cryptocurrencies – Bitcoin and Ethereum among others, for instance – are based on public blockchain networks, which could make transactions traceable while still providing some amount of anonymity to users.

On the other hand, there are several others cryptocurrencies that conceal the transactional details to offer a tighter privacy.

But Naimish Sanghvi, CEO of Coincrunch, a cryptocurrency news website, says, "In the context of the Indian government, private cryptocurrencies is a completely different thing. According to the Garg Committee report, anything not issued by the sovereign is a private cryptocurrency. If the government launches something, then it is public, but anything else outside of government control is private."

So What Kind of Impact is Expected?

With uncertainty looming large, a wave of investors trading in cryptocurrencies has been rushing to panic-sell their investments, leading to WazirX, India's biggest cryptocurrency exchange crashing for a few hours.

Currently, India doesn't have any regulations or bans on crypto trading but it's had a rather impetuous relationship with it.

The government has often raised concerns of corrupt practices and terror funding arising out of crypto trading.

A Reserve Bank of India (RBI) circular from April 2018 had also advised against dealing with virtual currencies, until it was set aside by the Supreme Court in 2020.

Then later on in 2021, Finance Minister Nirmala Sitharaman had indicated a "calibrated" stance, saying, "We want to make sure there is a window available for all kinds of experiments which will have to take place in the crypto world."

Given this teetering stance, what kind of outcome is expected from the bill?

"Considering the kind of interest or fascination it has acquired among the younger generation, it is clear that a considerable number of Indians have invested. But the consequences of this move would depend on what exactly the bill intends to do," says Mr Subhash Chandra Garg who headed the Garg Committee which had recommended a ban on virtual currencies in its 2019 report.

"What the bill which was prepared by the committee that I headed in 2019 proposed, is very clear. But what the government is preparing to introduce in Parliament now is as cryptic as cryptocurrencies," he adds.

"The government has said that it would have exemptions. Does it include exemptions for using cryptocurrencies within the crypto platform? For example, if you are allowed to transact in Ethereum platform with the cryptocurrency of that platform which is Ether, then it might be less damaging. If you're allowed to buy Ether using dollar or rupee, then it'll be less disruptive. But if you say that everything connected to cryptocurrency is banned, then it will have serious consequences."

Subhash Chandra Garg, Former Finance Secretary