In a major setback to cryptocurrencies in India, the Centre on Thursday clarified that they will not be accorded the status of legal tender by any means. Union Finance Secretary T V Somanathan said: “Right now, I will only say that cryptocurrencies are not going to become a legal tender. The Indian Rupee is a legal tender, while gold and silver are not legal tenders. The rest will be decided in the bill.”

The finance ministry is preparing a Cabinet note for further discussions on creating a regulatory regime for an official digital currency issued by the Reserve Bank of India (RBI) and prohibiting private cryptocurrencies.

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Sources said that the Cabinet note will take into account the obscurity of cryptocurrencies and how they can be exploited by those involved in illegal activities. Top sources told India Today TV that the November 13 meeting, chaired by PM Narendra Modi, can be termed a ‘turning point’ and the tone for the coming legislation and the government’s stand on cryptocurrencies took shape in the meeting.

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PM Modi had met top officials from Finance and other ministries on November 13. The most critical input in the meeting came from the Reserve Bank of India..

Right after the PM’s meeting, the government had stated that discussions with stakeholders and experts were on and attempts to mislead the youth through ‘overpromising and non-transparent advertising on cryptocurrency’ needed to be stopped.

Finance ministry sources confirmed that the RBI had submitted a detailed opinion report to the Centre for the meeting.

WHAT THE RBI REPORT ON CRYPTOS SAID

Sources said that the RBI report to the Centre underlined that little is known about the cryptos and they could pose a threat to the monetary sovereignty and stability of the Rupee, especially if domestic price formation gets set in virtual currencies in future.

The RBI — which in April 2018, had prohibited banks from dealing in cryptos — is said to have warned in the report that volatility of cryptos could impact the health of banks, leading to financial instability.

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The RBI’s detailed note also flagged that cryptocurrencies could lead to a drain of capital, encashment of investments made in India and abroad, shift transactions away from the Indian Rupee and hurt RBI’s earnings.

A senior finance ministry official said the government and the RBI are worried that cryptos, like Stablecoin, if hinged on the US Dollar, could strengthen the reach of the American currency.

The RBI, in its report, is said to have highlighted that virtual currencies without underlying value are subject to wide fluctuations and can become an obstacle in calibrating money supply and inflation control.

Four days after the meeting with the PM on cryptocurrencies, RBI Governor Shaktikanta Das had challenged the claims and demands of the cryptocurrency stakeholders.

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He had said, “I would like to reiterate that the number of accounts is exaggerated in the sense that about 70%-80% of accounts being cited are small accounts of Rs 1,000-2,000 and even Rs 500. So, anecdotally, and we have a lot of feedback that, while credit and incentives are being provided for account opening, the amounts in these range between Rs 500 and Rs 2,000.”

The RBI chief had said that he agreed that the value of trading in cryptocurrencies had gone up but “when the central bank says we have serious concerns from the macro-economic and financial stability point of view, then there are serious issues involved”.

He added, “I have yet to see serious, well-informed discussions in public space. There are discussions that this is a new technology and we should capitalise on it. But this technology is 10 years old. Blockchain didn’t come yesterday. The technology can grow. At this time, the RBI, as a central bank, which is entrusted with the task of maintaining financial stability after internal discussions, says there are serious concerns then there are deeper issues needing much deeper discussions.”

THE CRYPTO BILL AND OFFICIAL DIGITAL CURRENCY

Sources said that work on a draft of the cryptocurrency bill is going on and once it’s finalised, the RBI will be consulted for input and insight. The government has listed a bill in the Lok Sabha bulletin for the coming winter session of Parliament on cryptocurrencies.

Sources said that the government is worried over the use of terms like “coin” and “currency” in the virtual currency names that are misleading investors. That’s why there is no possibility of them being declared legal tenders.

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Meanwhile, the RBI is all set to start a pilot programme for a central bank digital currency or CBDC in December. Its testing will include scrutiny on security and the impact on monetary policy.

Sources say that CBDC amendments have to be made to the RBI act and issues of currency would also require changes.