‘Crypto may deprive RBI of cash control’

Kolkata: Former Reserve Bank of India Governor Duvvuri Subbarao has said the central bank could lose control over money supply and inflation management if cryptocurrency is allowed in the country.

At a webinar organised by the National Stock Exchange (NSE) and New York University (NYU) Stern School of Business, Rao said India’s case for issuing a central bank digital currency (CBDC) may not be strong as there are capital controls.

“Crypto is backed by algorithms and there is fear that the central bank might lose control over money supply and inflation management. There are also concerns that crypto will disrupt the monetary policy,” he said on Wednesday.

“Crypto can jump capital controls; fiat money is linked to the reserve currency,” he added.

Rao, who served as the governor of RBI from 2008 to 2013, said CBDC also needs robust data protection laws. According to him, cash is on its way out in India and digital payments are becoming popular.

However, Rao said owing to the pandemic, currency circulation has increased as people held on to cash due to lockdowns. “The central bank’s role as last-resort lender should not be hampered.”

Treat it as securities: CII

Crypto or digital tokens should be treated as securities of a special class to which the provisions of existing securities regulations will not apply, and a new set of regulations appropriate to the context should be evolved and applied, CII said in a statement.

This would mean regulatory focus principally on dealings and custody, rather than on issuance (except where issuance entails an Initial Coin Offering (ICO) to the public by an issuer established in India), it said.

Centralised exchanges and custody providers that may be established in India, must be required to register with Sebi and to adhere to KYC and AML compliance requirements that apply to financial markets intermediaries, it said, adding they should be held legally accountable and liable for the safekeeping of the crypto/digital tokens held by participants in digital wallets offered by them.

“To support this obligation, centralised exchanges may be required to maintain minimum capital and guarantee fund while complying with investor disclosure requirements which are prescribed by regulations from time to time, with respect to trading and investment risks,” it said.

The chamber also recommended extending the treatment of crypto/ digital tokens as ‘securities’ of a special class with regard to income tax law and GST law. Crypto/digital tokens can be considered as ‘capital assets’ for income tax purposes unless specifically treated as ‘stock in trade’ by a participant/ assessee, it said.It is also recommended to impose tax reporting requirements on participants who are investing or dealing in crypto assets (whether through a centralised crypto exchange or otherwise) through specific disclosures in income tax returns.

The regulators and tax authorities must commence capacity building to harness the power of big data and analytics for surveillance of the digital trail embedded in the blockchain network on which digital/cryptocurrencies/ assets run, the chamber said.