The Indian government may be warming up to blockchain technology and even a central bank digital currency (CBDC), but private virtual currencies still stand no chance.
Once global central banks launch their own digital currencies, most private ones will disappear, according to Subhash Chandra Garg, former finance secretary of India.
“The RBI (Reserve Bank of India) and the government will have to figure out how to allow the use of private cryptocurrencies on the crypto platforms which have their own system of value transfer,” Garg said at the Business Standard Insight Out Summit on Oct. 22 (Friday).
“The private cryptocurrencies hurt government revenues in a way…the return on investments that the crypto platforms can make from the currency delivered to them is not accrued to the government. Once the official digital currency comes in, most of the private cryptos and stablecoins will disappear,” he said.
Garg headed a high-level government committee to study issues related to virtual currencies. The panel was constituted in November 2017 after years of resentment to digital tokens and submitted a report (pdf) 16 months later.
Meanwhile, the RBI in April 2018, had restricted banks (pdf) from engaging in cryptocurrency-related dealings. The decision was overturned by the supreme court in March 2020. Over a year later, in May, the central bank issued a statement where it advised banks not to cite its 2018 circular for denying services to cryptocurrency platforms or investors.
Now, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021—also known as the Crypto Bill—is expected to be taken up in the winter session of the Indian parliament.
Amidst these developments, Garg took voluntary retirement in July 2019 after he was shifted from the finance ministry to the power ministry under Narendra Modi’s second term as prime minister.
How India can regulate blockchain-based services?
While blockchain technology itself cannot be regulated, it is preferable to amend or formulate laws to safeguard consumers who avail of services based on the technology, the former bureaucrat cautioned last week.
“It might be advisable to bring a Crypto Assets and Services Regulation Act, on the lines of Securities Contracts (Regulation) Act of 1956 (pdf),” Garg said.
He also saw a need for a “massive revision” in the Indian Contract Act, 1872, to include blockchain-based smart contracts—the self-executing agreements, with conditions agreed upon by the buyer and seller directly written into lines of code.
Most blockchain-based financial services such as trading, investing, lending, and borrowing, and even otherwise are based on smart contracts. They lead to huge cost savings and also streamline the processes involved. Customers, too, gain from easier and safer transaction methods.
Garg trifurcated the use of blockchain technology into three parts: currency, financial assets, and financial services.
“Many services, which were otherwise served on a centralised database system are now delivered on decentralised system, including even finance…In that sense, it (blockchain technology) is much more versatile,” Garg said.
However, private cryptocurrencies like bitcoin cannot be used as legal tender since their prices are market-driven, and have no intrinsic value, he said.
Why should private cryptocurrencies be banned?
A limited supply of bitcoin, one of the most popular cryptocurrencies, and high demand for them have resulted in prices skyrocketing in the past few years. On Oct. 19, a single bitcoin cost $61,829, its highest closing level since April. On the other hand, evolving developments such as negative remarks on cryptocurrency from Tesla billionaire Elon Musk and China’s crackdown on crypto services have led to a plunge in bitcoin prices in the recent past.
Such volatility negates the idea of any currency, which, to work, must be stable and backed by a government.
Garg suggested that the RBI launch its own CBDC as soon as possible.
“Until the world develops a way to value the real worth of crypto, there will be a lot of uncertainty, speculation, and volatility. That is the biggest problem,” Garg said, advocating a common international digital currency for ease of cross-border payments.
The use of CBDCs for international payments
Currently, cross-border payments are cumbersome, costly, and time-consuming, which increases the credit and settlement risk for all parties involved in a transaction.
The process may become easier with CBDCs once common international standards govern how multiple systems operate with each other.
A cross-border experiment backed by the Bank of International Settlements (BIS) and the central banks of Hong Kong, Thailand, China, and the United Arab Emirates showed that digital currency can lead to faster and cheaper global money transfers.
The project developed a prototype that reduced the time of cross-border transfers from days to seconds, according to the BIS report (pdf).