Rajeev Narayan

Many moons back, I met Pramod Mahajan, the then India’s Union Minister for Information and Technology, in the grand Parliament House. I was then Editor of Asia’s largest IT magazine, and Mahajan was being conferred with the ‘IT Man of the Year’ award by us. Asked why Indian IT had done remarkably well globally, Mahajan laughed inimitably and said: “That’s because the Government doesn’t understand IT and has thus never interfered. That’s the main reason Indian IT has done so well – lack of governmental interference.” Well said, indeed.

Two decades later, things have changed dramatically as sunrise industry segments face intense scrutiny by the Government, perhaps because it is scouring every possible opportunity to notch up revenues through levies and taxes. This once, the Government is not looking the other way. It has happened to Online Gaming. It has happened to AI (Artificial Intelligence) and start-ups. Now, it is happening to crypto-currency.

The Government is intervening rather vehemently on crypto-currency, with the first direction being the immediate and forced pull-back of all advertisements by players in this brand-new and barely-understood industry segment. Another diktat is that India may ban the use of crypto-currencies for making payments, but allow and regulate their trading as assets. Reports also suggest that the authorities now plan to present a ‘Crypto Regulation Bill’ in the Winter Session of Parliament, which begins on November 29. Paradoxically, that is a good thing, if only because the move appears to have re-scripted the Government’s thinking on banning the sector altogether.

 

What is crypto-currency?

Well, simply speaking, it is a form of payment that is exchanged online for goods and services. There are all and sundry companies – about 13,000 of them at last count – that have issued their currencies, calling them ‘coupons’ or ‘tokens’ that can be traded for goods or services provided. Here’s the catch. People who desire to use crypto-currency have to pay for it in real money. In a flagellating India, that means real rupees.

Cryptocurrency explained

How big is the cryptocurrency market?

Not much, and I am being very sarcastic, for this barely-understood market is already worth US $2.5 trillion worldwide. The value of all cryptocurrencies at the end of October this year was this mind-numbing number, while the total value of bitcoins, the most popular digital currency, was pegged at the US $1.2 trillion. Whew.

How does crypto-currency work?

It does by using a technology called ‘Blockchain’, spread across computers and managing / recording transactions and deals of any nature on the platform. The one good thing that all players in this space offer is absolute security (concerns on that below).

What’s up in India?

For starters, advertising has been banned, which means that we will now be able to watch India’s cricket matches without new crypto-currency companies selling their wares after every six-ball over is completed. But as mentioned, crypto-currencies are not to be banned, perhaps because of the huge revenue potential. Sources indicate that the Securities and Exchange Board of India could be summoned to duty as the regulator for this burgeoning industry, with the Government also contemplating imposing a 1-per cent tax on all transactions. With the Indian crypto-currency market pegged at around the US $7 billion already, that’s no loose number, amounting to an instant Rs 500 crore, plus change.

Why are the advertisements being banned?

Well, that is predominantly because most of them offer massive returns, “up to four times what you get from a Fixed Deposit (FD) account”, some ads claim. In these tremulous financial times, while some feel that this misleads the masses, others in the banking segment fear that the only fail-safe of the banking industry now, the good-old Fixed Deposit, may face a run as it offers around 5 percent returns annually, with the returns being taxable. The promise of a 20-per cent return is a Godsend in times like these.

The crypto-currency space in India is heating up so much that it is reported that the Prime Minister himself recently chaired a meeting to determine the fate of this industry space in the country, especially as there is a view that unregulated and runaway crypto markets could become a source of funding for money laundering and terrorist activities. Also, last week, the Government held back-to-back meetings with crypto industry representatives, shortly after it discussed the industry with the Reserve Bank of India.

What does the RBI say?

A tricky twist here is defining what crypto-currency is as an asset class. The RBI has been grappling with the issue of outlining burning issues such as financial stability, capital controls/accountability, and exchange rate risk. The central bank is also worried about how any arbiter can keep a predictable score of crypto exchanges when there is a massive price fluctuation and, therefore, the arbitrage opportunity.

In 2018, India banned all crypto transactions, but the Supreme Court struck down the restriction in early 2020. The RBI, though, remains recalcitrant toward formalizing crypto-currencies because of the reasons cited above. Governor Shaktikanta Das has officially said India needs much deeper discussions on the issue of crypto-currencies. “When the central bank says it has serious concerns from the point of view of macro-economic and financial stability, there are deeper issues involved. We have not seen any serious or informed discussions in the public space on these issues,” he pointed out.

Noted. The opportunity, though, is too large to be ignored. Perhaps, that is why the RBI is now apparently working on a digital currency, with the caveat that strict rules be imposed on crypto-currencies of any kind. This is as much to protect revenue collections for the exchequer as to ensure that India’s humble, domestic household savings don’t rush down a new and as-yet unproven path.

So, what is the moral of this story?

The simplest one is to tread with caution, but not become so careful and chary that we bring in extreme regulations that sound the death knell for what may be a new sunrise sector. Regulate, do not strangulate. Else, we may just nip a rising Phoenix in the bud and be left with ashes alone.

The author is a communications consultant and a clinical analyst.

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