Finance minister Nirmala Sitharaman informed parliament on Monday the Reserve Bank of India (RBI) had recommended a ban on cryptocurrencies, owing to their destabilising effect on the monetary and fiscal stability of a country.
The remark came in response to a question tabled in Lok Sabha on Monday pertaining to recommendations and guidelines by the central bank on digital currencies. The question raised by Thirumavalavan Thol, member of parliament from Chidambaram Lok Sabha seat, enquired about instructions, circulars, directions, warnings, etc., issued by the RBI regarding restricting the issuance, buying, selling, holding and circulation of cryptocurrencies in India during the last 10 years.
The finance minister told the house that RBI has been cautioning users, holders and traders of virtual currencies (VCs) vide public notices on December 24, 2013, February 01, 2017, and December 05, 2017, “that dealing in VCs is associated with potential economic, financial, operational, legal, customer protection and security related risks.”
The RBI had also issued a circular in April 6, 2018, prohibiting its regulated entities to deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs, Sitharaman further mentioned in the written reply. This circular was, however, set aside by the Supreme Court order dated March 04, 2020.
“Further RBI, vide its circular dated May 31, 2021, has also advised its regulated entities to continue to carry out customer due diligence processes for transactions in VCs, in line with regulations governing standards for know your customer (KYC), anti-money laundering (AML), combating of financing of terrorism (CFT), obligations under Prevention of Money Laundering Act (PMLA), 2002, etc., in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances,” Sitharaman says.
On concerns raised by the RBI over impact of cryptocurrencies on the Indian economy, Sitharaman recounted the central bank’s observation that digital currencies “will have a de-stabilising effect on the monetary and fiscal stability of a country”, owing to their volatility.
“RBI has registered its concern over the adverse effect of cryptocurrency on Indian economy. RBI mentioned that cryptocurrencies are not a currency because every modern currency needs to be issued by the central bank/government. Further, the value of fiat currencies is anchored by monetary policy and their status as legal tender, however the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a de-stabilising effect on the monetary and fiscal stability of a country,” she writes in the reply.
Factoring in the destabilising effect of cryptocurrencies, “RBI has recommended for framing of legislation on this sector,” Sitharaman says, adding that “RBI is of the view that cryptocurrencies should be prohibited”.
However, an effective cryptocurrency ban will require international collaboration, the finance minister noted. “Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”
After sitting on the fence for years, the Indian government has turned hostile towards cryptocurrency trade, slapping steep taxes on it without granting it legal status. As per the laws introduced in the Budget session and enacted from July 1, profits from trading of cryptocurrency and other digital assets like non-fungible tokens (NFT) will now attract a tax of 30%, while every crypto transaction will attract a 1% tax deducted at source (TDS).
This has exacerbated the troubles of the crypto industry in one of its top markets as it reels under impact of adverse macroeconomic conditions hounding the global economy.