Will cryptocurrency be recognised as a legal tender in India?

by Archit Kansal
26 October 2021
India Trending
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Key Takeaways

Indian government has been working tirelessly to build the foundations to enable use of digital currencies in the country. Its concerns are two-faced – use of cryptocurrencies by non-state actors to promote terrorism and the volatility of the currency in open market.
The Cryptocurrency Bill 2021 seeks to ban issuance/use of private cryptocurrencies in India. The Bill, currently being debated in the parliament, also is expected to define cryptocurrencies. Once we know if cryptocurrencies will be treated as commodities, services or similar to equities, it can be taxed accordingly and be regulated.

Since 2013, India has been wrangling with the question of cryptocurrencies. It has come a long way but the market is still highly unregulated. Indians saw mushrooming of crypto-exchanges till 2017 especially after the demonetisation. The government, so far, has not clarified its stance towards it but is exploring opportunities to regulate the market through an introduction of its own digital currency whilst banning all private cryptocurrencies.

The Reserve Bank of India (RBI), on May 31, 2021, asked the banks to continue their due diligence procedures on cryptocurrency traders under Anti-Money Laundering (AML) and Countering Funding of Terrorism (CFT) standards and not cite its 2018 order to deny banking services to customers dealing in cryptocurrencies. The Supreme Court of India had, in March 2020, set aside RBI’s 2018 order due to the absence of any legislative ban on cryptocurrency trading.

The government has been working tirelessly to build the foundations to enable use of digital currencies in the country. Its concerns are two-faced – use of cryptocurrencies by non-state actors to promote terrorism and the volatility of the currency in open market. Whilst on one side, the finance minister, Nirmala Sitharaman, said that cryptocurrencies will not see a total ban in the country, the Cryptocurrency Bill 2021 seeks to ban issuance/use of private cryptocurrencies in India. The Bill, currently being debated in the parliament, also is expected to define cryptocurrencies. Once we know if cryptocurrencies will be treated as commodities, services or similar to equities, it can be taxed accordingly and be regulated.

Indian businesses on the other hand have started adopting cryptocurrency. Currently, India has over 100 Mio cryptocurrency users, the highest in the world and the cost of transactions is very low. The popular cryptocurrencies such as Bitcoin, Etherum, Solana are being used in exchange of goods and services. In the absence of any law on use of cryptocurrency as a legal tender and the Supreme Court judgement, its use in transactions is neither legal nor illegal. India’s oldest crypto exchange, Unocoin, saw its trading volume rise considerably when it allowed use of Bitcoin to recharge Fastag, India’s National Electronic Toll Collection.

Global crypto investors are bullish towards India’s large crypto user base. India’s largest crypto-currency exchange, CoinSwitch Kuber achieved unicorn status a few days ago in a funding round led by Andreessen Horowitz (a16z) and Coinbase Ventures. This is a16z’s first investment in India. Coinbase’s investment in another Indian startup Coinbase DCX’s USD 90Mio funding round earlier this year was their first in India. Per Chainanalysis, a New York Based blockchain data platform, India is seeing large institutional-sized transfers above USD 10Mio cryptocurrency. The market in India has seen a growth of 641% over the last year and is expected to reach USD 241Mio by 2030.

India’s Central Bank Digital Currency (CBDC) is expected to pilot in Q4, 2021 with a subsequent phased launch thereafter. In India, due to the current economic landscape, both the RBI and the government are ensuring that the CBDC considers its three foundational principles namely, Non-disruption, Coexistence and Innovation & Competition. Abiding by these three principles is critically important in India to maintain financial and monetary stability by making CBDC just as trusted as fiat currency. The central bank is looking at it through five different use cases

Programmable Payments (OBT): ‘Fit-for-purpose’ money used for social benefits and other targeted payments in a country. Eg. pre-programmed CBDCs could be issued for LPG subsidies, or subsidies for fertilisers could be transferred via CBDC route.
Cross-Border Remittances: International collaboration for interoperability of CBDC will allow real-time transactions.
Retail Payments: This will cover all 3 transaction types – C2C, C2B and B2C through the use of electronic wallets.
MSME Lending: This will allow banks to develop a more accurate risk profile of different SMEs.
Offline Payments: would be a separate wallet and could be based on near-field communication (NFC) technology.

According to a report by NASSCOM, more than 60 percent of states in India, over 15 Mio retail investors and over 230 startups are focused on CryptoTech and more are emerging everyday. It is expected that by 2030, the market would grow at 2X and has a potential of creating over 800,000 jobs with a total economic value add of USD184Bio. With this, the government in India can no longer ignore or dismiss crypto any further. The analysts, both global and domestic, along with the corporates and traders expect a positive outcome in the Cryptocurrency Bill. However, it remains to be seen if crypto will usher in a new age for India.

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