The Cryptocurrency Debate | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Introduction:

According to the Global Financial Stability Report published by the International Monetary Fund, the popularity of crypto assets is growing. The market value of crypto assets surpassed $2.5 trillion in early May before falling 40% and then recovering to $2.1 trillion by September 2021. This report also brings to light the risks associated with the spread of crypto assets. These include fiscal risks to governments and systemic risks to the financial system suggesting that an increased usage can reduce the ability of central banks to implement monetary policy effectively. India is not a stranger to Cryptocurrencies. As per comparison platform Broker Chooser’s recent report at 10.07 crore India has the highest number of cryptocurrency holders in the world. 2021 Global Crypto Adoption Index released by Chainalysis has placed India second out of 154 nations. However Cryptocurrencies are not accepted as legal tender in India. In fact in the Budget Speech for 2018-19 the Government had said that it does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these cryptoassets in financing illegitimate activities or as part of the payment system. The Government had also said it will explore use of block chain technology proactively for ushering in digital economy. A legislation on this issue is also being worked out by the govt. RBI on its part has also cautioned users, holders and traders in virtual currencies regarding various risks associated in dealing with such VCs through its public notices over the past few years. The Central Bank has also said that it is working on a phased strategy for the launch of its digital currency by this year end.

Cryptocurrencies:

Examples: Bitcoin, Ethereum etc.

Why is the RBI against the use of cryptocurrencies?

• Sovereign guarantee: Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.
• Market volatility: 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.
• Risk in security: A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
• Malware threats: 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.

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.

Challenges:

• Most of the new users have little knowledge about the technology, or how to verify the genuineness of a particular cryptocurrency.
• A number of investors have put their money into less well-established and often spurious Cryptocurrencies.
• Some private cryptocurrency operators in India have said that almost 90% of the currencies are scams.
• Cryptocurrencies may or may not emerge as a useful tool because they are anonymous and non-fiat currencies.
• It poses challenge to states and central banks  Reports of hackings at several exchanges have exposed the risks attached to such investments.
• Intense volatility of cryptocurrency makes it an unacceptably risky investment for many.

Way forward

• Any new regulations made in this sector should prevent the misuse of these digital assets without hindering innovation and investments.
• Clarity on Crypto-currency definition: A legal and regulatory framework must first define crypto-currencies as securities or other financial instruments under the relevant national laws and identify the regulatory authority in charge.
• Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the government shall rather regulate the trading of cryptocurrencies by including stringent KYC norms, reporting and taxability.
• Provisions have to be made to route the value extracted from these networks transparently into our financial system.
• Regulatory uncertainties over India’s position on cryptocurrency highlights the need for clear-headed policy-making.

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.
• The government will see opportunities for revenues as large number of people have made gains through cryptocurrency.
• There will have to be a provision for an exit plan to ‘declare’ and ‘dispose’ the cryptocurrencies which are currently being held.
• 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.