On cryptocurrencies India is choosing to incrementally confuse

When Finance Minister Nirmala Sitharaman, in her Budget 2022 speech, said that the government would be taxing profits made from cryptocurrencies, there was much jubilation among crypto market participants who thought this was a step towards legalising cryptocurrencies.

This was considered a major break from India’s previous policy of curbing cryptocurrency transactions. In 2018, the RBI effectively banned cryptocurrencies in India by ordering banks to not deal in cryptocurrencies themselves and stop providing services to any person or entity dealing with cryptocurrencies. This, in essence, not only de-linked cryptocurrencies from banking services but also from the rupee, since conversion was no longer possible.

The Supreme Court in 2020 overturned this order, but the RBI has not changed its view. In December 2021, the central bank made a detailed presentation to its central board basically saying it would be advisable to ban cryptocurrencies.

More recently, RBI Deputy Governor T Rabi Sankar likened cryptocurrencies to Ponzi schemes (something the finance ministry had also done in 2017) and said that banning cryptocurrencies is the most advisable choice for India.

While the RBI has been consistently against the legalisation of cryptocurrencies, the government has not been as clear in its stand. The previous incarnation of its cryptocurrency regulation legislation was titled ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill’. Doesn’t leave much to the imagination, does it?

But then this Bill was dropped and instead ‘The Cryptocurrency and Regulation of Official Digital Currency Bill’ in Parliament was introduced. One would assume that removing the word ‘banning’ from the title and bringing cryptocurrencies into the tax net implies a more lenient approach towards crypto-regulation.

But Ms Sitharaman has dashed those hopes too. Speaking in the Rajya Sabha about 10 days after her Budget speech, she said that taxing cryptocurrencies does not have any implication on their legality.

Basically the government is saying, we are doing some things regarding cryptocurrencies, but don’t read too much into those actions. This is hardly an approach that inspires confidence.

What happens if a court says that the Income Tax Department recognising a source of income implicitly gives that source of income legal sanction?

If the government decides to ban cryptocurrencies, it is going to have to fight an uphill battle as banning them will lead to a profusion of illegal ways in which people access them. It opens up the door to money laundering, terrorism financing, and everything the government already fears.

If it instead decides to legalise and regulate cryptocurrencies, then it can be as strict with its regulations as it wants. This will still be considered a big win by the crypto community, no matter how stringent the rules are.

However, this would not be the first time the government and the RBI have been on opposite ends of the spectrum. It’s rare but it happens.

Back when S Venkitaramanan was finance secretary in the mid-1980s, he had asked the RBI to part with a larger portion of its surplus as dividend than it was doing at the time. The RBI flatly refused, leading to a clash between the finance ministry and central bank that lasted until Venkitaramanan himself became RBI governor in December 1990.

Another such difference of opinion was to do with participatory notes. While the government was keen to introduce them and encourage them, the RBI repeatedly voiced its concerns about them, especially regarding the hidden identities of investors and multi-layering of investments.

It will be interesting to see how this new difference of opinion between the finance ministry and the RBI pans out. Whatever is done, it should be done quickly. Confusion never helps.