India plans to ban private cryptocurrencies and promote central bank digital currency

India is preparing a bill to regulate cryptocurrencies - the "Cryptocurrency and Official Digital Currency Regulation Bill, 2021", which will be submitted in the winter session of the Indian Parliament starting on November 29. It aims to ban all private cryptocurrencies in India to promote the official digital currency issued by the Reserve Bank of India (RBI).

Although the concept of private cryptocurrencies is proposed in the bill, Indian regulations have not yet clearly defined them, which has caused confusion among the country's cryptocurrency service providers, and panic selling has also occurred in the Indian market.

On November 24, on WazirX, a well-known cryptocurrency exchange in the country, Bitcoin (BTC) fell from around 4.3 million Indian rupees (about 57,600 US dollars) to a low of 3.35 million Indian rupees (about 44,900 US dollars), with the maximum intraday drop of 22%; more obvious was the selling of the US dollar stablecoin USDT, which fell from 75.9 Indian rupees (about 1 US dollar) to 60 Indian rupees (about 0.8 US dollars).

India has been changing its attitude towards cryptocurrencies over the past three years. In 2018, the country banned cryptocurrency trading, but the Supreme Court lifted the restriction in March 2020. Local media believe that the new bill to be discussed in the Indian Parliament attempts to pave the way for the official digital currency issued by the country's central bank by suppressing private cryptocurrencies.

India plans to ban private cryptocurrencies, BTC falls 22%

On November 23, India proposed a bill called "Cryptocurrency and Official Digital Currency Regulation Bill 2021" in the upcoming winter parliamentary session on the 29th. According to the parliamentary announcement, "the stated intention of the bill is to provide a convenient framework for the creation of an official digital currency issued by the Reserve Bank of India." The bill also attempts to ban all private cryptocurrencies in India, but "it allows certain exceptions to promote the underlying technology of cryptocurrencies and their uses."

The bill prohibits "private cryptocurrencies," a concept that is not clearly defined and leaves a lot of room for interpretation, such as "exceptions" for technologies that promote cryptocurrencies and their uses.

This has caused confusion for cryptocurrency service providers. Nischal Shetty, founder of WazirX, a well-known cryptocurrency trading platform in India, said that he found it difficult to understand what the government meant by "private cryptocurrency". "Bitcoin, Ethereum, etc. are public cryptocurrencies built on public blockchains and have their own specific use cases. They need to run smart contracts and write to the distributed ledgers built on them. People cannot use INR (Indian rupees) or USDT to pay for Bitcoin or Ethereum blockchains."

“Don’t panic,” Shetty wrote on Twitter after news of the new bill emerged. “We all want regulation. We have been pushing for it from last 1,000+ days… We need to have faith in lawmakers. There will be discussion & deliberation.” Shetty tried to comfort his users, but panic inevitably set in.

BTC plummets on Indian exchanges

Mainstream cryptocurrencies generally fell in the Indian market, with a drop of more than 20%, and there was a sharp drop. WazirX was down for a while, and the official Twitter reported the transaction delay problem in the application.

From the morning to the evening of November 24, Bitcoin (BTC) fell from a low of around 4.3 million Indian rupees (about 57,600 US dollars) to 3.35 million Indian rupees (about 44,900 US dollars) on WazirX, with a maximum intraday drop of 22%; while Ethereum (ETH) fell from a low of 320,000 Indian rupees (4,290 US dollars) to 250,000 Indian rupees (3,352 US dollars), with a maximum drop of 21%; the US dollar stablecoin USDT also saw a sell-off, falling 20% ​​from 75.9 Indian rupees (1 US dollar) to as low as 60 Indian rupees (0.8 US dollars).

It was not until around 8 p.m. local time on November 24 that the Indian market recovered. As of 4 a.m. on November 25, BTC recovered to around 4.248 million Indian rupees, approximately $56,000; ETH rebounded to 315,000 Indian rupees, approximately $4,223; and USDT returned to around $1.

At the same time, on the global cryptocurrency trading platform Binance, BTC reached $57,200 and ETH was around $4,257. This shows that the current mainstream crypto assets in the Indian market still have a certain price gap with the international market.

Is India's ban aimed at paving the way for central bank digital currency?

Judging from the wording of the new bill, Indian regulation has left some room for cryptocurrencies, and the greater intention may be to clear market obstacles for the upcoming central bank digital currency.

Local media India Today quoted senior government sources as saying that India may not be completely closed to concepts and technologies involving digital currencies, nor will it take a tough stance like China. At the same time, some officials expressed concerns about cryptocurrencies and emphasized the sovereign status of currencies. "Currency is backed by the sovereign, and it can be regulated at all levels; if cryptocurrencies gain currency status, the question remains, who will provide guarantees?"

Indian Prime Minister Modi mentioned Bitcoin at the Sydney Dialogue Forum

The media outlet reported that there are signs that the government is working to adjust the situation by providing cryptocurrency-related safeguards. On November 18, Prime Minister Narendra Modi said in a speech at the Sydney Dialogue forum, "Take the example of cryptocurrency or Bitcoin, it is important that all democratic countries should work together on this and ensure that it does not fall into the wrong hands and ruin our young people."

Five days before that, Prime Minister Narendra Modi held a meeting with senior officials on cryptocurrencies. A source told India Today that despite volatility and risks, the popularity of cryptocurrencies suggests it can be a source of revenue for the government, including through direct taxes, goods and services tax, on services provided by cryptocurrency operators; it can also create jobs.

The Central Bank of India (RBI) has been expressing its serious concerns about cryptocurrencies since 2017. In July 2017, then-RBI Governor Urijit Patel said that transactions involving cryptocurrencies were being closely monitored. Since then, the RBI has set up an interdisciplinary committee to discuss the legality of cryptocurrencies.

On April 6, 2018, RBI issued a notice prohibiting banks and entities regulated by it from providing services related to virtual currencies. However, on March 4, 2021, the Supreme Court of India revoked the notice.

The definition of "private cryptocurrency" in the new 2021 bill is most likely based on the recommendations made by the SC Garg Committee established by the Department of Economic Affairs of the Indian Ministry of Finance in January this year. The committee even proposed a ban on cryptocurrencies in its report entitled "Report of the Committee on Proposing Specific Actions Relating to Virtual Currencies", arguing that "all these cryptocurrencies are created by non-sovereigns," and in this sense, "they are completely private enterprises. These private cryptocurrencies have no potential intrinsic value, so they lack all the attributes of currency."

Another important recommendation of the committee is that the government should be open to official digital currencies. It proposes that the Ministry of Economic Affairs set up a group with representatives of financial regulators such as RBI to review and develop a digital currency model suitable for India. If the official digital currency is to obtain the status of legal tender, the committee has proposed that the central bank should create an appropriate regulatory agency for such digital currencies under the power of Section 22 of the Reserve Bank of India Act.

Judging from the results, the committee’s recommendations seem to have been adopted, and India’s new bill on cryptocurrency and central bank digital currency will be discussed in parliament on the 29th.

A positive background for local cryptocurrency service providers is that on November 15, the Standing Committee on Finance, led by former Indian Finance Minister Jayant Sinha, met with representatives of cryptocurrency exchanges, the Blockchain and Crypto Assets Committee (BACC), etc. The representatives explained the regulations and clear basic rules of operation. Although members of the Standing Committee on Finance expressed serious concerns about cryptocurrencies and the need for regulation, no one proposed a ban at this meeting.