Embracing innovation

Blanket ban on cryptocurrency isn't a good idea

India is open to the use of blockchain technology but not private cryptocurrencies. If the recommendations of the inter-ministerial panel headed by Finance Secretary Subhash Chandra Garg — which submitted its report on Monday — are accepted and the proposed Bill is passed, India will not only shut its door to cryptocurrencies, such as bitcoin, but will also make dealing in such instruments an offence with imprisonment of up to 10 years. 

The idea of putting a blanket ban on cryptocurrencies is premature for multiple reasons. For one, these are still early days for cryptocurrencies and tradeoffs are not fully understood. A complete ban might insulate India from technological developments in the area, which can be useful in many ways. For instance, the committee itself has recommended the use of distributed ledger technology (DLT), the underlying technology for bitcoin. Second, it will be extremely difficult to administer and enforce the ban. It is possible that the trade will move underground and cryptocurrencies will be used for unlawful activities. 

To be fair, cryptocurrencies are risky instruments. For instance, they can be extremely volatile and owning them without understanding the associated risks may result in losses. It can also create regulatory challenges, as capital can move seamlessly across borders. Money created by private entities can increase complications for central banks as well. However, the penetration is still too low to cause any systemic threat. Therefore, rather than banning cryptocurrencies, what is needed at this stage is to educate and inform people about the associated risks.

Nonetheless, the panel has done well to recognise the importance of DLT. For example, it can significantly increase efficiency in trade finance by making transactions more transparent. Further, it can considerably reduce paperwork for know-your-customer requirements by enabling verification through a decentralised ledger. DLT can also help improve the quality of land records, which will allow both farmers and small businesses to access credit on favourable terms. The committee has also advised keeping an open mind regarding the possibility of introducing central bank digital currency in India. Again, this is an area that is not fully understood. Several central banks have started work in this direction. The Bank for International Settlements is also working with central banks interested in issuing digital currencies. There are plenty of issues that need to be settled before central banks can start issuing digital currencies. For instance, it is important to understand the implications of direct access to the central bank’s liability, and how it will affect the banking system and financial intermediation. Although an interest-bearing digital currency can perhaps improve monetary policy transmission in an economy like India, it can create significant disruption in the banking system and could become a risk for financial stability. Among other things, the introduction of digital currency might also require changes in the payment system.

It is encouraging that the inter-ministerial panel has shown marked openness to technological innovation and ideas in terms of encouraging greater adoption of DLT, and exploring the possibility of central bank digital currency. Unfortunately, the same cannot be said in the context of existing cryptocurrencies.