The Regulatory Framework for Cryptocurrencies in India

Cryptocurrency Regulation

As healthcare professionals, you are well aware of the need for strict rules, laws, regulations, audits, and monitoring. If anything, without such a framework, millions would have died prematurely or would have suffered at the hands of quacks. Regulation and rules do not stifle innovation but are meant to protect the unaware and gullible from the unknown and terrible.

The same thing applies to financial markets – which are possibly the second most regulated field in the world after the medical profession and industry. Just like a quack (or self-medication based on acquired knowledge) without proper training can ruin the lives of unsuspecting patients, a financial quack (or self-investment based on market & crypto news) can ruin your financial lives.

In the third and final part of our three-part series, we explore the regulatory framework as it is today and where it is heading. We will also assess if this framework is conducive for cryptocurrency investments, neutral, or against them.

Read: Should Doctors Ride the Cryptocurrency Wave? (Part 1)

Read: What are the Risks of Investing in Cryptocurrencies? (Part 2)

India’s Position

Sadly, even after almost a decade of cryptocurrencies and crypto exchanges starting operations in India, there is no cohesive policy to regulate them. The government of India listed the draft “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill” once again in the just-concluded Winter session of the Parliament but did not table it for discussion. That is why there is no official source to study its text. The only credible source is the PRS Legal Research post on the bill.

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One of the reasons that the Indian government and regulators are shying from banning or regulating cryptocurrencies is the evolving understanding of the technology. They might also be waiting for other countries to pass regulations on them to gain more insights.

The Reserve Bank of India

Among all the regulators, the RBI has been most vocal and active in regulating cryptocurrencies – albeit some describe their actions as harsher than required.

The RBI has warned the public against trading in cryptocurrencies since early 2013. With no regulatory framework from the government available, the RBI proactively banned all cryptocurrency platforms from accessing the formal financial channels for investing or trading in cryptocurrencies in 2018. This resulted in mayhem as all crypto assets were frozen and the prices of all cryptocurrencies fell.

The RBI in its bulletin on FinTech: The Force of Creative Destruction, released in November 2020, states the requirement for a global consensus and evolving regulation across the world. It stressed the continued awareness drives and warnings to the general public.

RBI Governor Mr. Shaktikanta Das, in his many interviews including in the latest one with CNBC Asia, Singapore on August 26, 2021, reiterated RBI’s position. He delineates cryptocurrencies from the blockchain and distributed ledger technology. He stressed regulating the former while leaving the latter open for innovation.

The Courts

The Internet and Mobile Association of India went to court against the 2018 RBI ban. The Supreme Court of India lifted the ban in March 2020. This came just in time for the biggest frenzy over cryptocurrencies as the governments and central banks were about to push easy money to fight the demand shock caused by lockdowns. The once dormant crypto exchanges seized the moment and rode the tidal wave.

The Finance Ministry, GoI

The draft bill on cryptocurrencies titled “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill” was once again listed but was not tabled by the government in the winter session of the Parliament. As the title suggests, the Indian government is moving in the same direction as China – ban all private cryptocurrencies and promote a rupee-backed official cryptocurrency.

The draft bill proposes the ban on private cryptocurrencies on the following grounds:

  • Potential use for money laundering and tax evasion.
  • Potential use in terror/insurgency funding, drug/human trafficking, and other illegal trades.
  • Risks to investors and consumers due to volatility and cybercrimes.
  • Inadequate disclosures, the inadequacy of the technical infrastructure and expertise to deal with evolving technology.
  • Threat to country’s financial stability and sovereignty.

The bill proposes to:

  1. Prohibit mining, holding, selling, trading, issuing, disposing, or using any private cryptocurrency within Indian jurisdiction.
  2. Any activity stated above is punishable by a hefty fine and imprisonment of up to 10 years or both.
  3. Ring fence the formal financial structure to minimize the risks to its stability.
  4. Allow the use of any processes or technology for teaching, research, and experiment.
  5. Treat cryptocurrencies as commodities and SEBI is to regulate them.
  6. Issue an official Indian Cryptocurrency, with the RBI as its custodian, to be used as a legal tender.
  7. To notify an official cryptocurrency of another country eligible for forex trade between it and the Indian Official Cryptocurrency.

Once the bill is enacted, anyone holding cryptocurrencies must declare and dispose of all cryptocurrencies in their possession within 90 days.

Even when an official cryptocurrency is launched by the RBI, it would be safe as a medium of exchange rather than as an asset class as it will mimic INR.

What Do I Do?

The most obvious question that comes to mind is: Are there better investments than cryptocurrencies?

Yes, if you consider cryptocurrencies as investments at all.

History may not repeat itself, but it certainly does rhyme. We would like you to read about how Dutch investors of the 17th century went crazy about a literally perishable commodity – the bulbs of the Tulip. The tulip mania that ensued pushed the prices of tulips through the roof and overnight they became the next big thing of the times. The tulip bulbs did not have any properties whatsoever to become currency or an asset class for investment by masses. Yet, people were going crazy over them.

Though the interest rates are subdued, and most fixed-income instruments are returning negative in real terms, but as inflation concerns heat up, the central banks are increasing or about to increase their base rates. Indian lenders, led by the SBI, have already started raising their deposit rates. You may at least get inflation-adjusted returns sooner than later. Long-term fixed-income instruments like the NPS, PPF, and other small savings schemes are still lucrative because of their tax breaks and almost 3x rates compared to savings accounts. (Also Read: Should Doctors opt for the New Pension Scheme?)

And partnering with great businesses for the long term by investing in their stocks is one of the sure-shot ways to compound your wealth over the long term. Even if you are not a great stock selector like Buffet or Jhunjhunwala, you can still participate in India and the global growth story through the MF route. SIPs still are the best way to participate in the stocks as they will average out the effects of periodic booms and busts. (Also Read: What is SIP in Mutual Funds?)

In the End…

If you still want to enjoy the “thrill” of betting on cryptocurrencies, we do not recommend that you disturb your financial plan. Carve out a small amount that you would otherwise blow up in a party or on a vacation – something negotiable and deferrable – and use only that money to try your “luck” in cryptocurrencies. Yes, it is your luck and not your skills.

Find a financial planner who can sit down with you and help you chart your financial goals, their importance, and most importantly your ability to cover any risk on them. If you plan to open or expand your hospital or fund the medical education of your child, you cannot risk your hard-earned money on something as volatile as spirit. (Also Read: How Doctors should choose their financial advisor in India?)

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Manikaran Singal is the Founder and Chief Financial Planner at Dr Good Money. Manikaran is MBA Finance (Gold medalist), Certified Financial Planner and SEBI Registered Investment Adviser. Having 17+ years of extensive experience, he is managing clients across the globe. He has authored a book titled - "The Art of Being Good with Money" published by CNBC TV 18, India's Biggest Media House. He is a Regular Contributor in leading Media Houses and his articles keep getting published in different prominent business magazines and Journals. He is of the strong Opinion that Money Behaves the Way you treat it. and if you really want to get Good out of it, first you have to behave good with it.


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