Cryptocurrency is a type of virtual or digital currency that uses cryptography to secure transactions. Instead of having a regulating authority, it uses a decentralized system to record transactions and issue new units. Therefore, Banks do not have any role to play in such digital transactions. Since it is a peer to peer system, it enables anyone anywhere to send and receive payments across anywhere in the globe. Transactions through a cryptocurrency are recorded in a public ledger and the cryptocurrency is stored in digital wallets. Cryptocurrency derives its name from using encryption to verify transactions. Advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers safely and securely. Bitcoin, founded in 2009, was the first cryptocurrency and still remains numero uno till date.
Cryptocurrencies run through a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders. It is created through a process called mining, which solves complicated mathematical problems through a computer and generating coins in the process. Currencies could also be bought from brokers, then store and spend them using cryptographic wallets. Owning cryptocurrency means not owning anything tangible. What we own is a key that allows us to move a record or a unit of measure from one person to another without any third party. Contrary to the popular notion, cryptocurrency is NOT money since it does not serve the critical functions of money: to be a medium of exchange, a unit of account, liquid, universally acceptable, stable and government approval.
Cryptocurrency laws in India
Cryptocurrency is currently a gray area in India. It is neither legal nor illegal. Crypto currencies have grown exponentially as an asset class in the last few years despite being infamous for their volatility and uncertainties around regulations in several countries including India. The Government of India has changed its position on crypto laws, with a ban in 2016, and then in 2021 considering a Cryptocurrency and Regulation of Official Digital Currency Bill. At present, there are no regulations or any ban on the use of cryptocurrencies in India. The Supreme Court reversed the Reserve Bank of India’s (RBI) order banning banks from supporting crypto transactions through an order in March 2020.
Timeline for Crypto Laws in India
2013- The Reserve Bank of India (RBI) issued a circular, warning the public against the use of virtual currencies.
2017 - RBI released another circular, reiterating its concerns with virtual currency like Bitcoin, Litecoin et al are not legal tenders. At this time, there was no ban on cryptocurrencies and most banks allowed transactions from cryptocurrency exchanges. 2018 – In March, the Central Board of Digital Tax (CBDT) proposed a scheme to the finance ministry for banning virtual currencies. In April, the RBI issued a circular restraining banks and financial institutions from providing financial services to virtual currency exchanges. 2020- In March, the Supreme Court of India lifted the curb on cryptocurrency imposed by the RBI.
2021- In November, the Standing Committee on Finance met representatives of crypto exchanges, Blockchain and Crypto Assets Council (BACC), among others, and concluded that cryptocurrencies should be regulated, rather than being banned.
2022- In Feb, India levied a 30% tax on income from crypto transactions.
Concerns of Governments regarding Cryptocurrencies
Few of the issues highlighted by several governments across the planet regarding the usage of cryptocurrencies are:
• Inheritance – Since the crypto industry is unregulated, if someone passes away, there is no way to access his funds without the keys of his digital wallet.
• Cyber Security – Owing to their digital nature, crypto exchanges are vulnerable to hackers, operational glitches, and malware.
• Price Volatility – Cryptos are widely known for their huge fluctuations which increases the risk of market being detrimental to investors
• Fraud and Money Laundering – Several Governments believe that crypto market is a convenient way for criminals to commit fraud, money laundering and other financial crimes
• Environmental - Cryptocurrency mining is highly energy-intensive. Bitcoin mining generates about 96 million tons of carbon dioxide emissions each year which is huge.
• Market Manipulation – Crypto trading suffers from illiquidity and manipulation because of the existence of “whale wallets” (wallets holding disproportionately large amounts of bitcoins) causing violent fluctuations for the convenience of few whale wallets.
• Limited Supply - All cryptocurrencies have a finite supply and the rate of mining them is uncertain and not controllable. The static money supply would prohibit banks to regulate the amount of money in circulation, thereby leaving it to the invisible hand of demand and supply, thereby having no control over policy making on crypto.
The total market value of all the cryptocurrencies crossed $3 trillion in November 2021, though the volatility in the crypto market didn't have a significant impact on the financial stability, its influence on the global economy cannot be ignored. The head of the International Monetary Fund (IMF), Christine Lagarde has stated that regulatory action from the international community on cryptocurrencies is "inevitable". 2021 has been the biggest year so far for the crypto market since several crypto coins like Ethereum, Cardona and Dogecoin have entered the market. It also saw El Salvador accept Bitcoin as a legal tender.
The government is unclear with the formulation of laws regarding cryptocurrencies. Throughout the year, it gave signs that crypto can be classified as a digital asset only to table a bill in November which demands a complete ban on private cryptocurrencies, without actually defining them. The laws regarding cryptocurrencies will become clear only after “The Cryptocurrency and Regulation of Official Digital Currency Bill” has been passed by the Parliament.
This article is written by Rakesh Behera, of Sambalpur University.