If India goes ahead with the rise of rumors on cryptocurrency, it will not be the first attempt by the country to impose currency restrictions. This time, however, the chances of the ban succeeding are even lower – and the consequences for the Indian economy could be even more dire. The country should not make the same mistake twice.
In the 1970s and 80s, at the height of the so-called license raj, Indians held foreign currency only for a specific purpose and with the permission of the Central Bank. If a businessman buys foreign exchange to spend two days in Paris and two days in Frankfurt, instead of spending two days in Germany, the Reserve Bank of India demands to know why he is withdrawing from the currency permit. Violators face the usual fines and the risk of up to seven years in prison.
Imports require additional permits. Narayana Murthy, the founder of Infosys Ltd., recalled that in three years he spent about $ 25,000 (including bribes) to make 50 trips to Delhi, only to be allowed to import 150,000 computers. In addition, since any foreign exchange earned by the company belongs to the government, the RBI releases only half of Infosys’ earnings to be spent on business expenses abroad.
Obviously the black market, with all its undesirable elements, has emerged for foreign currency. The government has doubled the preventive detention of those who carry out illegal foreign exchange and generally assigned to terrorists. Businessmen selling Nike shoes and Sony stereos have been arrested as smugglers.
This system has impoverished Indians and made it impossible for Indian companies around the world to compete. The country’s world-class IT sector only emerged after the payment balance crisis in 1991 forced India to open its economy.
Although the details of the crypto ban are unclear, the draft bill from 2019 bears a striking resemblance to the 1970s regulations. It criminalizes the possession, mining, trading or transfer of cryptocurrency assets. Offenders could face up to ten years in prison as well as a fine.
Such a blanket ban would be foolish on multiple levels. For one thing, law enforcement is much harder to enforce than under a license raj. Once raided to seize dollars and gold bars, Bitcoin faces the challenge of identifying the password or seed phrase that holds millions. The government does not seize or access the network of computers scattered in the global mining cryptocurrency and does not operate blockchain ledgers.
To enforce the ban, authorities must develop an intrusion surveillance system that can track all digital and Internet activities in the country. Thankfully, India does not have the capacity to withdraw it. Mostly, its efforts drive the cryptocurrency market underground.
It grows almost exactly to the ever-evolving set of arbitrary rules imposed by the Central Bank and the Tax Department, increasingly optimized to collect bribes. Young coders and start-up entrepreneurs face harsh and arbitrary attacks. Apart from the “smugglers” of the 1970s, some of India’s top and most entrepreneurial workers are engaged in these new economic technologies; Violence leads to a brain drain.
Ordinary Indians lose the real benefits of cryptocurrency. The ban will prevent Indians from curbing crypto-asset appreciation, which Blackchain evangelist Balaji Srinivasan calls a “trillion-dollar mistake”. India receives the highest global payment inflows and the use of blockchain networks can save Indians billions in transfer fees. Meanwhile. Top Indians with options flee the country, taking their wealth and inventions with them.
And none of this addresses the government’s real fear: tax evasion. Unlike gold bars and dollars under the bed, tracking cryptocurrency is difficult if not impossible. Some consumers use that fact to hide revenue from tax authorities.
But, like its devastating predecessors – the government’s decision in 2016 to invalidate 86% of Indian currency notes overnight – banning cryptocurrency to fight “black money” is like setting fire to a forest to smoke some sheep. Sorting out India’s worse complex tax code, expanding the tax base and making implementation less arbitrary is a very good solution, thereby encouraging more Indians to pay the amount due to them.
Avoiding capital flight and instability during financial crises is a government second concern. Cryptocurrency capital allows Indians to bypass current restrictions on account convertibility and invest more easily abroad. Protecting Indians from global instability by banning cryptocurrency is like making roads safer by removing cars. The real long-term solution is to gradually reduce restrictions on capital mobilization and make India a more desirable investment destination.
Instead of criminalizing digital currencies, the government should take a closer look at India’s restrictions on financial transactions and adapt to a changing world. Simplification in 1991 made India a world leader in IT. More opening up Indians where they are – at the border of FinTech innovation, not with suspicion.
This story was published from the Wire Agency feed without any changes to the text.