If Bitcoin is legalized in India, the money supply will jump up by 50%. Are we ready to take the impact?

The task force on the Bitcoin formed by the Central Government is presently battling the lobbying pressure from ZebPay and other stake holders who want Bitcoin to be legalized in India and the contrarian voices of people like the undersigned and trying to arrive at a decision at the earliest.

The main public input they are considering is the MyGov.in discussion board. On the discussion board, a number of pro-Bitcoin messages were planted by vested interests. There was even a message from an insider in the name of MCX supporting the Bitcoin legalization which was quickly removed on objection.

Additionally the committee/taskforce appears to have met ZebPay several times in closed door meetings and held consultations.

It is anybody’s guess why the committee should have closed door meetings with a stake holder and not a public open meeting. Add to this, the attempt of MCX, a regulatory agency itself trying to bat for Bitcoins in the discussion board and its Directors not taking any noticeable action to punish the insider influencers.

Any intelligent observer can take a guess in these circumstances that pressure is being brought on the Task Force for a favourable decision that leads to the Bitcoin Exchanges being permitted to conduct their business freely perhaps under the guise that they take the PAN card number of the traders and claiming that they have “De-Anonymized Bitcoin Transactions”.

The frequent utterings of WebPay representatives in the media to the effect that “Bitcoin is in the process of legalization” indicates a level of confidence that is not giving a feeling of comfort to neutral observers. Additionally the fact that the names of the individual members of the initial commitee and the Task force and their failure to disclose and declare that they donot have any holdings of Bitcoins add to this discomfort.

There is a genuine fear that the decision of the Task force has already been fixed and it could be announced as soon as the time is ripe may be when the entire media is busy with the discussions on Jaitely’s GST effort and Modi’s US visit.

I hope that the task force members are not gullible enough to think that even if they are prepared to believe that Bitcoin legalization is beneficial to the country and therefore it should be promoted, the larger audience are gullible to believe similarly. They should therefore expect that any decision to push Bitcoin legalization in India would be challenged in the Court both for the imprudence as well as possible bias besides being raised within the BJP party fora.

Mr Modi has been proudly claiming that his Government has not seen any scam in the last three years and would like to keep up this record.

However, in the event of Bitcoin is legalized, there could be a perception that this decision hides a scam as big as the Coal scam of the UPA regime.

I expect that the CAG will take note of the possibility of a biased influence on the decision of the task force and keep observing how the decision on Bitcoins unfolds. The discussions which the committee has held with ZebPay and others should be matters subject to RTI query and if these records are destroyed and refused to be divulged in an RTI, it would confirm that “Dal Me Kuch Kala tha..”

The reason why I consider “Legalization of Bitcoins would lead to one of the biggest scams in the Modi Government” is as follows.

On November 8, 2016, Mr Modi demonetized the Rs 500 and Rs 1000 currency notes in a bid to curb black money in India. Subsequently the Finance Minister Mr Arun Jaitely successfully negotiated with the authorities in Switzerland to provide information on the bank accounts of Indians held in Swiss Banks at least in future. The message from the Government was very clear that the Modi Government was keen on curbing black money which is also an effort to reduce corruption. The other attempts such as linking of Aadhar to PAN card and Benami Property identification etc are also measures that the Government is projecting as a comprehensive strategy towards curbing black money.

However, if the Bitcoin task force succumbs to the pressures from vested interests and legalizes Bitcoin or otherwise gives an impression that the Government is not keen to intervene and people can do what they want with Bitcoins…accept them as legal tender for goods and services if they so desire….then in one stroke a huge stock of Bitcoins held not only by Indian Citizens but people all over the World including many of them who are criminals, some of them who are enemy countries will become part of the money circulation in India. They could dump the Bitcoins to Indians and create chaos in the market.

Currently, it is estimated that the total currency in circulation in India around November 2016 when the demonetization exercise started was around Rs 14.26 lakh crores. (There are other estimates which put the figures higher). Out of this stock of currency, at least notes equivalent to Rs 6.32 lakh crores represent the demonetized notes sought  to be removed from the system.

All the measures that the Government is now undertaking such as the use of UPI, BHIM or AEPS etc where we talk of “Digital Payments and Digital Currencies” donot add to the money circulation. They are simply alternate channels of using the money available in the system and could reduce the need for holding currency.

However, the current discussion of “Virtual Currency” refers to Bitcoin and other similar Crypto Currencies which are all fungible and indistinguishable. Its impact would be to create a new stock of liquid cash that can be used to buy goods and services with the receiver not obliged to bring it into the books of account as “Measurable Revenue”. Also this may be held in Bitcoin wallets with players abroad and one fine day declared as “Lost Due to a Cyber Attack”. While new buyers withdraw money from the Banking system and buy Bitcoins, the Bitcoin wealth itself may not return to the Banking system. It will remain in invisible and anonymous wallets and transferred to other similar wallets.

Now if the Bitcoin is legalized, not only the current stock of Bitcoins but also the other Crypto Currencies which are convertible into Bitcoins (including any National Crypto Currency which provides for seem less conversion with Bitcoins as well as pseudo currencies like Lindens) will become part of the money supply in India.

Currently it is estimated that the market capitalizaion of Bitcoins is about Rs 2,7 lakh crores and market capitalization of all Crypto currencies including Bitcoins is around Rs 7 lakh crores. This is about 50% of the current money supply.

This means that the money supply in India would double overnight with any move to legalize Bitcoins.

Judging from the records of earlier years the money supply in India has an annual accretion of around 8-10% while the inflation levels have been around 5-7%. Currently the Government has brought inflation down and is targeting an inflation level of around 2% by the next year.

If the money supply jumps by 50% overnight, the inflation level will also jump. Historical data suggests that inflation could jump to astronomical figures of upto 40% P.a. Assuming that the Crypto Currencies held by foreigners and Criminals may not come into circulation, the real increase in the money supply in actual circulation and the inflation effect may not be that alarming. But there is no doubt that there will be a huge inflationary pressure which would make the Government miss the inflationary targets in the next few budgets at least until the next Loksabha elections in 2019.

Hence all dreams of BJP going to the next election with an economy that shows “Good Governance” and “Acche Din” will vaporize.

Is Mr Jaitely ready for this risk? Does Mr Amit Shah and Mr Modi aware of this risk?… I have my doubts.

It is therefore necessary for Mr Jaitely who is busy with GST and Mr Modi with the US tour to immediately spare some time towards what the Finance Ministry’s task force on Bitcoin regulation is likely to do. If they are negligent, the future of India could be put in jeopardy.

I sincerely hope that the Task force has realized the enormity of the effect of the decision which the Bitcoin supporters are trying to lure the committee into taking.

Whether the CAG recognizes the latent scam or not, Whether the media is interested in focusing on this impending decision of huge implications on the economy, we shall keep our vigil. We shall do our best to ensure that no decision is taken to legalize Bitcoins which we firmly believe is the currency of Criminals, Terrorists and Black Money holders. We request the public to render their vocal support in this regard and ensure that the message reaches the right quarters.



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About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
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