The year 2020 has been a significant one for cryptocurrencies. In the face of global economic uncertainties brought by the closing of businesses and people not working, cryptocurrencies have proved to be remarkably resilient, empowering people on the one hand and creating regulatory challenges on the other.
Cryptocurrency is digital money produced & deposited applying blockchain technology. Its etymology is traced to when anarchist groups lost faith in FIAT MONEY because USA’s Subprime Crisis (2007) eroded the purchasing power of the US Dollar. They also dislike Banks & Card Companies because of transaction charges on e-banking, card payments, MDR, and interoperability issues. As a result, cryptocurrency was envisaged as an idea to break this monopoly and empower all sections of economic participants.
Cryptocurrency’s primary strength lies in its internally decentralized and voluntary nature. It eliminated the middlemen because of its operability on Block-Chain Technology, which enables transfer, management, and storage of the asset, without a middleman. This hence significantly reduces the transaction costs and makes transactions faster due to real-time worldwide network operability.
Being digital and being operated on a distributed ledger has the following advantages over traditional money, such as it can be transacted over long distances and potentially be more divisible without a large transaction cost, which attracts micro-payments in the new sharing and service-based digital economy. Also, with the increased potentials and threats of cyber frauds, cryptocurrency provides the safe and enhanced security of payment systems by virtue of the design of blockchain, by which crypto assets can’t be duplicated.
With all the pros, crypto provides various and many decentralized payments for people, however at the same time, its decentralized nature poses some challenges for the economy, as it would divert the central role of regulation of authorities. One such would be the control of authorities over Microeconomic variables such as inflation, etc. Because when a large part of the domestic financial system operates on alternate currency, monetary policies of local currency become disconnected from the local economy. This has been seen in the case study of the Dollarization of Ecuador.
Adding to it, the anonymous nature of transactions of cryptocurrency makes it apprehensive for its usage for illegal activities like terrorist funding, money laundering or ransom, etc. For example, Car with a Bomb parked outside Mukesh Ambani’s home with a letter demanding ransom in Bitcoins. This proves criminals prefer the anonymity of Bitcoins. Another challenge that anonymity poses is to trace transactions and verify tax liabilities.
Another challenge is limited internet penetration and lack of awareness regarding cryptocurrency, which may create a financial divide. Furthermore, as this entire system works without any central authority, it makes it more vulnerable to be used as a tool of economic manipulation in some other country which can lead to its weaponization.
In addition to these, the system of cryptocurrencies creates several systemic challenges like fragmentation of the market (globally, there are more than 600 major cryptocurrencies in vogue), high volatility of the market price of these entities, and most importantly, lack of trust leading to a low degree of acceptance for cryptocurrencies.
Cryptocurrency and India
In recent years, the Reserve Bank of India (RBI) and the Indian Government have expressed the possible financial, operational, legal, and security risks associated with cryptocurrencies on various instants.
Since 2013, RBI has been advising Indians not to get involved in cryptocurrency due to scams, tax deception, and terror finance. In 2017, the Ministry of Finance published a statement that explained that virtual currencies are not legal tender and do not have any regulatory recognition or protection in India.
In the 2018-19 budget address, the Finance Minister declared that the Government would take all steps to eradicate their use in financing illegal actions or as a part of the payment system. In April 2018, RBI notified that entities regulated by it should not deal in virtual currencies or provide services for promoting any person or entity in trading with or settling virtual currencies.
These advancements resulted in a draft Bill, i.e., Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. The Bill introduced an outright ban on private cryptocurrencies on the one hand, and on the other, recommended establishing a ‘digital rupee’ alternately.
Then some cryptocurrency exchange companies like CoinDCX etc., moved to the Supreme Court, claiming that Parliament has not made any law stating this activity as illegal (unlike possession of cocaine/narcotics.) Even Japan, the USA, Singapore, etc., has not banned cryptocurrency investment but commanded regulations to check its misuse/fraud. Likewise, without thoroughly examining the nature/impact of cryptocurrency, a blanket ban was installed, which has decimated their business since no bank is opening their bank accounts.
Later, in March 2020, the Supreme Court struck down the 2018 RBI announcement banning all the organized entities from using cryptocurrencies in the Internet and Mobile Association of India v. Reserve Bank of India case. This decision was based on the ‘principle of proportionality,’ i.e., even though the RBI is authorized to regulate the financial sector, its act of banning the use of cryptocurrencies is not proportional to the alleged ‘mischief’ or impairment caused to the RBI regulated entities. Protecting Article 19(1)(g) grants that all citizens have the right to practice any profession, including those corporations dealing with cryptocurrency. The Supreme Court noticed that the same objective (financial fraud protection) could be accomplished by imposing a less drastic ban.
As a result, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is envisioned to manage the sector. Parliament’s intention of prefacing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Cryptocurrency Bill, 2021) for discussions is seen through the Lok Sabha Bulletin, dated 29-1-2021. While the Cryptocurrency Bill, 2021 is not available in the public domain, it is learned that the purpose of the Cryptocurrency Bill, 2021 is to generate an enabling skeleton for the official digital currency to be issued by the RBI and to ban all private cryptocurrencies available in India. At present, the interpretation of the term “private cryptocurrencies” lacks certainty. Yet, specialists understand it to add any cryptocurrency that has not been announced or recognized institutionally by the RBI.
