India recognises that innovation is disruptive, but it is concerned about the risks posed by cryptocurrencies and unhosted wallets in enabling money laundering and terror financing, finance minister Nirmala Sitharaman said at the spring meeting of the International Monetary Fund (IMF).
India strongly feels the need for an adept and nimble technology-based global regulatory regime in the domain, Sitharaman said while speaking at a panel on the future of money hosted by IMF in Washington DC.
Be it central bank digital currency (CBDC) or assets in the non-governmental domain, the risk that worried her, more so in the private domain, were “unhosted wallets” through which this operation took place across borders, she said.
“Regulating cannot be done by a single country within its terrain through some effective method,” the finance minister said. “And for doing it across borders, technology does not have a solution which will be acceptable to various sovereigns and, at the same time, is applicable within each of the territories.”
Unhosted wallets allow the use and transfer of cryptocurrencies and assets not hosted by a financial institution or bank.
Any regulatory regime will also have to take into account the diverse forms in which crypto assets are used in different jurisdictions, Sitharaman said.
“The risks involved will have to be differentially approached because for each user case, the risks can also be different depending on the economy you are talking about. So if you take a use case in Nigeria, its application and risks involved will be very different from risks in a tourism and investment-rich Bahamas or any other country. So as long as the non-governmental activity of the crypto assets are through the unhosted wallets, regulation is going to be very difficult.
Suggesting that cross border payments will also become effective through central bank digital currencies – which will address issues of efficiency, transparency and better management – the finance minister pointed out that India will unveil its own CBDC by the end of this fiscal year. Acknowledging that protocols today were better than two years ago, the FM said that what was needed was a global approach a regulation, as well as an understanding of the technology even as it keeps evolving to have tech-driven solutions, “not so much to interfere, but to keep an eye” on them.
And this eye was necessary because of specific risks that India anticipated. “I think the biggest risk for all countries across the board is money laundering aspect and also on the aspect of currency being used for financing terror,” Sitharaman said. She claimed that innovation was disruptive, and that was not a negative, but its right feature. “But on the essential thing of asset of valuation which might be monetised for other activities which are not so savoury, I think regulation using technology is the only answer. But regulation using technology will have to be so adept and so nimble that it has to be not behind the curve but be sure that it is at the top of it. And that’s not possible if any one country thinks it can handle it. It has to be across the board.”
When asked about India’s decision to tax income out of crypto assets, Sitharaman explained the rationale of her announcement in the last budget. While not getting into the veracity of numbers on the value of such assets held by people, the FM said that the government realised that there were a “lot of things happening in terms of transacting crypto assets which we don’t recognise as currency”. There was also no regulatory mechanism. In this backdrop, the FM said that the government wanted to be sure that there was a money trail or travel route being tracked, “We were not sure Financial Action Task Force money trail, travel route, was being tracked at all, we were not sure how we can keep a trail of following these transactions. They were electronic codes eventually.” To keep track of who was buying or selling, India announced a 30% tax on incomes generated out of transactions of these crypto assets and a one per cent tax deducted at source that would be imposed at every transaction.
“By taxing, we were trying to make sure that we are keeping a trail and making sure these are going to be eventually compliant with anti-money-laundering rules and making sure these kinds of operations don’t end up, inadvertently too, funding any kind of terror activities.” The FM emphasised that this did not mean that India had legitimised them. “We haven’t said this is currency. We haven’t said that this has intrinsic value. But certain operations are taxable for the sovereign and that is why we have done it.”
Addressing a separate event hosted by the Atlantic Council, the FM said that India’s decision to adopt a CBDC was a “natural course of progression” given how much digitisation had happened in India. But she clarified again that India was not against technology. “We are not against the distributed ledger technology. We are not against that blockchain technology that can come up with very many functions and help society. I know many countries are using this for financial inclusion. The technology is not what we are averse to or we are against. Not at all. We would want to benefit from…and India is contributing a lot in the sphere.”
She said that when the central bank brings out its digital currency, it is expected to lead to more efficient management of money, better and cost-effective ways of dealing, and timely transactions being undertaken. “And when it comes out with it, it has an intrinsic value.” But she recognised that outside of it, transactions were continuing “unabated”. “Something is being earned out of it and sovereign definitely goes there because if you can earn, then sovereign should also get a bit of it.” She once again reiterated the lack of regulation, the difficulties with creating a regulatory regime, and the risks associated with such assets.
IMF director Kristalina Georgieva said that the world of digital currency was changing so rapidly that unless innovation was integrated with regulation, there would be trouble. The Fund, in particular, was focusing on questions of interoperability and how central bank currencies would communicate with each other to avoid fragmentation; what it meant to regulate privately issued coins and how regulation could be agile; how to mitigate significant risks of cyber attacks; and how to protect the monetary sovereignty of smaller countries with the risk that central bank currencies of other countries would take over. “We have to recognise that disruptive is good, destructive is bad. We have to be able to follow digital money to prevent destructive activities…have some standards around functioning of these wallets.”
Saon Ray, visiting professor, Indian Council for Research on International Economic Relations (ICRIER) said while some countries have banned cryptocurrencies, other have tried to regulate them. “In countries like Israel, virtual currencies are included in the definition of financial assets while in Germany, virtual currencies qualify as ‘units of account’ and therefore, ‘financial instruments’. People can buy or trade crypto assets through exchanges and custodians licensed with the German Federal Financial Supervisory Authority,” she said adding that in the US, the federal government does not recognise cryptocurrencies as legal tender, while states differ in definition and regulation of cryptocurrencies.