The report says that it would be advisable to “have an open mind” regarding the introduction of an official, government-backed cryptocurrency in India

The committee set up to look into the legality of cryptocurrencies and blockchain has submitted its report to the Finance Ministry and recommended that private cryptocurrencies be banned completely in India.

It has also drafted a law, the ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’, which mandates a fine and imprisonment of up to 10 years for offences. The committee, however, said the government should keep an open mind on the potential issuance of cryptocurrencies by the Reserve Bank of India.

The government had constituted an Inter-Ministerial Committee on November 2, 2017, under the Chairmanship of Economic Affairs Secretary Subhash Chandra Garg and comprising senior officials of the Ministry of Electronics and Information Technology, SEBI and the RBI. “The committee notes with serious concern mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these,” the report said. “All these cryptocurrencies have been created by non-sovereigns.”

The report went on to highlight the fact that cryptocurrencies do not have any intrinsic value of their own and lack any of the attributes of a currency. That is, they neither act as a store of value nor are they a medium of exchange in themselves.

“Therefore, the Committee is of clear view that the private crytocurrencies should not be allowed,” the report said. “These cryptocurrencies cannot serve the purpose of a currency. The private cryptocurrencies are inconsistent with the essential functions of money/currency, hence private cryptocurrencies cannot replace fiat currencies.”

The Committee, however, leaves the door open for the central bank issued cryptocurrencies, adding that it endorsed the RBI’s stance of banning any sort of interface of cryptocurrencies with the banking system in India.

“The Committee recommends that all private cryptocurrencies, except any cryptocurrency issued by the state, be banned in India,” the report said. “The Committee endorses the stand taken by the RBI to eliminate the interface of institutions regulated by the RBI from cryptocurrencies.”

However, the report goes on to say that it would be advisable to “have an open mind” regarding the introduction of an official, government-backed cryptocurrency in India. But it also added that it is currently unclear what the advantages of such a currency in India would be.

In light of this, it recommended that the government constitute a committee under the Department of Economic Affairs and the participation of the RBI, Ministry of Electronics and Information Technology (MEITY), and the Department of Financial Services to further look into the matter.

The draft law says that anybody who mines, generates, holds, sells, deals in, transfers, disposes of or issues cryptocurrencies with will face a fine and/or jail time of between 1 and 10 years. The fine has been set at the either three times the loss or harm caused by a person, or three times the gain made by the person, whichever is higher.

Process welcomed

While the committee has taken a strong stance against cryptocurrencies, it has highlighted the benefits of the underlying technology—the distributed ledger technology (DLT) and blockchain.

“The Committee recommends that the RBI examine the utility of using DLT based systems for enabling faster and more secure payment infrastructure, especially for cross-border payments,” the report said. “The Committee recommends that blockchain based systems may be considered by MEITY for building a low-cost KYC system that reduces the need for duplication of KYC requirements for individuals.”

Further, the report said that DLT-based systems can be used by banks and other financial firms for loan tracking, collateral management, fraud detection, claims management in insurance, and reconciliation systems in securities markets.

“Similarly, DLT can be beneficial for removing errors and frauds in land markets if the technology is implemented for maintaining land records,” the report added. “The Committee therefore recommends that various state governments may examine the feasibility of using DLT for land-records management.”