India’s Crypto Dilemma: Digital Assets’ Transparency Clashes with Electoral Bond Concerns

Key Takeaways

• India’s Supreme Court deems the anonymous Electoral Bond Scheme unconstitutional.
• Despite India’s cautious stance on cryptocurrency, its potential for ensuring transparent political contributions emerges amid criticism.
• The government has been reluctant to regulate cryptocurrencies while awaiting international consensus.

India, which is the world’s largest democracy, reiterated its status for transparency after the Supreme Court struck down the Electoral Bond Scheme. The court criticized the anonymity it provides to donors and labeled it as “unconstitutional”. Although political funding will change India’s upcoming elections, crypto is still in the backseat.

There is a growing demand for transparency in political contributions. It contrasts sharply with the government’s cautious, yet evolving, stance on cryptocurrencies.

The Controversy Over Electoral Bonds

Introduced through amendments in India’s Finance Act of 2016 and 2017, electoral bonds emerged as interest-free bearer instruments. These bonds allowed individuals and corporations to make anonymous donations to political parties. They were purchased exclusively through the State Bank of India (SBI). The anonymity of donors defended as a measure to protect their identity, has faced scrutiny and criticism for obscuring the sources of political funding.

In February, the Supreme Court’s intervention branded the scheme and its enabling legal amendments as  “unconstitutional” and “arbitrary,” challenging the opacity it brought to political donations.

The apex court’s criticism extended to the national bank, SBI, for its failure to disclose details of the bonds. The court has now mandated the disclosure of all information, including unique identifiers of redeemed bonds, to ensure accountability. Meanwhile, details of donors are emerging.

Can Cryptocurrency Bring Transparency?

The discourse around cryptocurrencies in India presents a stark contrast. The government has maintained a guarded stance when it comes to specific regulations. At the recent India Today Conclave, statements by the Union Finance Minister Nirmala Sitharaman made it clear that the regulatory vacuum persists.

Sitharaman was quoted saying: “We haven’t regulated them, and then we haven’t regulated them even now. But they cannot be currencies is what I’ve always held, and that’s the government of India’s position.”

Her comments highlighted the government’s concern over cryptocurrencies’ potential misuse. She also emphasized the need for an international regulatory framework. This could, she suggested, address the challenges posed by this technology-driven asset class.

She added: “Currencies are to be issued with the fear of the government or the central bank, so that is a different story. So if they’re coming back, this resurgence, that is the asset which is being created for speculation or for trading or for whatever purpose, and it is still unregulated in India.”

Crypto and Political Funding

The Supreme Court’s ruling against anonymous political funding and the ongoing debate on cryptocurrency opens a new dialogue on transparency.

Rajat Mittal, Advocate-on-Record in the Supreme Court of India, reflected on the Court’s decision. He suggested that leveraging crypto assets on public blockchains could significantly reduce the anonymity of election funding. As a result, this could offer a transparent alternative to the contentious electoral bonds.

Mittal told CCN: “In my view election funding through crypto assets on a public blockchain can largely mitigate the anonymity of donations for election purposes.”

About the status of crypto, Mittal explained that the statement by the Finance Minister reiterates that cryptocurrencies are not legal tender and cannot be called currencies as currencies are traditionally issued with the backing of the Central Government or Reserve Bank of India (RBI).

He explained, “This aligns with the existing Indian law where cryptocurrencies are defined as virtual digital assets for the purpose of taxation.”

The advocate explained that India’s Government has emphasized its reluctance to provide any regulatory clarity on the status of crypto until international forums such as G20 reach a consensus.

Mittal said: “The Government’s stance to not act unilaterally on crypto regulation indicates a strategic approach, awaiting broader international consensus before implementing the domestic framework.”

What is Path Forward?

The saga of electoral bonds and the regulatory flux of cryptocurrency in India can provide a more transparent approach. As the country prepares for the 2024 elections, crypto players have an opportunity to offer political funding mechanisms. There is a potential eye toward digital solutions that offer transparency and accountability.

Meanwhile, the government’s strategic patience in cryptocurrency regulation may need international initiation.