The annual mating ritual was played out – the Budget was presented and provided grist for the adda mill. The new addition however were the high testosterone, high risk appetite driven young Turks, who were eyeing the big pot of gold at the end of the cryptocurrency rainbow, now fading like a mirage.
The single yet loaded statement in the Budget speech created a flurry in crypto corridors, with interpretations ranging from claims of the government having clarified cryptocurrencies to be illegal, to those claiming that it only intends to take action against illegal use. Reality lies somewhere in between.
Absence of a central authority in the blockchain technology employed by bitcoins lends high volatility to this asset class, with even statements or actions of governments or regulators creating tectonic shifts in value. In case of finance minister Arun Jaitley, you can take practice of law out of a minister but not the lawyer in him. The careful use of the word “crypto-assets” instead of “cryptocurrency” – to drive home that the virtual asset was NOT a currency or “legal tender” – and the subtle addition that the government will take measures to eliminate use of crypto-assets “as part of the payment system” carries the sting in the tail.
The reiteration that cryptocurrency is not “legal tender” does not make it illegal, as has been interpreted by some. It merely means that the virtual asset is not currency – either on par with fiat currency or otherwise. The remainder of the statement merely states the intent of zero tolerance towards use of crypto-assets for illegitimate activities. The catch is with the addition of the intended restraint on use of crypto-assets as payment systems. This clearly restricts the use of cryptocurrencies or crypto-assets, from being used to pay for purchase of products or services.
The Payment & Systems Act, 2007 regulates payment instruments like credit and debit cards and also digital wallets. However unlike a Paytm or Ola money wallet, which would retain the fiat currency value, cryptocurrency wallets convert fiat currency into cryptocurrency.
The present legal situation therefore with respect to cryptocurrencies in brief is as follows: three RBI circulars caution investors against buying or trading in cryptocurrencies, effectively like a caveat emptor warning except for the hint of treating some cryptocurrencies as Ponzi schemes. Further, purportedly based on RBI’s instructions, banks have now started closing accounts used by cryptocurrency exchanges and platforms and have also issued warnings against use of foreign currency for purchasing cryptocurrencies. The basis for the above remains unclear.
The government has clarified its stand that (a) cryptocurrency is not legal tender; (b) action will be taken against illegal uses of cryptocurrency; and (c) it will not treat cryptocurrencies as a payment instrument. That still leaves the window open for trading in cryptocurrencies. The only impediment for this is closing of bank accounts through RBI’s initiative. The ambiguity lies in the fact that a precise statement still shies away from taking a stand on trading in cryptocurrencies.
Trading platforms are the low hanging fruit for government to regulate or control flow of fiat currency or forex into cryptocurrencies. Blocking this channel without taking a definitive stand on cryptocurrencies is clearly counterproductive. It will merely encourage use of cash for such transactions. The government would have therefore pushed the transactions underground instead of keeping them clearly visible.
The smarter move may be for the government to keep its enemies (as it seems to perceive cryptocurrencies) closer by allowing trading (if its intent is not to ban the same) through banking channels. That would enable not just the regulator but also the taxman to track transactions and the flow and conversion of fiat currencies into cryptocurrencies.
The real issue now is that of the young and energetic investor, now seeing his pot of gold slip away. In the time that the government and regulator have taken to decide on the legality of cryptocurrencies – from 2013 till date – much money has flown into the cryptocurrency stream, that too of the middle class. To leave doors open still for interpretation and speculation will definitely affect the common man.
Courtsey: Times of India