A recommendation to ban virtual currencies is a “regressive step” and reflects “poor understanding” of distributed ledger technology, the technology underpinning crypto currency usage, according to startups and investors operating in the space.
The move by an inter-ministerial panel also drew flak from global investors.
Tim Draper, founder of DFJ Venture Capital, said, “India’s government banned Bitcoin, a currency providing great hope for prosperity in a country that desperately needs it.”
The committee, led by Economic Affairs Secretary Subhash Garg, has proposed jail terms of up to 10 years for anyone indulging in crypto activities like mining and trading. It also suggests the elimination of ‘crypto assets’ from the payments ecosystem.
“The government should not decide where one is investing his or her money in. They can always complete the KYC process of individual investors to stop activities like money laundering and so on, but banning will be quite a regressive step,” said Nakul Saxena, an investor in the space.
Crypto currency could solve multiple issues in cross-border payments, he added.
Tanvi Ratna, a US-India Fellow of the New America Foundation and a blockchain policy researcher, said there was not enough understanding on crypto currency usage in public blockchain systems designed for payments.
“The government wants to ‘eliminate the use of crypto assets…in payments systems…but aggressively promote blockchain technology,’ which they think can dis-intermediate transactions without crypto — this is a big red flag right from the start. Poor understanding of the innovation,” Ratna said.
The panel only looked at virtual currencies, without classifying the underlying technology into common categories like currencies, securities and utilities, as it was done by the US Securities and Exchange Commission and the Financial Action Task Force, she said.
Crypto-backed currencies, securities and utilities typically differ in their usability and applications. “If I classify as a virtual security and not a circulating currency, am I off the hook from the start?” Ratna asked.
Alluding to the difficulty in controlling illegal streaming and download of movies online, the crypto currency ban would not be completely enforceable, experts said.
The proposed ban, while a deterrent against transacting in crypto, would not be completely enforceable as tech-savvy individuals could find ways to circumvent the ban, said Sathvik Vishwanath, co-founder of Unocoin.
Citing examples of how transaction in crypto currencies could still be done, Vishwanath said virtual private networks could be used or users could remotely log in to desktops in other countries where transactions are legal. “I don’t think this ban would be enforceable. Tech-savvy individuals could have a server in the US and direct the transactions from there.”
Industry experts said the recommendations would impact innovation in new technology areas.
Early-stage crypto startups are looking to move abroad in case of a ban. Many are also working with global companies due to the current limitations imposed by the RBI on using banking networks to transact in crypto currency. Loss of investments has crippled crypto startups, and experts said India would face dearth of expertise in this technology going forward.
“A ban cannot be achieved without infringement of everyone’s privacy, resulting in a surveillance state,” Varun Deshpande, cofounder of Nuo Network, said. “It will only encourage illegal activities in the dark markets while the regulators are busy policing the ones who would have complied with regulations.”
The report, released on Monday, recommends a virtual currency backed by the RBI as legal tender, while using the distributed ledger technology for KYC, trade finance, stamp paper registration and for land records.
A Supreme Court hearing on the case between the Reserve Bank of India and the Internet and Mobile Association of India, on behalf of crypto currency firms, has been posted for Wednesday.