Regulation of Cryptocurrencies in India

In News

• Recently, the PM chaired a meeting on cryptocurrency where the need for its regulation was discussed.
  • Earlier, RBI cautioned investors about digital currency over its non-transparent advertising.

India and Cryptocurrency

• 2009: First cryptocurrency, Bitcoin launched in 2009 by Satoshi Nakamoto.
• 2018: RBI banned banks and other regulated entities from supporting crypto transactions.
• 2019: Inter-ministerial committee recommended banning all private cryptocurrencies.
• 2020: SC struck down the ban on the trading of cryptocurrency as unconstitutional.
• 2021: Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 introduced.
  • Under this, a plan to ban private digital currencies favours 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.

RBI and Digital Currency

• RBI exploring DLT (Distributed Ledger Technology) based Central Bank Digital Currency. 
  • Under DLT, details are recorded in multiple places at the same time.
  • For ex: Blockchain is just one type of distributed ledger.
• Central Bank Digital Currency (CBDC): It will be a legal tender.
  • Can be converted/exchanged at par with similarly denominated cash.

Features of Cryptocurrency

• Anonymous: Cryptocurrencies make it possible to lend, sell, buy, or borrow without an identity, credit score, or even a bank.
• Highly secure: All records of its creation and when it’s sent or received are stored in a sort of big digital book that anyone can access, keeping it honest. It can’t (easily) be stolen or seized and can be used anywhere in the world.
• Cheaper to transfer: Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means. Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
• Illegal and highly volatile: However crypto is NOT just used for illegal purposes. In fact, due chiefly to its price fluctuation and other reasons it has fallen out of favor on the black market.
• No physical form: Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. However, it can be and many governments are working to create a crypto coin version of its respective fiat currency.
• Decentralised: Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency. When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is considered centralized. When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.
• Blockchain technology used: A blockchain is a database that stores encrypted blocks of data then chains them together to form a chronological single-source-of-truth for the data.
  • Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset
  • The asset is decentralized, allowing full real-time access and transparency to the public
  • A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
  • Blockchain’s inherent security measures and public ledger make it a prime technology for almost every single sector.

Some of the real-world applications of technology related to cryptocurrency

• Use in voting: People can vote to the deserving leader while being anonymous to their identity.
• Use in funds distribution: A huge fund is distributed to the leaders of the states but because of corrupt minds, the money vanishes and remains in pieces. Cryptocurrency will definitely help the country to get rid of it.

Benefits of Cryptocurrency

• Inherent security:  Use of pseudonyms and ledger systems conceals the identities.
• Low transaction cost: Very low fees and charges for transactions.
• Lack of interference from the banking system: Outside ambit of banking systems.
• Lower Entry Barriers: No entry barriers, unlike conventional banking systems.
• Universal recognition: Lots of cryptocurrencies and acceptable in many nations.

Concerns/Challenges

• Security risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
• Shield to Crime: Used for Illicit Trading, Criminal Activities, & organised crimes. 
• Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.
• Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
• Price Volatility:  Prone to price fluctuations & waste of computing power.
• Lack of Consumer Protection: No Dispute Settlement Mechanisms and control of Securities and Exchange Board of India (SEBI). 

 Way Forward

• Take a cue from developed countries, have safeguards, measures and regulatory structure.
• Need to expedite passing of the Cryptocurrency regulation bill. 

Source: IE