In general, the goal of blockchain technology is to allow digital information to be recorded and distributed, but not edited. The bitcoin (most commonly used cryptocurrency) protocol is built upon the blockchain, and while the use of printed fiat currency is regulated and verified by a central authority, Bitcoin is not controlled by anyone. Instead, transactions made in Bitcoin are verified by a network of computers and permanently inscribed on the blockchain. Furthermore, additional currencies and DApp’s are built on the Ethereum blockchain. This fact makes India’s decision very curious. However, before we attempt to understand the reasoning behind India’s decision, we must first look at the committee’s recommendations.
The Department of Economic Affairs of India on February 28, 2019 came out with a report titled, “Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies.” In chapter 5, in the committee’s recommendations on virtual currencies they wrote;
(a) The Committee notes with serious concern mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these cryptocurrencies. All these cryptocurrencies have been created by non-sovereigns and are in this sense entirely private enterprises.
(b) There is no underlying intrinsic value of these private cryptocurrencies. These private cryptocurrencies lack all the attributes of a currency. There is no fixed nominal value of these private cryptocurrencies i.e. neither act as any store of value nor they are a medium of exchange. Since their inceptions, cryptocurrencies have demonstrated extreme fluctuations in their prices. Therefore, the Committee is of clear view that the 56 private cryptocurrencies should not be allowed. These cryptocurrencies cannot serve the purpose of a currency. The private cryptocurrencies are inconsistent with the essential functions of money/currency, hence private cryptocurrencies cannot replace fiat currencies.
(c) A review of global best practices also shows that private cryptocurrencies have not been recognized as a LEGAL tender in any jurisdiction.
(d) The Committee recommends that all private cryptocurrencies, except any cryptocurrency issued by the State, be banned in India.
(e) The Committee endorses the stand taken by the RBI to eliminate the interface of institutions regulated by the RBI from cryptocurrencies. The Committee also recommends that all exchanges, people, traders and other financial system participants should be prohibited from dealing with cryptocurrencies.
(f) Accordingly, the Committee has recommended a law banning the cryptocurrencies in India and criminalizing carrying on of any activities connected with cryptocurrencies in India. (
- g) The Committee also recommends the Government may consider establishing a Standing Committee to take into account the technological developments globally and within the country and also the views of global standard setting bodies. The Standing Committee could revisit the issues addressed in the report as and when needed.
As we can see, from the summation of these recommendations, the issues are not technological, rather they are governmental. In other words, the government of India can neither control the “mushrooming of cryptocurrencies” or “tender jurisdiction” over them. Furthermore, these private cryptocurrencies “are inconsistent” with functions and stability of fiat currency in so much as they can’t be regulated, taxed or collected by the government. Consequently, governments are hesitant to support that which they can’t control or regulate. Thereby, while India will continue to innovate in the realm of blockchain technology, they will not support any currencies built upon them. In the end, the government is more concerned with their own economic stability and monetary policy than they are with supporting private cryptocurrency ventures.
***This blog is based upon a article I wrote in Medium