The Union Budget, Cryptocurrencies & the Case for Economic Literacy
By: The Iyea
Tags: Bitcoin, Cryptocurrency, Economics, Media, Finance

By Ajay Sabharwal

On 1st February 2018, as a part of the Union Budget, Finance Minister Arun Jaitley, said that, “The Government [did] not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”[1]

Reactions from some of the most widely circulated publications/media outfits were exaggerated. Some of them include:

“Union Budget 2018: Bitcoin, other cryptocurrencies not legal, govt to eliminate their use” -Hindustan Times[2] “Cryptocurrencies not legal, will eliminate their use, says Arun Jaitley” -The Hindu[3] “Union Budget 2018: Crypto-currencies illegal, says FM; to explore Artificial Intelligence technologies” -Indian Express[4] “Budget 2018 Bombshell for Bitcoin — Finance Minister Arun Jaitley says will eliminate use of cryptocurrencies” -Gopal Sathe for NDTV Gadgets 360[5] “FM Arun Jaitley settles the Bitcoin issue for once and for all” followed by “Cryptocurrencies, including Bitcoins, have been outlawed in India following similar actions by countries such as China and South Korea, dealing a blow to enthusiasts.” — Saloni Shukla, of The Economic Times [6]

Even Arvind Gupta (@buzzindelhi), Founder, Digital India Foundation, Founder, ApnaCard, a digital wallet system supporting P2P payments and former National Head, BJP IT Department tweeted:

““Government does not consider cryptocurrency as legal; we will take all measures against its illegal use,” said FM @arunjaitley Jaitley during the speech.”[7]

Not only are all these statements misleading, they are downright false.

Before all else, in response to the Economic Times article, South Korea’s finance minister has confirmed that the government has no intention to ban cryptocurrency trading.[8]

Coming to the question of what the Indian finance minister said and meant, it is required that we understand some basic economic terms.

What is legal tender?

Coins or banknotes that must be accepted if offered in payment of a debt are considered legal tender. The Indian Rupee is legal tender in India, the Euro in France and the Dollar in the United States. One is free to accept any other kind of ‘unit of exchange’ (barring certain government restrictions) but it is mandatory to accept a legal tender as a form of payment. In a sense, a shopkeeper cannot refuse to take rupees from you if you are buying tomatoes in India. Dollars or Pounds might not hold the same status.

This, however, doesn’t stop individuals from paying in or receiving other items to settle debts. For example, someone may still choose to trade cattle or seashells or bullion or dollars or UAE’s dirhams in exchange for clothes or food or shoes. Because exchange is voluntary and free one, all one needs is another person willing to accept the said ‘unit of exchange’ as currency.

Very often, shopkeepers, citing lack of petty change give back candies. Are candies legal tender in India? No. Does that make the act of the shopkeeper illegal? No. However, can you ask them to take it back and give you a two-rupee coin instead? Yes, and they, as per law, will have to oblige. Why? Because rupees are legal tender in India and by definition, is inescapable and must be honoured. Mango Bite (unfortunately for Parle) is not.

What Finance Minister Arun Jaitley said as a part of his budget speech, implied that no person or company will be forced to accept Bitcoin or any other cryptocurrency as payment. Does that make it illegal? No.

With the question of legal tender settled, let us come to the question of the government taking measures to eliminate its usage.

Will the government act to eliminate the use of cryptocurrencies?

The finance minister said that the government “will take all measures to eliminate use of these crypto-assets in financing illegitimate activities”.

It is no secret that cryptocurrencies offer an edge to criminal outfits to avoid government scrutiny and at the same time provide a convenient way for those who which to procure illicit substances or services. Worldwide cryptocurrencies have been used to buy illegal drugs, launder money and pay for prostitution among other illegal services. But that does not make cryptocurrencies in illegal. Fiat currencies, whether they are US Dollars, Pounds or Indian Rupees, have been used to do all these things and worse. That doesn’t make these currencies illegal. There is no reason why cryptocurrencies should be treated any other way.

Thus, the government taking steps to stop the use of cryptocurrencies to finance illegitimate activities is nothing new.

The government, therefore, did not say it was stopping the use of cryptocurrencies. It just said it would take measures to stop its use in financing illegal acts. That the government does anyway with its legal tender as well. You are not allowed to buy illegal drugs or solicit certain illegal service providers with Indian Rupees. There is no reason why cryptocurrencies should be treated any other way.

That settles the question of the use of cryptocurrencies, however, the impact of such a statement and the resulting hysteria caused due to wide spread financial illiteracy must be explained as well.

What was the impact of such a statement?

Bitcoin, which usually trades on a premium of 10–20 percent on Indian exchanges, fell almost instantly to 1/3rd of the international price after the budget announcement. Trading between 6 and 6.5 lakhs, on Zebpay (a cryptocurrency exchange in India), Bitcoin fell in the 2.5 lakh range, recovering to the 6-lakh range in a matter of hours. No fall in the international price was proportionate to justify the fall on Zebpay. The fall was probably because of panicking investors misinterpreting the minister’s statement to suggest that holding bitcoins was illegal, hence, selling at a much lower price to get out of the market.

Animal spirits in financial markets cannot be tamed but individuals investing in any commodity, currency or security must educate themselves before investing. This must not just include fundamentals of the said investment but also a basic understanding of simple yet essential economic terms and principles.

As far as economic literacy is concerned, it is lacking not just in common investors but also in mainstream media ‘journalists’. The onus falls on those attempting to cover financial issues, that they not just understand the basics but also restrain themselves from indulging in hyperbole, and (in the case of a cryptocurrency price crash), schadenfreude.

Naval Ravikant, CEO and co-founder of Angel List, wrote on his Twitter feed, on January 4 2018:

“Lots of literacy in modern society, but not enough numeracy.”

Perhaps, it was implicit, but he ought to have added ‘economic literacy’.