Introduction:
While Bitcoin started more than a decade back in 2008, total market capitalisation of all cryptocurrencies was only $20 billion in early 2017. This went up to $289 billion in next three years and thereafter exploded to reach a peak of $2.9 trillion in November 2021. In the last three months it has again witnessed a sharp decline. As of today the total number of cryptocurrencies is at 17,697 and the total number of crypto exchanges is 462. Currently, there is no regulation or any ban on the use of cryptocurrencies in India. The Reserve Bank of India’s order banning banks from supporting crypto transactions, was reversed by the Supreme Court order of March 2020. While the RBI has repeatedly underlined its strong view against cryptocurrencies, saying these pose a serious threat to the macroeconomic and financial stability of the country, Govt of India is working on a legislation for regulation of this sector. Finance Minister in her Budget speech this year has also proposed to introduce a digital currency in the coming financial year for which RBI is soon expected to carry out pilot studies.
Blockchain technology
- It is a specific kind of DLT that came to prominence after Bitcoin, a cryptocurrency that used it, became popular.
- 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.
Cryptocurrency:
- It is a digital or virtual currency that uses cryptography for security.
- Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank.
- They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders. The most common cryptocurrencies are Bitcoin, Ethereum, Ripple, and Litecoin.
- Facebook has announced a digital currency called Libra that will roll out for use in 2020 and allow the platform’s billions of users across the globe to make financial transactions online.
Need for regulation:
- Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused,and to protect unsuspecting investors from excessive market volatility and possible scams.
- However, regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
- India has not been able to tick these boxes, and we’re in danger of missing out in the global race altogether.
International Practice:
- South Korea and the U.S. are intensifying regulatory scrutiny of the market.
- South Korea recently proposed legislation to either heavily regulate exchanges or ban them.
- In U.S., a court ordered a popular cryptocurrency platform to hand over information related to 14,000 accounts to the Internal Revenue Service Global tech firms such as IBM are developing their own cryptocurrency platforms for transactions in a secure and transparent manner.
- World’s top central bankers are preparing to issue their own Central Bank Digital Currency (CBDCs).
- Japan has recognised Bitcoin exchanges as legal.
Challenges:
- The government is wary that regulation will provide legitimacy to “what is currently ambiguous,” and may lead to further rise in its valuation and end up contributing “to the investment bubble”.
- A currency that is not based on any real economic activity, unlike a sovereign currency whose value is based on the relative value of a tradeable basket of goods and services, cannot prima facie inspire much comfort.
- Bitcoin’s value, astronomical even now at about $8,300 but much below January 2018’s stratospheric levels, is based on demand for a fixed supply of Bitcoins in the future it cannot exceed 21 million in number, of which 18 million has already been mined.
- Cryptos are feared not just for their sheer speculative propensities, but also for their capacity to undermine sovereign currencies (the latter is an exaggerated apprehension).
- Virtual currency is being traded anonymously over the Internet and used for a host of anti-national and illegal activities, from terror funding to illicit trade of arms and drugs and so on.
- The online use of this currency, was without any border restrictions or geographical constraints, resulting in danger to the integrity and sovereignty of the nation.
- However, it does not make sense to go overboard and criminalise merely adventurous crypto speculators. There are no official or other data available that point towards misuse of cryptocurrencies for illegal end
Way Forward:
- There is a need for more investor awareness on Cryptocurrencies
- Investors must spend time educating themselves about bitcoin and the technology behind it
- India must be careful to differentiate between Cryptocurrencies and the blockchain technology
- SEBI will have to proactively consider allowing trading of Bitcoins under existing or new laws.
- Explore the use of blockchain technology in areas such as education, health and agriculture
