In India, an effort to ban cryptocurrencies has reportedly been revived. What comes next?

The Indian crypto community faced a new period of uncertainty Friday after the Economic Times newspaper reported that the country’s government is planning a new law that would ban cryptocurrencies.

“A note has been moved (by the finance ministry) for inter-ministerial consultations,” an undisclosed senior government official told The Economic Times. BloombergQuint also reported the news, citing an anonymous government official, saying that “a cabinet note” seeks to ban crypto via law and is inviting comments from government departments.

What is this “note?” Is it related to the draft “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019,” which was introduced by a high-level Inter-ministerial Committee (IMC) of the Department of Economic Affairs, Ministry of Finance?

It is, according to legal and regulatory experts who spoke with The Block.

“There is only one government document around [the] ban...and that's the IMC report with the draft bill. So on the basis of this report, the finance ministry is opening a consultation on exploring the ban option,” Tanvi Ratna, crypto regulation specialist and founder and CEO of Policy 4.0, told The Block.

Ratna also advises the Indian government on policy matters and she said the note or “government file” has indeed been “signed” and moved by the finance ministry. A cabinet note is a means of conveying information to government ministers, and the advancement signifies the start of a prolonged process that will eventually involve both chambers of India's national legislature. Ultimately, it's a process that could take months or more to reach completion.

Jaideep Reddy, a partner at Nishith Desai Associates, also told The Block that the note appears to be based on the draft ban bill. Nishith Desai Associates represented the Internet and Mobile Association of India (IAMAI) in the IAMAI vs. Reserve Bank of India (RBI) case, which the Supreme Court of India resolved earlier this year in favor of IAMAI.

That Supreme Court verdict overturned the RBI's April 2018 circular that had barred banks from serving cryptocurrency exchanges and firms. Still, major banks in India remain hesitant to serve the crypto sector.

Inquiries to the finance ministry and RBI were not returned by press time.

Long journey 

Will the cabinet, i.e. the union council of ministers, move ahead with the note and ban crypto? It’s not that straightforward, according to both Reddy and Ratna.

“It is a long journey from draft cabinet note to law, and it is up to citizens and industry to make their voices heard if they feel that this is a drastic step," said Reddy. Ratna echoed a similar view, saying that lawmaking is a long process in India.

Here’s how the legislative process generally works in India. First, there is a ministry that comes up with a proposal (with a committee's help or without).  Once the proposal is accepted, it is moved for consultation in the cabinet and it goes through various ministries for feedback. Once this process concludes, the proposal gets converted into a bill by the law ministry and it then moves to the Parliament. The Parliament has its own approval processes — which involves voting, debating, preparing a Parliamentary committee report, getting nods from the Lok Sabha (House of the People) and the Rajya Sabha (Council of States).

Once the bill passes the Parliament, it then goes to the president of India for a final signature.

Not only is this a long process, but there is also “no hard deadline” for tabling any bill in Parliament, Anoush Bhasin, founder of crypto-specific legal and tax consulting firm Quagmire Consulting, told The Block.

But if the cabinet wants a specific bill to get passed, it can go for the ordinance route, a crypto lawyer who didn’t want to be identified told The Block. Ordinances enable the Indian government to take immediate legislative action. 

Unexpected move?

What could have led the finance ministry to open dialogue with the cabinet? Ratna and the crypto lawyer quoted above positioned it as a response to the Supreme Court verdict of March. 

Before the verdict, the ministry thought “the [crypto] ecosystem was under control with the RBI’s circular and now as the circular is gone, the ministry thinks the risk has come back and they need to do something,” said the lawyer. 

Ratna said the note hasn’t come “out of the blue.” The draft bill was supposed to be discussed, but it got delayed due to the Supreme Court-RBI matter, COVID-19 and other factors, she said.

Will the bill get passed? In the current form, it is unlikely as the draft bill isn’t thorough, said Ratna and Reddy. Reddy said even if the cabinet were to pass it, the bill would have to go through the law ministry first in order to draft it well.

Overall, opening the discussion is good for the industry, said experts. The bill’s “provisions may undergo certain changes (hopefully making it less prohibitive than the currently proposed draft),” said Quagmire Consulting’s Bhasin.

Are crypto exchange operators worried?

Leading crypto exchange operators in India do not seem to be concerned with the news.

“It is not really a major cause for concern,” Nischal Shetty, founder and CEO of Binance-acquired WazirX, told The Block. “It’s still not clear whether the finance ministry intends to work upon the old crypto bill or whether they plan to work on bringing an updated new bill. I think it’s too early for us to worry about the note.”

Shetty further said that if the government is concerned about crypto being used for criminal activities, then banning it “is the wrong way to go about it.” As intermediaries, exchanges can help track various trades, accounts and can help law enforcement agencies to identify criminals, he added.

Sumit Gupta, co-founder and CEO of Coinbase-backed CoinDCX, shared a similar response. “We see no reason to panic, as this is part of the process of forming clearer regulations around the use of cryptocurrencies. We trust and believe that the Indian government will consult the relevant stakeholders from the Indian crypto community, and listen to our voices before any decisions are made.”

Unocoin’s co-founder and CEO said the news is “just a call for discussion” and it could take “a few quarters” before any decision is made.

It's also not clear if the bill will even make it to the finish line. Anirudh Rastogi, founder of technology-focused law firm Ikigai Law, told The Block: “We have heard that all sections in the government/RBI are not in favor of a ban.”