India is home to the largest group of people that hold wealth in form of cryptocurrencies and ranked 2nd out of 154 countries on the 2021 Global Crypto Adoption Index. Yet, the Reserve Bank of India and the government seems to have their reservations. After already having rolled out a ban on cryptocurrencies which the Supreme court quashed. The government is once again preparing a bill to enforce a ban on the circulation of all private cryptocurrencies.
The administration's concerns are not unfounded; one of the reasons for the prior ban was the crypto frauds and the pump-dump schemes being rampant in the absence of concrete regulations over the entire network. Blockchain technology is much like the wild west, where the ambiguity over its future is a great deal, making it very challenging for nation-states like India to ascertain the likelihood of an impending revolution or a full-blown implosion akin to the dotcom bubble. More than that, the government is wary about illegal funding which because all transactions are purely cryptographical functions making it substantially difficult to track. However, perhaps the biggest reason for the bill is still in the shadow are the implications on the economy and, more directly, the Indian Rupee. Authorities fear that the prevalence of a borderless digital currency may lead to an unchecked departure of funds giving rise to a potential economic turmoil. The RBI has voiced repeated concerns that cryptocurrency posed a "serious concern on the macroeconomic and financial stability." Similar statements have been made by Prime minister Modi himself.
Parallel to this, RBI is working on a Central Bank Digital Currency (CBDC), essentially a digital rupee. This, much like the digital yuan that was rolled out in China, will be such that each paper rupee will always be equal in value to the digital rupee. By doing this, the RBI hopes to harness some positives of technology while also maintaining absolute control over it.
While there are those distrustful, there are others who believe that the rise of cryptocurrency is not only a financial revolution but also a social and a political one. For example, Balaji Srinivasan, a Silicon Valley magnate, has strongly batted in favour of mass adoption in India. Attempts to turn the ban into a reality, he points out, is utterly non-effective and infeasible due to the very nature of cryptocurrency. The only way to get hold of culprits is by hard collective evidence, such as a sticky note with one's passwords to one's crypto reserve. To enforce the ban all across with full effectiveness, the government may have to bring in draconian measures like blocking all communications with outside world (so as stop transmission of passwords, let's say) and stopping immigration and emigration. Such methods are completely infeasible, especially at a bigger scale of adoption such as India's, and anything short of this is pretty much non-effective at a significant level. There is also a lot to gain from the adoption. The problem of tracing illegal funding may seem difficult, but the decentralized network also ensures that all of the transactions are completely traceable and available for anyone who wants a look. This makes it theoretically possible to follow any money which is not in the case of cash. For the longest time, the US held countries hostage over their dependence on the dollar, and cryptocurrencies will grant India independence from the trade wars and their wagers, such as the US and China. It will also make available vast overseas pools of capital available domestically, and it has great potential to help the economy given how big of an upside it is for the country. Even the idea to make a digital rupee may fall flat in the case of similar initiatives taken by other countries, in which case the rupee will again trail behind many currencies.
An interesting way to perceive this deadlock is by making a prisoners dilemma analogy and a payoff matrix. Suppose India chooses to sit it out on crypto; it risks falling much behind if other countries get rich for being early adopters of cryptocurrencies or will lead to non-outcome if all the countries in the world decide the same. On the other hand, if India decides to go all out and adopt it, it will get the early adopter advantage, and if everybody adopts, then we have a situation of all being early adopters but the central banks will have to give up monopoly over money in that case. Countries like El Salvador have hit full throttle towards adoption and even accept bitcoin as a legal tender. On the contrary, China has completely outlawed trading cryptocurrencies. India has to choose where it would stand on this spectrum, and perhaps it would be wise to steer away from either of the extremes. For instance, El Salvador's bravado cannot be replicated here in India since it's a much bigger economy and would borderline be a speculative gamble. On the other hand, calling it quits on cryptocurrency like China may lead India to miss out on one of the biggest revolutions around the world. As Naval Ravikant would put it, "countries banning cryptocurrencies will be kicking themselves off the upcoming decentralized internet."
While the Indian government has understandable worries, hitting the neutral option cannot be the way to go because first, the movement is almost inevitable tomorrow, if not now. Second, the potential for a decentralized network has much larger ramifications than just pure transactions. Platforms such as Ethereum and Solana have come to see great and diverse applications of the blockchain technology to support Decentralized Apps (Dapps), Decentralized Finance (DeFi) and NFTs, which turned a 41 billion dollar industry in 2021 and growing rapidly. The sheer potential brought on the table by these innovations are difficult to ignore, and definitely should not be slept on. The equilibrium way to go for India is not to walk away but also not get into an embrace too tightly.