RBI’s View on Cryptocurrency

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Recently, the Reserve bank of India (RBI) has made it clear that its view on cryptocurrencies like Bitcoin remains unchanged and it continues to have “major concerns” on the volatile instruments.

Major Highlights 

• The RBI had first come out with a circular on the issue in 2018, cautioning people about investing in cryptocurrencies, which do not have any sovereign character.
• It had barred entities regulated by it from dealing in such instruments. 
  • However, the Supreme Court in early 2020 struck down the circular.
• Revised notification to financial institutions was necessitated because some banks were still referring to the old circular set aside by the apex court and this was an attempt to set the record straight.

• The central bank is not into investment advice but added that one should make his own appraisal and do his own due diligence before taking such a call.

Cryptocurrency

• It is a digital currency that can be used in place of conventional money.
• In cryptocurrencies, cryptography is used to secure and verify transactions. It is also used to control the supply of cryptocurrencies.
• It is supported by a decentralized peer-to-peer network called the blockchain.
• First cryptocurrency: Bitcoin, launched in 2009 by Satoshi Nakamoto.

                                                               Image Courtesy: GAO

Benefits of Cryptocurrency

• Inherent Security: The use of pseudonyms and ledger systems conceals the identities.
  • It uses cryptography technology which is almost impossible to break.
  • A transaction done by cryptocurrency is irreversible and cannot be reversed.
• Low Transaction Cost: Very low fees and charges for transactions.
• Lack of Interference from Banking System: Outside ambit of banking systems.
  • There is no gatekeeper like that of government and central banks and users are responsible for all the transactions.
• Lower Entry Barriers: No entry barriers, unlike conventional banking systems.
  • The transaction is instantaneous and since the network is global, the transaction can be done across the globe without restrictions.
• Universal Recognition: Lots of cryptocurrencies and acceptable in many nations.
  • The transaction is instantaneous and the transaction can be done across the globe without restrictions.

Concerns

• Security Risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
  • They are prone to issues like Hijacking, Routing Attacks, Distributed Denial of Service (DDoS) attacks.
• Shield to Crime: Used for illicit trading, criminal activities and organised crimes. 
• Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
• Price Volatility: Prone to price fluctuations and waste of computing power.
• Lack of Consumer Protection: No dispute settlement mechanisms.

India and Cryptocurrency

• 2013: RBI issued a warning to individuals dealing with virtual currencies in India on the financial, legal, operational and security-related risks
  • The Government set up a committee chaired by the Special Secretary (Economic Affairs) with the goals to
    • Take stock of the present status of Virtual Currencies both in India and globally.
    • Examine the existing global regulatory and legal structures.
    • Suggest measures (related to consumer protection, money laundering, etc). 
• 2017: The Ministry of Finance issued a statement that clarified that virtual currencies are not legal tender and do not have any regulatory permission or protection in India.
  • In the budget speech of 2018-19, the Finance Minister announced that the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate their use in financing illegitimate activities or as a part of the payment system.

• 2018: RBI banned banks and other regulated entities from supporting crypto transactions.
• 2019: Inter-ministerial committee recommended ban all private cryptocurrencies.
• 2020: Supreme Court struck down the ban as unconstitutional.
  • Court’s observation: RBI has not come out with a stand that any of the entities regulated by it, namely, nationalised banks/scheduled commercial banks/cooperative banks/NBFCs, have suffered any loss or adverse effect directly or indirectly, on account of virtual currencies (VCs).
  • Hence, the RBI circular is “disproportionate” with an otherwise consistent stand taken by the central bank that VCs were not prohibited in the country.
  • The court found that the RBI did not consider the availability of alternatives before issuing the circular.
  • The court referred to the Centre’s failure to introduce an official digital rupee despite two draft Bills and several committees.
• 2021: Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 introduced.
  • Under this plan to ban private digital currencies, favour RBI backed currency.
  • A 3-6 month exit period prior to banning the trading, mining and issuing of cryptos.
• Finally, Cryptocurrencies, though unregulated, are not illegal in India.

Way Forward

• Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21^st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology. 
• Establishing safeguards, measures and regulations after taking inspirations from developed countries.
• Some of the cryptocurrencies have seen a massive dip in their per-unit trading prices lately, leading to erosion of investor wealth. Some investors have been looking at cryptocurrencies as an attractive investment class.

Source: TH