There has been a lot of talk around Cryptocurrency / Digital Assets in the past few months - be it for the kind of swings observed in the prices of these assets, or be it the statements issued by various authorities.
To begin with let's go through some of the announcements and statements from some key people in respect of dealing in Cryptocurrency in India followed by a plain interpretation of these statements and lastly, we will cover our view on it.
Statements:
Most recent one by RBI, during it's bi-monthly Policy review on Apr 5, 2018 -
“Ring-fencing regulated entities from virtual currencies:
Technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others.
Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately.”
However, below commentary was a part of the same announcement, just prior to above piece -
“Central Bank Digital Currency:
Rapid changes in the landscape of the payments industry along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money have led central banks around the world to explore the option of introducing fiat digital currencies. While many central banks are still engaged in the debate, an inter- departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency. The Report will be submitted by end-June 2018."
Statement from the budget speech by the honourable Finance Minister in the budget speech, on Feb 1, 2018 -
“The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system. The Government will explore use of Blockchain technology proactively for ushering in digital economy”
On this, there was an opinion shared by Head of the Blockchain and Cryptocurrency Committee of India (BACC) -
“What the Finance Minister might be saying is that cryptocurrency is not considered to be a part of these payment systems. Similarly, gold is not part of a payment system, but people still barter assets like gold for goods, as long as both parties record the transaction. It is an asset barter transaction.
There is a little subjectivity on the matter. Can an individual swap cryptocurrency for another cryptocurrency?
Interpretation:
Apart from the opinion shared above, a plain interpretation of the above statements can be summarised as below -
The RBI as well as the government is primarily concerned about the illegitimate use and frauds / Ponzi schemes run by various persons, in the name of Cryptocurrency. A prime example of a Ponzi scheme is a very recent incident that was identified by the Police and ED. The people detained in connection with this Ponzi scheme used to lure people to invest into Bitcoin through their company and they promised 10% returns on the invested amount every month. Investors were issued a new Cryptocurrency - MCAP, which was supposed to yield the return. However no such return was given and investors ended up losing their money.
Also in parallel, various government and / or RBI backed studies are in progress, to come up with our own Digital Asset, which can be regulated by the RBI, plus there can be regulations in various Financial Laws regarding the same. Income Tax Act, GST, FEMA, are few primary regulations which will need amendments amongst a host of other laws, in order to have a foolproof legal framework around this new form of asset/payment/settlement mechanism.
In the interim, RBI has in its recent announcement, directed all entities regulated by it, to refrain from rendering any services to businesses/individuals dealing in Cryptocurrency. Also, those entities already into such business relationships, have been given a deadline of 6 July 2018, to stop providing such services. This means that banks/payment gateways etc which are already providing services to persons dealing in Cryptocurrency, are expected to discontinue such arrangements by July 6.
Our view:
We had briefly touched upon this topic in this article on our blog. We are looking to build up on that, in light of this recent announcement as well.
What happens to our holdings in Cryptocurrency?
This surely must be the first question that would have come up in your mind.
Simple answer - It is not going anywhere. Holding of Cryptocurrency / Digital Assets is not illegal in India. In fact, most purchases in India, would have been done after following stringent KYC procedures, funded by fiat currency (INR for us in India) transferred from the buyer’s own bank account. It would be tax paid money of the buyers and again, taxes would be paid on the grains realised from cryptocurrency trading.
Only change that has happened is - you might not be able to buy more of such assets using fiat currency or encash your holdings into fiat currency - after 6 July 2018. Only things you need to be cautious of, are:
Your own liquidity needs: To begin with, you would have already invested that money, which you must have been willing to lose at the time of investing. Nonetheless, if that wasn't the case, and you expect to use that money now, it would be better to exit at this point, and get fiat currency against your Cryptocurrency / Digital Assets.
The manner of your holding: Amongst other ways to hold your digital assets, the most popular way is to hold it in your wallets with various exchanges. Smaller exchanges could find it difficult to sustain in shorter term, given the ban on conversion from and to fiat currency at this point (starting July 6). In the extreme case that the exchange is not able to sustain, your holdings with that exchange could be at a risk. However, that might not be the case with bigger exchanges.
How do we trade now?
Since from July 6 2018, the banks are expected to discontinue serving persons dealing in Cryptocurrency, it can be reasonably expected that fiat currency can be deposited and / or withdrawn upto July 5. Accordingly till July 5, exchanging Cryptocurrency for fiat currency should not be any issue.
However post July 6, it remains to be seen as to which pairs will be traded on various exchanges across India - probably there could be Crypto to Crypto pairs introduced by them. Or they can continue to allow trading with fiat currency - but certainly no fiat currency can be deposited or withdrawn to/from the INR wallets with these exchanges. We shall keep updating this article, as and when we come across new information about trading post July 5.
**Note: We strongly recommend everyone to refrain from transferring your Cryptocurrency / Digital Assets to exchanges or other persons outside India, as already covered in our previous article referenced above. It could be seen as a violation as per Section 3 of the FEMA.
Conclusion:
- Cryptocurrency / Digital Assets as against the general perception about them, represent the underlying technology. There is a general perception that these assets just “represent thin air”. But after having read about quite a few Digital Assets, we genuinely think that these represent the underlying technology, a technology that is trying to address some of the pain points faced in trade/commerce across the world as of date. Of course there could be newer, improved versions of some or all of these technologies in the coming years, but that only means that investment in these assets holds genuine value. If you are in for a long term, there is no need to worry at this point - just ensure that you have diversified in various cryptocurrencies, across multiple Cryptocurrency Exchanges in India.
- We reiterate - as of date, holding of Cryptocurrency / Digital Assets is not illegal. Just that exchanging it for fiat currency, has been restricted (from July 6) by the recent announcement by RBI. Also, since RBI and Government are already working towards bringing our own Digital Asset and its related regulations, our calculated guess would be that holding of Cryptocurrency / Digital Assets might as well never be illegal in India.
- Additionally, as we write this article we have been coming across communications being sent out by various popular Cryptocurrency Exchanges operating in India, that all of them are seeking a dialogue with the RBI, in order to seek a mutually agreeable way to tackle this. There could very well be a completely different picture by July 6. As mentioned earlier, we shall keep updating this article with newer information, as and when it is available.
**Disclaimer - Through this article, we do not intend vouch for or recommend investing / related activities in Cryptocurrency / Digital Assets, and not intend to vouch for or recommend any exchange or any other entity dealing in Cryptocurrency / Digital Assets. Also, we do not intend to provide any suggestions in terms of manner of holding any Cryptocurrency / Digital Assets.
Lastly, our sole intention here is to provide an opinion on the various announcements and their implications, based on our understanding of the existing rules and regulations.
Please share your feedback on this article in the comment section. As always, feel free to reach out to us on our email: help@ayanshfinsights.com
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