Cryptocurrency status in limbo as officials fear 'dollarization' of economy, unclear global regulation

The Centre may not be in a hurry to finalize a regulatory framework for cryptocurrencies, as it would mean labelling them as a legal security – or tender – which could lead to ‘dollarization’ of the Indian economy, one senior government official told Moneycontrol on condition of anonymity, pointing at the fact that most cryptocurrencies are dollar denominated.

“There is no clarity globally on how to regulate cryptocurrency and crypto assets. Unless we know how other countries are moving forward, whether or not they are recognizing them as legal tender… we can’t take unilateral measures,” said the official.

Similar concerns were raised by banking regulator RBI in 2022, when, while briefing the Parliamentary Standing Committee on Finance, top central bank officials said that ‘almost all’ cryptocurrencies are dollar-denominated and issued by foreign private entities. This may eventually lead to dollarization of a part of the economy, which will be ‘against the country’s sovereign interest’, the official had said.

RBI officials had also said that cryptocurrencies have the potential to be a medium of exchange and replace the rupee in financial transactions, both domestically and across the border. “…this could undermine the RBI’s capacity to regulate the flow of money in the system,” the officials had informed the panel.

According to CoinGecko – a crypto data aggregator platform – the global cryptocurrency market cap today is $3.45 trillion, and has grown 28.2% compared to a year ago.

On Friday, the RBI Governor Sanjay Malhotra had told reporters there is no new development as far as crypto is concerned, adding that a government committee is looking into the policy regarding the asset. “…we are concerned about crypto because that can hamper financial stability and monetary policy,” Governor Malhotra had said.

The remarks follow Supreme Court’s observation last month, where it urged the Centre to formulate a ‘clear cut’ policy to govern cryptocurrency usage in India.

According to news reports, the central government is currently working on a discussion paper – likely to be floated this month – to seek stakeholders’ views on regulating crypto assets before deciding its formal stance. A committee comprising of officials from RBI, Sebi, and the Finance Ministry is reviewing global crypto regulations, reports added.

Global regulatory frameworks for cryptocurrency are gradually taking shape. In the United States, the SEC’s approval of Bitcoin exchange-traded funds last year marked a significant step toward bringing crypto assets into the mainstream financial system. In the United Kingdom, crypto companies are required to register with the Financial Conduct Authority (FCA) and comply with anti-money laundering regulations.

India’s approach to crypto regulation so far has remained cautious and fragmented. While the government has taken steps such as imposing a 30% tax on crypto gains and a 1% tax deducted at source (TDS) on all transactions, a comprehensive regulatory framework is still in the works.

Experts have said that crypto assets need a global regulatory framework so that every jurisdiction can operationalise the detailed local requirements aligned to global principles, in order to mitigate risks of money laundering. “This cannot be a single jurisdiction effort and has to be a global effort, else oversight would be ineffective,” said Vivek Iyer, Partner and Financial Services Risk Leader, Grant Thornton Bharat.

⁠Iyer said crypto legalisation may not lead to dollarisation of the economy, because dollarisation means ‘moving to full currency convertibility and that cannot be possible without the liberalisation in FEMA (Foreign Exchange Management Act) requirements’. FEMA imposes controls on currency exchange and capital flows to protect economic stability.