Through R Gandhi
Cryptocurrencies, or virtual currencies, have attracted the attention of more than 1.5 crore of Indians according to claims from cryptocurrency exchanges. The volume of transactions on these exchanges has grown intelligently. This despite regulatory uncertainty, an impending legislative ban, and banks’ reluctance to provide banking services surrounding cryptocurrencies in India.
Even during the recent sharp drop in the value of Bitcoins and other cryptocurrencies, exchanges claim that trading volumes have increased. Obviously, there is immense interest in cryptocurrency trading. The Reserve Bank of India directives to banks in April 2018 effectively banning the use of the banking system for trading virtual currencies in India, the Supreme Court’s verdict in March 2020 overriding these directives and the government’s stated intention to Passing a law banning private issuance of virtual cryptocurrencies and the popularity of the cryptocurrencies listed above have all created the current crypto conundrum in India.
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It will be good to recall the history of cryptocurrencies to better understand the current situation in India. Radicals known as Cryptopunks, Intel’s Timothy May and Eric Hughes in 1992, came up with an idea to bring in private currency based on crypto logic; this was based on a distrust of the dominant system and an anarchist philosophy. Later, in 1998, there was a proposal to build B-Money – money that could not be taxed or tracked. There have been attempts to create Bit-Gold, which is based on the concept that what is difficult to solve (mine) will be of value, i.e. solving a puzzle of the crypto equation can be valuable. These ideas and attempts finally came to fruition, in 2008, in the form of Bitcoin, when Satoshi Nakamoto is widely believed to have inaugurated it.
Since then, the challenges and thrills of cryptocurrency mining have become a serious calling for many cyber enthusiasts; given its anarchist philosophy. Cryptocurrency mining and cryptocurrency trading have attracted people and groups engaging in illegal activities like tax evaders, money launderers, ransom seekers, and terrorists.
In their wake, there have been several ways to use cryptocurrencies. They are used as currencies, used to make payments for goods and services; and they are popular as investable and speculative assets. They are widely, according to anecdotal cases, used for nefarious activities such as money laundering, ransom demands and terrorist financing, in addition to avoiding taxation.
In those 13 years, the idea of cryptocurrencies has multiplied and as of September 12, 2021, according to coinmarketcap.com, there were 11,821 cryptos, of which it lists up to 6,541 as being traded. There are 406 crypto exchanges in the world; the market capitalization of the cryptos traded is $ 2,121,722,724,723. The two main cryptos, Bitcoin and Ethereum, represent 40.7% and 19.0% respectively. The value of all cryptocurrencies fluctuates widely. (See box). There is a kind of cryptocurrency, called stablecoins, which has a 1: 1 relationship with a fiat currency like the US dollar.
Along with their growing popularity and increasing visibility, and the attraction of commoners, several questions, misgivings and doubts have been raised around the world about the legality and safety of using cryptocurrencies. Additionally, cryptocurrencies have raised a host of issues regarding consumer and investor protection, as well as their use to protect illicit activity and for money laundering and terrorist financing. In the meantime, there were choirs demanding various political actions – ranging from the freedom of financial innovation of cryptocurrencies to the regulation of cryptocurrencies and even their total ban. This has forced political authorities in several jurisdictions to declare their stance on cryptocurrencies.
As a Commonwealth Task Force report on the subject (2019) puts it, there is no single and commonly emerging global model for the regulation of virtual currencies. Several countries have publicly concluded that, until now, it was not necessary to introduce new regulations to address general issues with virtual currencies and that they could build on existing regulations to resolve the issues. In contrast, some countries have taken measures to substantially ban all use of virtual currencies, including for reasons of financial stability. Many other countries would consider some form of regulation of virtual currencies.
The India stand
India started out with a cautious stance at the start. As early as December 2013, the Reserve Bank of India had warned the general public and users on virtual currencies, in particular on the risks associated with the use of virtual currencies. He said virtual currencies are not authorized by any central bank or monetary authority. There are potential financial, operational, legal, customer protection and security risks associated with their use.
Virtual currencies, being in digital form, are stored on digital / electronic media; are prone to losses resulting from hacking, loss of password, compromised credentials, malware attacks, etc. The loss of the electronic wallet could result in the permanent loss of the virtual currencies it contains. Payments by virtual currencies are made on a peer-to-peer basis. No established framework for resorting to customer issues / disputes / chargebacks etc. is not available.
There is no underlying or asset support for virtual currencies. Value seems to be a matter of speculation. Its legal status is unclear. And the use of virtual currencies for illicit and illegal activities has been reported. The Reserve Bank reiterated this caution in February 2017 and in December 2017 as well. On April 6, 2018, the Reserve Bank issued directives to all entities regulated by it, according to which they will not process or provide services to natural or legal persons dealing or settling virtual currencies.
At the same time, the Indian government has also been active in issues relating to cryptocurrencies. A high-level interministerial committee (CIM) was set up on November 2, 2017, under the chairmanship of the secretary of the DEA, to study issues related to virtual currencies and propose specific actions to be taken in this area. The Union Finance Minister, in the 2018 budget speech, also announced that the government does not consider cryptocurrencies as money or legal tender and will take all measures to eliminate the use of these crypto assets in the financing of illegitimate activities or within the framework of the payment system. . He said that virtual currency per se does not have any of the advantages associated with fiat currency. In addition, the Committee noted that unofficial virtual currencies can be used to defraud consumers, especially consumers or unsophisticated investors.
Another concern with the use of unofficial digital currencies relates to the economy and the financial system, with implications for the money supply, especially given their volatility and crippling use of resources, including money. energy. Due to the anonymity associated with virtual currencies / cryptocurrencies, they are vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult.
Bearing all of the above in mind, the committee recommended that all private cryptocurrencies, except any cryptocurrency that may be issued by the government, be banned in India. He also provided a bill for such a statute. In February 2021, the government informed that it would be tabling a cryptocurrency bill as existing laws are inadequate to deal with cryptocurrency issues. The outlines of the bill are not yet public, speculations, discussions and debates on the subject have multiplied.
Crypto should be treated and regulated as a separate asset class with a view to enabling governments around the world to effectively tackle illegal activities associated with virtual currencies. After much debate over the years, people have fully understood that crypto cannot be a currency because the fundamental element of a currency – that it should be legal tender – is missing in this case, that is – that is, one cannot force a cryptocurrency to be accepted by another person because it is not legal tender. The emerging general view is that it should be viewed as an asset, not a currency, not a payment instrument and not a financial instrument as there is no clearly identified issuer.
What are the properties of an asset? An asset can be physical, financial or virtual. Virtual like IPR or brand value. It will have a value, which can fluctuate in either direction. It can be bought, sold, traded or traded through contracts. Such a transaction can be either in whole or in part; it can be either divided or undivided; it can be exchanged for goods and services; it can be monetized in part or in whole. Thus, cryptocurrencies or virtual currencies will be considered as an asset.
Once we understand and accept that this is an asset (not a currency), it becomes relatively a little easier to have regulation around it. However, there are all possibilities to use this virtual asset for criminal activity in the absence of regulation and many cases indicate it. Any jurisdiction should have a clear framework according to which no part of economic activity should be considered to support criminal activity. Each society will have its own rules, will expect respect from all its members and will penalize non-compliance.
So a practical way to solve the current conundrum is to look at crypto or virtual currencies first as an asset. Considering the risks associated with cryptocurrencies or virtual currencies, it may be practical to restrict their transactions only by qualified investors and entities, who have established the capacity to understand and take such risks.
(The author is the former Deputy Governor of the Reserve Bank of India)
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