Facebook's recently unveiled Libra cryptocurrency holds tremendous potential for making the use of cryptocurrency normal and mainstream.
The Libra cryptocurrency and the announcement of the Facebook Calibra digital wallet has, on the one hand, met with >misgivings as to Facebook's intentions, the extent of power it will wield, and the privacy implications of the initiative. On the other hand, the support to it by major companies like Uber, Lyft, Visa and Mastercard. among others, has also given hope that one day, one could pay for a ride via Uber through a cryptocurrency.
Given the current >regulatory state of cryptocurrencies in India however, this may not be possible here so soon. One major interest is in how a mainstream cryptocurrency like Libra might change things in India, and whether the backing of a company like Facebook and several other tech giants and financial services companies will encourage Indian regulators to take a new stance.
Paying for an Uber ride with Libra
Much as one would like to pay for an Uber ride with the Libra cryptocurrency, under the current regulatory framework in India, this will not be possible. To outline the reasons, the >April 2018 RBI notification has firstly prohibited entities regulated by it, (such as banks and financial firms) from dealing with virtual currencies, or from providing services like maintaining bank accounts, settling, trading, giving loans, etc., in relation to cryptocurrencies.
Banks in India are thus prevented from supporting the Calibra wallet as proposed by Facebook, thus preventing apps like Uber from using it. This would prevent, say, the conversion of fiat currencies (the Ruppee) in your bank account into the Libra, for payment on the app.
Payments via Indian currencies only?
Here, one can also recall an >RBI notification issued in 2014, to deal with two-factor authentication for card payments via the Uber app not being in place. While dealing with the issue, the RBI had directed that where Indian bank-issued cards were used for payment for goods and services purchased in India (for example, paying via a card for a ride via Uber in India), then two conditions are to be met: The first is that the transaction must settle in Indian currency only and the second is that the transaction must be acquired through a bank in India. It was this notification that had >driven Uber to adopt payments via the domestic mobile wallet Paytm, which is licensed as >Payments Bank by the RBI, in order to ensure compliance with domestic payment laws.
It is interesting to note that the RBI mandate, that online transactions must settle in Indian currency and be acquired through a bank in India, applied only to payments via an Indian bank-issued card, and not to online transactions in general. This point makes it tempting to wonder if it is possible to use Calibra in India, backed by a non-Indian bank (since this does not involve card payments), or independent of any bank altogether (given that it is a peer-to-peer payment system).
Neither, however, is possible. To run a payment system (here Calibra) in India, or in other words, any system that enables payment between a payer (here an Uber customer) and a beneficiary (here Uber), authorisation from the RBI under the >Payment and Settlement Systems Act, 2007 is required. Given the regulatory stance on virtual currencies, such authorisation for Calibra would not be possible.
One can also recall the statement of the then >Finance Minister, Arun Jaitley in his Budget speech in February 2018, where he stated that the cryptocurrencies are not legal tender and cannot be used 'as a part of the payment system'. Payments using any cryptocurrency, be it the Bitcoin or Libra, via Uber's mobile wallet, is thus out of question.
A ten-year jail term for holding cryptocurrencies?
The >2018 notification, thereafter, led a >group of petitioners to the Supreme Court against it. While the case is still pending, lending some hope, the Supreme Court refused to lift the prohibition via the RBI notification. Further, RBI's recent >draft rules for a regulatory sandbox came as a disappointment via its express exclusion of virtual currencies from its ambit.
One saving grace with the Indian regulatory stance had been that apart from these specific restrictions, there was no stance taken on, say, merely holding cryptocurrencies, or trading on a global exchange. However, worrying reports of a draft 'Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019' has emerged, which is said to propose a ten-year jail term for merely holding cryptocurrencies in India. If such a law is enacted, the mere holding of Libra or any other virtual currency will violate it. The law is said to punish mining, holding, generating, selling, transferring, disposing of, issuing or dealing with cryptocurrencies.
The impact of a mainstream cryptocurrency
In this regulatory atmosphere, the announcement of Libra brings new hope to cryptocurrency ventures and enthusiasts in India. The mainstream nature of Libra is a particular feature that will distinguish it from other cryptocurrencies and will allow regulators to observe how a widely-used peer-to-peer currency could function.
There are in fact several factors in >Libra's White Paper and various news reports which support a possible quick adoption of the cryptocurrency by the people. These include the easy access of Libra via Facebook account holders as well as non-account holders (through iOS and Android apps), incentives to its use such as via grant of free Libra on opening a wallet, and the promise of lower or no fees per transaction.
An important selling point for cryptocurrencies for a long time has been that the fees would be lower, being fixed per transaction and not based on the amount of the transaction. This is a selling point for Libra as well, through its potential for enabling cheaper international remittances, lower interest rates on loans, lower per transaction fees, etc.
The significant volatility of cryptocurrencies like the Bitcoin was another major factor which prejudiced regulators world over against these currencies. Traditionally, the value of fiat currencies is maintained by linking it to gold, but virtual currencies like Bitcoins have no intrinsic value. The value of the Bitcoin, in fact, is generated by the demand for it.
Facebook aims to tackle this issue as well, by choosing to link the value of the Libra to a basket of bank deposits and short-term government securities for historically stable international currencies, including the US Dollar, UK Pound, Euro, Swiss Franc and Japanese Yen. This is another factor that may work in Libra's favour from the perspective of regulators.
Hope for crypto enthusiasts in India
Libra has already >caught the attention of international regulators, and one can expect changes to Facebook's approach based on changes in the international regulatory stance.
In the meanwhile, if the Libra does lead to large-scale adoption of a cryptocurrency as planned by Facebook, this will certainly force the Indian regulators to observe and to consider cryptocurrencies, if not to embrace them at this point of time.
The author is a lawyer specialising in technology, privacy and cyber laws
Read our complete coverage of the Libra cryptocurrency