In the past few weeks, talks of the government ban on the operation and functioning of digital currencies have been making the rounds on all media channels. Before taking a look into what the proposal is, it is important to understand what a cryptocurrency is.
Cryptocurrencies or digital currencies are decentralized networks, often not under the control of the government which involves an open ledger system containing a network of computers that operate on blockchain technology. Such a system is secured using cryptography such that each block has encryption and a hash number preventing double-spending or counterfeit currencies. Every computer in the network maintains a copy of the ledger and every new block is approved by all nodes (computers) making it impractical to forge transactions. It involves a peer-to-peer connection of computers for the exchange of data without space for an intermediary to come in. An incentive for the miners (people who confirm the transactions) is that they are given cryptocurrencies to trade as well. If they commit fraud, which is technically impossible in the first place as it requires them to convince thousands of other people in the network to verify their transactions, their share of the currency will be confiscated.
Digital currencies have no intrinsic value or a physical embodiment. This technology creates a permanent ledger and supports accurate tracking. The most notable cryptocurrency among the group of digital currencies is ‘Bitcoin’, which was recently reported to have a market capitalization of over $400 Billion. After Tesla announced that it had bought $1.5 billion worth of Bitcoin in February 2021, its market capitalization crossed that of Visa and Mastercard. Other digital currencies include Ethereum, Litecoin, and IOTA.
However, an ecosystem such as this, which is semi-autonomous, provides room for money laundering and funding of illegal activities. Its lack of legal tender coupled with the semi-anonymity it provides makes it easier to dupe investors in the system. Moreover, if private companies issue currency instruments, then the central banks will no longer have control over the financial ecosystem. Another disadvantage of the system is the massive amount of processing power and storage required for the transactions.
Keeping all this in mind, India is looking for a blanket ban on all private cryptocurrencies which will include its trading, investment, and mining. An inter-ministerial committee (IMC) has been authorized to study the issue and a bill for the same has been introduced in the parliament. In February 2019, the government even came up with a bill that made dealing in cryptocurrencies a punishable crime attracting a fine of up to Rs. 25 crores, or a jail term of one to ten years, or both. However, this was not passed in the parliament.
In addition to this, the government is also looking to launch its own Central Bank Digital Currency (CBDC) under the RBI (Reserve Bank of India). This year, the government introduced the Cryptocurrency and Regulation of Official Digital currency Bill, 2021 that talks about the possibility of setting up digital assets for the country with an intrinsic fiat value (issued by the government). Regulatory bodies like SEBI and RBI don’t have a framework that regulates cryptocurrencies which in itself are not commodities or assets issued by an identified entity.
The government in its recent comments has also not made it clear whether it is a complete ban or a regulatory bill; the latter has a larger chance of being executed. The term ‘regulation’ has various connotations. The government may have a wide range of provisions to bring to the table concerning regulation, which includes but is not limited to the compulsory reporting of the transactions in crypto to the RBI, a bandwidth of value to avoid large fluctuations and volatility in the market, anti-Money laundering standards (including a curb on terror financing) and Know-Your-Customers (KYC) norms.
Countries like Senegal, Tunisia, Singapore, Venezuela, and China have already issued their cryptocurrencies. 13 cryptocurrency businesses have been approved to operate in Thailand. China in particular has started a pilot program for the issue of e-Yuan with the help of four banks from April 2020. In 2021, China will issue 40 million yuan as a part of this program.
The larger aim of the government there is to replace payment technologies like Wechat and Ant Pay, owned by Tencent and Alibaba respectively. However, in the event of a financial crash, citizens may opt to store their savings in these Central Bank Digital Currencies (CBDCs), which may lead to funding problems for the banks. Nevertheless, the future of the Indian currency underpins itself on the decisions of the people in the positions of authority.
References
https://www.investopedia.com/terms/c/cryptocurrency.asp#:~:text=A%20cryptocurren cy%20is%20a%20digital,a%20disparate%20network%20of%20computers. - https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cry ptocurrency.html
https://www.indiatoday.in/technology/features/story/is-india-going-to-ban-bitcoin-here -is-story-so-far-1767746-2021-02-10
https://www.moneycontrol.com/news/business/startup/cryptocurrency-ban-will-be-un precedented-govt-bitcoin-defeats-purpose-say-experts-6482311.html
https://www.livemint.com/market/cryptocurrency/indian-platforms-campaign-to-deter centers-expected-ban-on-cryptocurrencies-11612785628133.html
https://www.financialexpress.com/money/eavesdropper-money-monster/2153880/