Ban on cryptocurrency in India

Context:

• Earlier this month, the RBI told its board that a ‘complete Ban on cryptocurrency in India was needed as partial restrictions won’t work.

Ban on cryptocurrency in India–

RBI on Cryptocurrency:

• The RBI has consistently resisted crypto as it has concerns related to financial stability.
• The central bank’s monetary policy would be less effective if crypto is allowed to move freely.
• Virtual currencies would also undermine banks and other regulated entities. Other concerns about crypto include extreme price volatility and difficulty in tracing transactions.
• Besides, in a country like India, managing the foreign exchange risk will be a greater challenge given that money would flow in via digital currency and not necessarily in the form of dollars,
• Even IMF chief economist Gita Gopinath highlighted this challenge while pointing out that emerging and developing countries face a greater threat.
•  Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.
• Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.
• A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
• In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
• Money laundering.

Present status of Cryptocurrencies in India:

• An inter-ministerial panel on cryptocurrency has recommended that all private cryptocurrencies, except any virtual currencies issued by state, will be prohibited in India.
• The Reserve Bank of India (RBI) has also raised concerns on the cryptocurrencies traded in the market and conveyed them to the Centre.
• Back in March 2020, the Supreme Court had allowed banks and financial institutions to reinstate services related to cryptocurrencies by setting aside the RBI’s 2018 circular that had prohibited them (Based on the ground of “proportionality”)

Definition of Cryptocurrency

In simplistic terms, Cryptocurrency is a digitised asset spread through multiple computers in a shared network. The decentralised nature of this network shields them from any control from government regulatory bodies.

The term “cryptocurrency in itself is derived from the encryption techniques used to secure the network.

As per computer experts, any system that falls under the category of cryptocurrency must meet the following requirements.:

1. Absence of any centralised authority and is maintained through distributed networks
2. The system maintains records of cryptocurrency units and who owns them
3. The system decides whether new units can be created and in case it does, decided the origin and the ownership terms
4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
5. The system allows transactions to be performed in which ownership of the cryptographic units is changed.

Types of Cryptocurrency

The first type of crypto currency was Bitcoin, which to this day remains the most-used, valuable and popular. Along with Bitcoin, other alternative cryptocurrencies with varying degrees of functions and specifications have been created. Some are iterations of bitcoin while others have been created from the ground up

Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto. As of March 2021, there were over 18.6 million bitcoins in circulation with a total market cap of around $927 billion.

The competing cryptocurrencies that were created as a result of Bitcoin’s success are known as altcoins. Some of the well known altcoins are as follows:

1. Litecoin
2. Peercoin
3. Namecoin
4. Ethereum
5. Cardana

Today, the aggregate value of all the cryptocurrencies in existence is around $1.5 trillion—Bitcoin currently represents more than 60% of the total value.3.

Advantages and disadvantages of Cryptocurrency

Cryptocurrency has the following advantages

• Funds transfer between two parties will be easy without the need of third party like credit/debit cards or banks
• It is a cheaper alternative compared to other online transactions
• Payments are safe and secured and offer an unprecedented level of anonymity
• Modern cryptocurrency systems come with a user “wallet” or account address which is accessible only by a public key and pirate key. The private key is only know to the owner of the wallet
• Funds transfer are completed with minimal processing fees.

Following disadvantages.

• The almost hidden nature of cryptocurrency transactions makes them easy to be the focus of illegal activities such as money laundering, tax-evasion and possibly even terror-financing
• Payments are not irreversible
• Cryptocurrencies are not accepted everywhere and have limited value elsewhere
• There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.

SC Garg Committee recommendations (2019):

1. Ban anybody who mines, hold, transact or deal with cryptocurrencies in any form.
2. It recommend a jail term of one to 10 years for exchange or trading in digital currency.
3. It proposed a monetary penalty of up to three times the loss caused to the exchequer or gains made by the cryptocurrency user whichever is higher.
4. However, the panel said that the government should keep an open mind on the potential issuance of cryptocurrencies by the Reserve Bank of India.

Source: Times of India

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