The proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 would, in effect, ban the transaction and ownership of all private cryptocurrency in India. The criminalization of cryptocurrency has been stringent, with the government’s policy documents suggesting prison time for violators of the proposed law. For a country that houses the largest number of cryptocurrency owners (as of October 2021), the government stance of blanket bans as opposed to regulation and fiscal intervention is peculiarly Luddite. This curious character of the policy move is further amplified when one sees the Bill in juxtaposition to Indian Prime Minister Narendra Modi’s flagship Digital India program. The goal of this program, according to its online charter, is to transform India into a ‘digitally empowered society and knowledge economy.’
My aim through this article is not to defend cryptocurrency or to summarize the contradictions in India’s digital empowerment roadmap. Rather, my goal here is to link the surge in Indian ownership of cryptocurrency to the 2016 wide scale demonetization of Rupee notes and the waveing trust in government-issued, centralized tender. I then make note of the déjà vu vocabulary from that fiscal policy intervention, which is being mobilized to justify the curbs on cryptocurrency. The broader question posed here is: does currency have morality? And does its decentralization erode this character? The Indian state seems to think so.
‘Notebandi’
November 2016 saw the demonetization of the two most used currency notes in India. With a nationwide address, Prime Minister Narendra Modi announced the ‘notebandi’ of all 500 and 1000 Rupee notes in circulation. The word ‘notebandi’ translates directly as the closure of a note and that perhaps is best indicative of the disruption the suddenly-implemented policy caused. In a country that has a broad-based informal economy, oiled by the anonymity cash affords, three key reasons were provided for the demonetization: To combat counterfeit notes and unaccounted funds that were apparently being used to fund illegal activities (terrorism, non-defined ‘anti-national’ activities; to limit black money, that is income that evaded taxation; to formalize the Indian economy and encourage a cashless transition.
The first reason was propagated with much force, giving currency a moral character. Unregulated (unrecorded, untaxed, and on occasion counterfeit) currency was presented as a cause rather than a symptom of national interest impinging on immorality. By removing the anonymity attached to cash transactions and emphasizing on a passbook principle via bank transfers and a push towards debit and credit card usage, the state could in effect keep tabs on the circulation of funds.
By taking 86% of the total cash out of market circulation, the Indian government in effect froze and upturned the country’s economy. While the wider moral and legal arguments may have found favour within jingoistic circles, the actual impact of the move was borne by the lower and middle classes. A drastic blow to the cash-heavy market, demonetization was instrumental in shaking citizens’ faith in legal tender. Menon and Das have linked this quivering faith to the rise in Indian purchases of cryptocurrency. According to their argument, the push towards a cashless economy had individuals looking towards different options, and the lucrative Bitcoin boom provided a decentralized, non-state affiliated choice of tender. Though an unintended consequence of demonetization, the notebandi episode brought cryptocurrency into the Indian mainstream. This form of tender is not just limited to metropolitan centers, but has also expanded considerably into Tier 2 and Tier 3 cities.
A Brief History
December 2017 saw the Reserve Bank of India (RBI) and the Ministry of Finance issue discouraging statements on the use of cryptocurrency. While the field remained unregulated, it was not deemed illegal. Rather, the lack of public (state) backing had cryptocurrency being compared to Ponzi schemes. Four short months later in April 2018, the RBI issued a circular prohibiting cooperative and commercial banks, payment and small finance banks along with Non-Registered Financial Companies and payment providers from dealing in any kind of virtual currency. The circular also prevented them from providing services to entities that dealt with virtual currency. However, in May 2018 a writ petition against this circular was filed in the Supreme Court of India. This coincided with the release of a fiscal committee report recommending a blanket ban on the use and circulation of all cryptocurrency in India. In May 2020, the Supreme Court quashed the RBI directive allowing the market to revive itself, terming the ban on virtual currencies unconstitutional. This did not reduce the precarity of the quivering market in India as rumours qua a parliamentary Bill banning trade once again remained on the horizon.
Pecunia Olet
The Vespasian axiom holds that money has no smell, irrespective of its origin. A coin cannot “reek” or have moral valence in and of itself. In the Indian argument against cryptocurrency – pecunia olet – the decentralized tender is inherently corrupt. According to the Inter-Ministerial Committee report of 2019, the key concern against crypto- currencies is that they are outside the control of central banks and thus “central banks cannot regulate the money supply in the economy if non-official virtual currencies are widely used.”
The lack of regulation has been tied to the possibility of illegal activities on the vaguely understood “dark web.” This has given rise to déjà vu arguments towards the banning of cryptocurrency. Fiscal control is inherently tied to state control and thus is linked to matters of national security. The same fears of unregulated notes and counterfeits in funding terrorism, purchase of weapons and illicit drugs are being presented as reasons for the ban. The RBI has presented an alternative of a public virtual currency –- a “digital Rupee” so to speak. What we must note here, though, is that a public virtual currency is not the same as a cryptocurrency. Central to blockchain technology that counts towards tender (and one of its primary draws) is its anonymity. A digital Rupee can neither replicate nor seeks to replicate the main lure of the decentralized crypto.
While the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was not presented in the Winter Session of Parliament, it is a long way from being tabled. What this means for a citizenry that has invested in virtual currency – and has still not recovered from the demonetization debacle – remains to be seen. Legal criticisms of the Bill remain rife, but questions of state intent must be pushed forward into the discourse. Concerns of financial freedom, democracy and decentralization of funds must be interrogated, and the doge in the room must be addressed. A shift from proposed prohibition to potential regulation would be key in rescuing a quivering market. A truly digital India cannot leave crypto in its liminal backrooms any longer.
Azania Imtiaz Khatri-Patel is a Rhodes Scholar in Residence at the University of Oxford.