In what may come as a major disappointment for India’s crypto community, a law to regulate cryptocurrencies is unlikely until at least after next April, several people familiar with the matter told CoinDesk.
The legislation is still a work in progress. While the bill titled “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021″ was listed on the website of the Lok Sabha (the lower house of India’s Parliament), for the winter session of Parliament which ended Dec. 22, it was dropped in the final days of the session.
While it has been reported the government “wants to hold wider consultations on the matter,” CoinDesk has learned that the government is unlikely to complete those consultations before the next session of Parliament, commonly referred to as the Budget Session.
With only about a month left for the Budget Session it is highly unlikely the bill will be drafted before at least March because the Finance Ministry and institutional stakeholders responsible for shaping the bill have other competing priorities, said three individuals who work closely with the Finance Ministry but were not authorized to speak to the press.
The development is both a blow to India’s burgeoning crypto ecosystem and an opportunity. The crypto industry has been eager for favorable regulation, but the delay keeps the uncertainty alive, complicates processes that exchanges are trying to put in place and slows down the process that could move people in the world’s second most populated country toward adopting cryptocurrencies. The flipside though is that the delay gives more time to the industry to engage and comply with the government.
The much-anticipated law has been hotly debated and desired by industry stakeholders to chart out a roadmap toward financial stability. Uncertainty hit a low point in April 2018 when India’s central bank, the Reserve Bank of India (RBI), banned banks from supporting or engaging in crypto transactions until the Supreme Court overturned the ban two years later. Since then, discussions between government, industry and policy experts about how to regulate crypto have been ongoing.
The finance minister informed Parliament that “because rapidly a lot of things had to come into play, we had started working on a new bill.” Reports indicate the proposed bill has replaced the word “cryptocurrency” with “crypto-asset.”
The bill has also reportedly evolved from prohibiting “all private cryptocurrencies in India” while allowing “for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” to enabling cryptocurrency to be used as an asset but banning its use as currency or payment. Violations would reportedly result in a non-bailable warrant and/or fines, implemented by watchdogs – the RBI and the market regulator, the Securities and Exchange Board of India (SEBI).
The stakes for a favorable outcome for India’s crypto industry are incredibly high. According to one report, India has the most crypto users in the world, almost four times the number the U.S. has.
Several factors contribute to the continued state of uncertainty around the law.
The next session of Parliament, which is likely to begin at the end of January, is known as the Budget Session. The finance minister presents the budget. This is the primary priority.
The Finance Ministry, tasked with drafting the cryptocurrency bill, also has the fiscal responsibility of making the budget. The budget, likely to be presented Feb. 1, is expected to dominate the resources of the ministry, leaving little or no time for other priorities.
“During the Budget Session, the finance ministry gives every single senior official a sectoral responsibility, and as a result nobody is performing their normal functions,” said Vivan Sharan, a technology and policy expert who has worked with the government in the past.
The Budget Session will likely last until at least the end of April.
Subhash Garg, a former secretary in the Finance Ministry’s Department of Economic Affairs, told CoinDesk he did not see how the ministry could both draft a budget while also working on the cryptocurrency bill.
“One cannot speculate about whether the bill will come in the monsoon session in July. There are much deeper issues. I don’t know if the government is expanding the scope of the bill. I could take even longer and perhaps, should take longer,” Garg said.
Past trends around major bills and reports indicate that Prime Minister Narendra Modi will make a final decision on the regulatory framework amid conflicting views among stakeholders.
In November 2021, Modi, who has reportedly held several rounds of discussions on the matter, indicated a vision for crypto regulation when he said, “We must also jointly shape global norms for emerging technologies, like social media and cryptocurrencies, so that they are used to empower democracy, not to undermine it.”
However, over the next month, the Prime Minister’s Office is likely to be busy drafting the speech of the president of India, which kicks off the first session of a new year, the Budget Session.
Political stakeholders will also face the competing priority of upcoming elections in five states, including arguably the most important state election in Uttar Pradesh, India’s most populous state.
These elections, currently slated for February or March, could have the effect of delaying discussions to create political consensus. It could curtail the Budget Session of Parliament, as was the case in 2021. At that time, “due to demand of leaders of various political parties in both the Houses” the session was shortened “so that Members could participate in the election process in certain states/UTs.”
It is likely that the upcoming elections would both distract from and result in less time for the cryptocurrency bill to be scrutinized.
Some parts of the government are also focused on Jan. 26, 2022, India’s Republic Day, when the country marks and celebrates the date on which its Constitution came into effect.
The Indian government also appears to want more international input on cryptocurrency regulations and frameworks. It has already decided to study regulatory measures other nations are considering and how global standards on cryptocurrencies evolve. The Finance Ministry has also reached out to the Bank for International Settlements (BIS) to frame its legislation, as it seeks wider consultations on the matter.
Signals from the International Monetary Fund (IMF) also suggest a similar approach. On Dec. 9, the IMF outlined the need to start “now” to tackle what will prove to be a “daunting task,” calling for “comprehensive, consistent and coordinated” global regulations that provide “a level playing field to harness the benefits of crypto’s underlying technology while mitigating its risks.”