On 24-3-2021, the Ministry of Corporate Affairs released a notification (MCA Notification) mandating organizations to inter alia make specific revelations concerning the virtual currency/cryptocurrency transactions undertaken by them during a financial year.
Over the past few years, the Government of India has been pondering over the future of virtual currencies/ cryptocurrencies and has published various forewarnings to investors against the risks linked with virtual currencies/cryptocurrencies in India. Though the MCA Notification and thought around banning private cryptocurrencies in India indicate a move to satisfy the expectations of the investors. But, enough trust cannot be reposed amongst the investors because of friction between the Cryptocurrency Bill, 2021, and the MCA Notification about the legality of virtual currencies/cryptocurrencies in India. On the one hand, the Cryptocurrency Bill, 2021 seeks to outlaw issuance/use of private cryptocurrencies in India, while on the other hand, the MCA Notification mandates disclosures concerning virtual currency/cryptocurrency transactions undertaken by them during a financial year to be made by companies.
It cannot be said with confidence that the Cryptocurrency Bill, 2021 would achieve the force of law, but assuredly the MCA Notification has to some extent raised the bets to settle the uncertainty relating to the legal nature of virtual currencies/cryptocurrencies in India for the foreseeable future.
A balance between the two can be created when we move away from asking ‘should we allow cryptocurrencies?’ and move towards ‘how can central banks capitalize on this opportunity?’ This can approach involve:
- Mastering the Regulation: The idea of a digitally generated currency is new in regulatory parlance. Thus, the approach towards its regulation should be to evolve rapidly and fix problems along the way. Several experiments can be created to understand facets of cryptocurrencies like public-private partnerships, areas of effective operation, and payment mechanisms.
- The idea of Central Bank Digital Currencies (CBDCs): It may be technologically and administratively challenging for central banks to create and circulate state-sponsored CBDCs. But provides several advantages as it can help interventions in the macroeconomy and can help to improve the speed and affordability of the transaction systems.
- To incorporate cryptocurrency or any form of digital currency, the financial system needs to be strengthened in areas of improving financial literacy across all stakeholders; Increasing digital penetration by creating better digital infrastructure and improving the affordability of digital means, and Strengthening the cybersecurity architecture is essential to create a secure payment architecture and for maintaining the trust of economic participants in the system.
- The private sector can endeavor innovative outcomes and services that assist the authorities’ efforts to nurture more resilient, inclusive, and innovative payments. In turn, central banks and financial policymakers should take care not to squeeze out private firms but to compose CBDCs or statutes in a way that encourages competition.
- The digital age here consists of multiple currencies operating in an ecosystem. This includes private cryptocurrencies, CBDCs, and innovations like “Stable” coins (they are pegged to existing fiat currencies or mimic their macroeconomic behavior). The money supply in the economy would now be able to move from traditional channels as well as digital channels. As a result, the central bank here would have to slowly redesign liquidity transmission frameworks like repo operations to take these flows into account.
- There needs to be universal consent on the classification of digital currencies so that there can be uniform and efficient cross-border law. For example, reviews by international forums such as the Financial Stability Board (FSB) could help as a consensus-making core.
- Given the success that the nation has seen in the past three decades vis-à-vis ITeS-based solutions, India can become a tech powerhouse for innovation with the adoption of a pro-crypto policy. Non-fungible tokens (NFTs) are emerging as an idea that is going beyond cryptocurrencies by creating a parallel to physical ownership in the digital world.
India’s approach to crypto is protective in nature. It intends to contract regulation of cryptocurrencies to discourage investors from retaining them though the Government is unlikely to obey through with an earlier proposal to ban private digital coins. Alternatively, it could admit only those that have been pre-recognized by the Government to be registered and traded on exchanges — a deliberately cumbersome process. Such a pre-verification approach would constitute restrictions for thousands of peer-to-peer currencies that grow on standing outside the ambit of governing scrutiny.
The new laws are more inclined to discourage the marketing and promotion of cryptocurrencies to dull their attraction for retail investors. The Government is looking to classify crypto as an asset class, as demanded by the crypto exchanges, rather than as a currency. Reports also show that the Government is exploring new ways to generate revenue through cryptocurrency and its transactions. The current rates of taxes on crypto are likely to change. The next thing that comes to mind is, who will regulate the crypto? RBI is likely one of the best contenders, but its chances get reduced because RBI is likely to roll out its own crypto. So the other next option can be SEBI, or maybe the Government may come up with a new body to regulate, which doesn’t come under RBI or SEBI either.
Concluding, what is certain is, a blanket ban is not what the Government may look towards, but a tightly regulated mechanism to keep a record of transactions and the crypto may be developed, to let it flow, and to keep things proportional.
📌Analysis of Bills and Acts
📌 Summary of Reports from Government Agencies
📌 Analysis of Election Manifestos