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Indian Government's Plans to Ban Cryptocurrency Outright Are A Bad Idea

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While Turkey hit the headlines last week with a ban on paying for items with cryptocurrency, the government of India appears to be moving towards outlawing cryptocurrency completely. An unnamed senior government official told Reuters last month that a forthcoming bill this parliamentary session would include the prohibition of the “possession, issuance, mining, trading and transferring [of] crypto-assets.” Officials have subsequently done little to dispel the concern that they are seeking a full cryptocurrency ban: in response to questions by Indian MPs about the timing and the content of a potential Cryptocurrency Act, the Finance Ministry was non-committal, beyond stating that the bill would follow “due process.” 

If the Indian government plans to effectively police its own draconian rules, it would need to seek to block, disrupt, and spy on Internet traffic

If rumors of a complete ban accurately describe the bill, it would be a drastic and over-reaching prohibition that would require draconian oversight and control to enforce. But it would also be in keeping with previous overreactions to cryptocurrency by regulators and politicians in India.

India regulators’ involvement with cryptocurrency began four years ago with concerns about consumer safety in the face of scams, Ponzi schemes, and the unclear future of many blockchain projects. The central bank issued a circular prohibiting all regulated entities, including banks, from servicing businesses dealing in virtual currencies. Nearly two years later, the ban was overturned by the Indian Supreme Court on the ground that it amounted to disproportionate regulatory action in the absence of evidence of harm caused to the regulated entities. A subsequent report in 2019 by the Finance Ministry proposed a draft bill that would have led to a broad ban on the use of cryptocurrency. It’s this bill that commentators suspect will form the core of the new legislation.

The Indian government is worried about the use of cryptocurrency to facilitate illegal activity, but this ignores the many entirely legal uses for cryptocurrencies that already exist and that will continue to develop in the future. Cryptocurrency is naturally more censorship-resistant than many other forms of financial instruments currently available. It provides a powerful market alternative to the existing financial behemoths that exercise control over much of our online transactions today, so that websites engaged in legal (but controversial) speech have a way to receive funds when existing financial institutions refuse to serve them. Cryptocurrency innovation also holds the promise of righting other power imbalances: it can expand financial inclusion by lowering the cost of credit, offering instant transaction resolution, and enhancing customer verification processes. Cryptocurrency can help unbanked individuals get access to financial services.

If the proposed cryptocurrency bill does impose a full prohibition, as rumors suggest, the Indian government should consider, too, the enforcement regime it would have to create. Many cryptocurrencies, including Bitcoin, offer some privacy-enhancing features which make it relatively easy for the geographical location of a cryptocurrency transaction to be concealed, so while India’s cryptocurrency users would be prohibited from using local, regulated cryptocurrency services, they could still covertly join the rest of the world’s cryptocurrency markets. As the Internet and Mobile Association of India has warned, the result would be that Indian cryptocurrency transactions would move to “illicit” sites that would be far worse at protecting consumers.

Moreover, if the Indian government plans to effectively police its own draconian rules, it would need to seek to block, disrupt, and spy on Internet traffic to detect or prevent cryptocurrency transactions. Those are certainly powers that the past and present Indian administrations have sought: but unless they are truly necessary and proportionate to a legitimate aim, such interference will violate international law, and, if India’s Supreme Court decides they are unreasonable, will fail once again to pass judicial muster.

The Indian government has claimed that it does want to support blockchain technology in general. In particular, the current government has promoted the idea of a “Digital Rupee”, which it expects to be placed on a statutory footing in the same bill that bans private cryptocurrencies. It’s unclear what the two actions have in common. A centrally-run digital currency has no reason to be implemented on a blockchain, a technology that is primarily needed for distributed trust consensus, and has little applicability when the government itself is providing the centralized backstop for trust. Meanwhile, legitimate companies and individuals exploring the blockchain for purposes for which it is well-suited will always fear falling afoul of the country’s criminal sanctions—which will, Reuter’s source claims, include ten-year prison sentences in its list of punishments. Such liability would be the severest disincentive to any independent investor or innovator, whether they are commercial or working in the public interest.

Addressing potential concerns around cryptocurrency by banning the entire technology would be excessive and unjust. It denies Indians access to the innovations that may come from this sector, and, if enforced at all, would require prying into Indian’s digital communications to an unnecessary and disproportionate degree.


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