Why a ban on cryptocurrency could have dire consequences for India

 Just like its disastrous predecessor - demonetization - banning cryptocurrency to fight "black money" would be like setting fire to the forest in order to smoke out a few sheep

If India proceeds with a rumored ban on cryptocurrency, it wouldn’t be the country’s first attempt to impose currency controls. This time, however, a ban is even less likely to succeed — and the consequences for India’s economy could be direr. The country shouldn’t make the same mistake twice.

In the 1970s and 80s, at the height of what was known as the License Raj, Indians could only hold foreign currency for a specific purpose and with a permit from the central bank. If a businessman bought foreign exchange to spend over two days in Paris and one in Frankfurt and instead spent two days in Germany, the Reserve Bank of India would demand to know why he’d deviated from the currency permit. Violators were routinely threatened with fines and jail time of up to seven years.

Imports required additional permits. Infosys Ltd. founder Narayana Murthy spending about $25,000 (including bribes) to make 50 trips to Delhi over three years, just to get permission to import a $150,000 computer. Plus, since any foreign exchange that the company earned notionally belonged to the government, the RBI would release only half of Infosys’s earnings for the firm to spend on business expenses abroad.

Naturally a black market, with all its unsavory elements, emerged for foreign currency. The government doubled down, subjecting those dealing in illicit foreign exchange to preventative detention, usually reserved for terrorists. Businessmen selling Nike shoes and Sony stereos were arrested as smugglers.

The system impoverished Indians and made it impossible for Indian firms to compete globally. There’s a reason the country’s world-class IT sector took off only after a balance of payments crisis forced India to open up its economy in 1991.

While details of the possible crypto ban remain unclear, a draft bill from 2019 bears an eerie resemblance to the 1970s controls. It would criminalize the possession, mining, trading, or transferring of cryptocurrency assets. Offenders could face up to ten years in jail as well as fines.