Even though the Reserve Bank of India’s recommendation to ban cryptocurrencies due to their destabilizing effects on the country’s monetary and fiscal health, the Finance Minister said on Monday that regulating or banning cryptocurrencies cannot be effective until an international agreement has been signed.
In response to Lok Sabha MP Thol Thirumavalavan’s question about government plans to impose restrictions on such instruments, Finance Minister Nirmala Sitharaman said,
“Currently, cryptocurrencies are borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any regulatory or banning legislation will only be effective if significant international collaborations are undertaken to evaluate the risks and benefits and develop a common taxonomy and standard.”
The Minister explained that legislation to rein in its use won’t be considered until a global compact on cryptocurrency regulation is in place. For two sessions last year, the legislation was on the agenda of Parliament but is off the table pending the formation of a global compact.
During her address to the Lok Sabha, Ms. Sitharaman explained that the RBI was concerned about the adverse effects of cryptocurrencies on the economy: “The RBI has mentioned that cryptocurrencies are not a currency because the central bank or government must issue every modern currency.”.
“Also, the value of fiat currencies is influenced by monetary policy and their legal tender status, while cryptocurrency value is based solely on speculation and expectations of high returns, which are not well anchored, which will have a destabilizing effect on a country’s monetary and fiscal stability,” she continued.
Despite the central bank’s warnings since 2013, the ministry noted that people continue to use virtual currencies. The RBI prohibited regulatory entities in April 2018 from dealing with virtual currencies or providing services to facilitate the handling or settlement of virtual currencies. In March 2020, the Supreme Court overturned the directive.
As a result of RBI’s concerns regarding cryptocurrency’s destabilizing effect, a law governing this sector has been recommended. The RBI supports prohibiting cryptocurrencies,” the minister said.
A following letter from the central bank advised its regulated entities in May 2021 that they should continue to perform due diligence on customers for transactions in such currencies following the regulations governing Know Your Customer (KYC), Anti-Money Laundering, Combating Financing of Terrorism, and obligations under the Prevention of Money Laundering Act, 2002. The Foreign Exchange Management Act (FEMA) has provided guidelines for overseas remittances.
With such legislative changes on the horizon, it remains to be seen if new crypto coins will soon enjoy the same popularity surge that their established token counterparts have seen for the past year. Crypto share growth in India has been estimated at 421% in 2022.