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Insights into Editorial: RBI is right, need to move with caution on cryptocurrencies

 

 

Context:

  1. Reserve Bank of India (RBI) Governor is absolutely right in saying we need some more debate and discussion before cryptocurrencies are adopted in India.
  2. Prime Minister warned that bitcoin presents a risk to younger generations, sounding a hawkish tone as his government prepares to introduce legislation to regulate cryptocurrencies.
  3. PM Modi framed virtual money, which is highly popular in India and exists beyond state and central bank control as a domain that needs to be closely policed.
  4. It is important that all democratic nations work together on this and ensure it does not end up in the wrong hands, which can spoil our youths.
  5. Critics of cryptocurrencies allege that largely anonymous unregulated transfers make them a perfect tool for drug traffickers, people smugglers or money laundering.
  6. Several countries have begun to legislate to introduce oversight over cryptocurrencies, and exchanges in many jurisdictions are now subject to the same regulations as other financial service providers.
  7. India effectively outlawed crypto transactions in 2018, only for the country’s top court to strike down the ban two years later.
  8. That led to a boom in the sector as the country’s vast young population took heed of an advertising blitz by Bollywood and cricket stars.
  9. There have been growing calls for India to issue another ban, but Modi’s government appears set to stop short, preferring instead strict legislation that could be passed before the end of the year.
  10. Reserve Bank of India chief has been sharply critical, saying that cryptocurrencies are a serious threat to the financial system if not properly regulated.

 

About cryptocurrency:

A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.

It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.

It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.

Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

 

Distributed ledger technology (DLT) and Block Chain technology:

  1. Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time.
  2. Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
  3. Whether distributed ledger technologies, such as blockchain, will revolutionize how governments, institutions and industries work is an open question.
  4. Blockchain technology is a specific kind of DLT that came to prominence after Bitcoin, a cryptocurrency that used it, became popular.
  5. Cryptocurrencies such as Bitcoin use codes to encrypt transactions and stack them up in blocks, creating Blockchains. It is the use of codes that differentiates cryptocurrencies from other virtual currencies.

 

RBI Concerns regarding cryptocurrencies:

  1. The RBI is primarily concerned about cryptocurrencies for its potential threat to the Indian rupee.
  2. If a large number of investors invest in digital coins rather than rupee-based savings like provident fund, the demand of the latter will fall. This will hamper the ability of banks to lend out money to its customers.
  3. Moreover, since cryptocurrencies are unregulated in the country and are difficult to trace, the government will also not be able to tax the amount, posing a threat to rupee.
  4. On top of that, cryptocurrencies can be used in money laundering and illegal activities.
  5. Crypto investors, for all these reasons, are in turn susceptible to hacking, scams, and losses as crypto coins are volatile in nature.
  6. The RBI has repeatedly reiterated its strong views against cryptocurrencies since it gained popularity in India following a sudden boom in Bitcoin prices.
  7. The central bank’s argument is that cryptocurrencies pose serious threats to the macroeconomic and financial stability of the country.
  8. The RBI also doubted the number of investors trading on them as well their claimed market value.
  9. RBI governor had reiterated his views against allowing cryptocurrencies saying they are a serious threat to any financial system since they are unregulated by central banks.

 

What is the main appeal of a crypto currency technology?

  1. Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted.
  2. Thus, providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.
  3. Depending on what form cryptocurrencies take on in India, there could be an adverse impact on monetary policy, possibly on the currency and fiscal stability.
  4. While an outright ban would probably deprive the country of a promising technological avenue and may also foster an illegal market.
  5. We need a top-class regulatory framework to ensure private cryptocurrencies do not end up becoming a fertile ground for nefarious activity like drug trafficking, terror financing or money laundering.

 

Regulation is priority:

  1. Regulation is needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams.
  2. The regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
  3. Cryptocurrencies and Blockchain technology can reignite the entrepreneurial wave in India’s start up ecosystem and create job opportunities across different levels, from blockchain developers to designers, project managers, business analysts, promoters and marketers.

 

India’s unclear stance need to be addressed:

  1. While the Supreme Court’s decision to quash the restrictions on banks dealing with cryptocurrency entities has been a telling sign that authorities are not completely against digital tokens or blockchain technology, many young investors are bracing for potential restrictions.
  2. They cite the lack of proper regulations in India as a deterrent in the country’s path to adopting digital tokens for wider use.
  3. The Indian Parliament is currently working on a cryptocurrency bill, though it’s still unclear when it will be heard or what its contents will be.
  4. Much of Indian authorities’ scepticism stems from the fact that a worldwide boom in cryptocurrency has bred the ground for fake trading platforms, often leading to fraudulent activities.
  5. Some teenagers have already strategized how to protect their investments from a sudden ban, for example, by holding multiple trading accounts in domestic, as well as foreign exchanges.

There is a need of recognize the rise in popularity of cryptocurrency and then introduce safeguard, measures and regulatory structure by which people do not feel that they should have something to fall back on.

 

Conclusion:

India is currently on the cusp of the next phase of digital revolution and has the potential to channel its human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. All that is needed to do is to get the policymaking right.

Blockchain and crypto assets will be an integral part of the Fourth Industrial Revolution, Indians shouldn’t be made to simply bypass it.

RBI’s objective is to understand the magnitude of the impact trading in cryptos could have on financial markets, not to thwart the advent of new technologies nor choke innovation.

To be sure, there is no immediate demand to give cryptocurrencies the status of a digital currency; in other words, they are not becoming legal tender.

Media reports say the government is planning to legalise trading in cryptos as assets on exchanges.