The IMF’s Chief Economist Gita Gopinath called for crypto regulation rather than a ban while in India earlier this month.
She met top government officials, including Modi. She also met officials of NITI Aayog, a public policy think tank of the Indian government where cryptocurrency regulatory frameworks were discussed, according to an individual with direct knowledge of the meeting.
RBI, a critical institutional stakeholder to the consultations and one that has stated its desire for a complete ban on all private cryptocurrencies, is also occupied with closely monitoring inflationary pressures and the impact of COVID-19 on the economy.
RBI also has to be vigilant in its regulatory and supervisory role with respect to regulated entities, such as banks and non-banking financial companies (NBFCs), as the full impact of COVID-19 on these lending institutions has yet to unfold. The big looming uncertainty over all this is the threat of the omicron variant.
While the RBI is adequately staffed with specific departments to discharge these tasks, it still does not have a fintech department, just a division, leaving questions about efficiency and long-term commitment unanswered.
India is caught between an urgent need for regulating cryptocurrencies and accurately framing the bill through widespread discussions, which takes time.
This catch-22 situation can be seen in last week’s RBI board meeting. Board members sought a presentation on RBI’s position on cryptocurrencies because “the sense of urgency is multiplying for various quarters and therefore the timing of the presentation is also not without purpose,” said at least one individual with knowledge of the matter. The other suggested the presentation was “part of the comfortable ongoing overall dialogue between government and RBI on cryptocurrencies.”
The RBI told its board it would like to ban all cryptocurrencies, a position that has not changed since its 2018 notification that imposed a similar ban until the Supreme Court of India overturned it last year.
Though the overwhelming sentiment of the board meeting was that cryptocurrencies “cannot be ignored” and a “lot of consideration among all actors is required” before regulations can be implemented, said two people familiar with the matter.
“The Indian government is still grappling with several open questions, including capital control and taxation, that stem from the complexities of the crypto business models and the technology underpinning them,” Sharan said.
National consensus and security
Widespread consultations are the government’s mantra going forward, and the government is inclined to make a law only when there is a kind of a national consensus driven by stakeholder consensus. Five experts who spoke with CoinDesk separately agreed with the three sources who said the crypto law could take till at least May.
“I don’t see the government introducing the bill in parliament without first inviting comments from the public,” said Rashmi Deshpande, a legal expert who has worked with cryptocurrency stakeholders and has made representations on their behalf to the government.
“Remember the Supreme Court ruling had pulled up the RBI for not consulting stakeholders before its circular restricting the banks from providing services to crypto currency exchanges,” Deshpande said.
This would follow a larger balance between the ambit of the cryptocurrencies and the global trends and design around cryptocurrencies. It would also be in line with the geopolitical shift in a new world order involving an expansionist China.
India has a number of international security threats related not just to Pakistan but also escalating tensions with China. So, the concern is whether the cryptocurrency route can be used to create more international security issues.
India is also concerned about the possibility of a Chinese digital yuan posing an economic threat to India’s own CBDC (Central Bank Digital Currency). The concern with China is that India missed out on the artificial intelligence bus and that it might miss out on a digital revolution that cryptocurrency might offer.
India’s regulatory framework has a vision to counter the rising contentions related to cryptocurrencies and their potential weaponization.
The government’s pattern has also been to avoid rushing technical bills. The cryptocurrency bill was listed to be introduced in the last two sessions of Parliament but was not introduced.
If the crypto bill is introduced in the Budget Session, it is likely to be sent to a committee, referred to as the select committee, specifically formed for the purpose of deliberating and scrutinizing the bill. This committee is also unlikely to complete its deliberations in the same session of Parliament.
Legislative precedent also suggests a lengthy process for a crypto law.
Hotly debated legislation that is technical in nature usually sees additional scrutiny.
With a technical piece of legislation, Parliament would want to hear from multiple stakeholders both within and outside the industry. Therefore, the usual parliamentary scrutiny would take longer than with other legislation, as has happened with other technical bills such as the Personal Data Protection Bill of 2019 and the DNA Technology (Use and Application) Regulation Bill of 2019. Both bills were sent to a select committee for additional scrutiny.
All major legislative decisions also have to come from the Prime Minister’s Office, such as a recent move to revoke India’s contentious farm laws. It is likely that a final decision on the regulatory framework for the cryptocurrency bill would follow a similar path. The question is whether it would come through a final decision on what the contours of the bill should be for a legislative introduction in Parliament or as a special order (known as an ordinance) when Parliament is not in session.
Between the Winter Session (which ended Dec. 22) and the Budget Session (which is likely to start at the end of January), the government could technically bring in cryptocurrency legislation through an ordinance or special order, but sources said this is highly unlikely.
“Chances are very low that the government uses the ordinance tool,” said Anirudh Rastogi, who regularly advises several stakeholders on cryptocurrency related policy issues.
Other possibilities include the government re-prioritizing the bill if a crypto scam emerges or the government considering regulation in parts.
“Modular regulations aimed at decoupling the laws like amending the RBI act to bring in the central bank’s digital currency are possible,” Sharan said.