Cryptocurrency And Its Scope In India
Cryptocurrency for the first time emerged in the form of bitcoins in the year
2009 and its technology is even older. But they gained popularity in recent
years. Cryptocurrency works in a decentralised manner so there is no authority
behind it. Due to which the government is not supportive of cryptocurrency.
Cryptocurrency has emerged as a promising investment because as it could be seen
that even if the world goes down, cryptocurrency doesn't. For example, in the
case of worldwide pandemic COVID-19.
But, all this scope of cryptocurrency is useless when the government and the Reserve Bank of India (RBI) is not supportive of it. The Reserve Bank was giving circulars to discourage the crypto investors for some time until it decided to ban all its entities from supporting cryptocurrency transactions. This circular was put aside by the honourable Supreme Court of India as it was found disproportionate.
Today there is a need for a regulatory framework which is supported by both the Reserve Bank of India as well as the government. Because, cryptocurrency is here to stay for a long time and it can not be banned absolutely. So, why not regulate it.
Cryptocurrency And Its Scope In India
Introduction
A cryptocurrency is a virtual currency which is based on blockchain technology. This type of currency works on cryptography. It is decentralised meaning that no authority is there behind it to regulate and control it.
The number of types of cryptocurrency is increasing on a regular basis. There are over 4000 cryptocurrencies as of early 2021 but it is believed that top 20 cryptocurrencies hold the market share upto 90%.[1] Earlier people used to invest in gold as an asset to protect their money against inflation. Over the past couple of years, more people found Bitcoin to be a better alternative asset. Even institutional investors are converting their cash into Bitcoin to protect their finances against inflation.
Who can own Cryptocurrency
Anyone whether an individual or a corporate entity can purchase cryptocurrency. There is no restriction to who can own cryptocurrency.
How to earn cryptocurrency
Cryptocurrency is based on the term cryptography which means solving codes or to generate a key for any encrypted program. The currency is hidden behind the encryption which can only be seen through a key.The process to get to this key is called mining.
Mining is not easy as it sounds. It really is a hard way to earn because a person will have to use computer systems, a stable high internet connection and hard labour combined with a bit of luck to solve the encryption.
Another way to earn cryptocurrency is to just pay for it. A person can pay for it to those who have cryptocurrencies and are willing to give it for real money. Lastly a person can accept the payment of cryptocurrency for any kind of services provided by him.
Risks assimilated with cryptocurrency
Cryptocurrency is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value. Since, cryptocurrencies are not backed by any bank or organisation therefore if it goes down it all goes down.
With the changes going around, criminals have also accustomed them with modern ways. Frequency of cyber crimes are increasing day by day and with the increase in popularity of cryptocurrency it is rapidly becoming a hotspot for them. They mostly target the service providers, investors, storage houses because the amount will be bigger with big players and service providers. Also, its very difficult to catch the culprit and once they get their hands on the keys to the wallet. They can use the currency just like its owner.
If the keys to the account are stolen, lost or deleted, then there is no way to retrieve the cryptocurrency back.
Government may prevent the use of Bitcoin owing to its complexity and decentralized nature.[2]
High risk high gain proposition
Cryptocurrency emerged in the year 2009, if a person would have invested even 1000 rupees in them at that point of time. He would have been a millionaire by now. But now the value of cryptocurrency is already very high and from here either it can go to new limits or it can crash. Investors can not rely on any authority because there is no authority behind the transactions of cryptocurrency or to regulate it. Price of cryptocurrency is a highly fluctuating one and it is near impossible to predict the behaviour of the market.
Risk of illicit activities
Cryptocurrency works on cryptography which ensures security and anonymity to the transaction. But this feature is very dangerous when it comes to terror funding, smuggling, scams and other money laundering acts. Because it is very difficult to find the source and other necessary details due to the encryption.
Impact of COVID-19 on cryptocurrency
COVID-19 a disease from which millions of people died and every person was affected. COVID-19 is a highly communicable disease, therefore almost every country in the world imposed lockdowns due to which people were forced to stay at home and work from home. During this pandemic, financial markets become unstable as anyone could have predicted. But, to the surprise cryptocurrency market remained stable, especially Bitcoin. It can be termed as proof that bitcoin has become a full-fledged element of the financial market. So, COVID-19 pandemic has verified cryptocurrencies positively.[3] It has emerged as a hedge against the uncertainty of COVID-19.
Stand of Reserve Bank of India
The Reserve Bank of India (RBI) has always advised about the potential risks involved with the use of cryptocurrency. But in 2018 Reserve Bank took a firm step by banning its regulated entities from supporting transactions related to cryptocurrency and providing any services dealing with the same.This ban was seen as bad by the cryptocurrency holders and investors and soon after petitions were filed in the honourable Supreme Court of India.
Reasons for ban by the Reserve Bank of India
The Reserve Bank is responsible for financial stability and credit system in India. It also manages foreign exchanges under the Foreighn exchange management act, 1999. There was a significant number of scams related to cryptocurrencies in the market. These scams are raised further by the demonetisation in India. Ponzi schemes are also one of the reasons for this banking ban. Ponzi schemes are basically scams in which interest is paid to the earlier investors by the money invested by the later investors.
Intervention of The Supreme Court
Aggrieved by the restriction imposed by Reserve Bank, the Internet and Mobile Association of India, filed a petition questioning the legality of the circular issued by the RBI. Soon after, another petition was filed by the corporates interested in dealing with cryptocurrency along with few individual traders.[4] The case was filed in the year 2018 under the name of Internet and Mobile Association of India v. Reserve Bank of India.
In this case, it was argued that the circular of the Reserve Bank banning its subsidiaries was against the fundamental right of to practise any profession, or to carry on any occupation, trade or business provided by Article 19(1)(g) of the Indian Constitution.
Their main argument being that Reserve Bank has exceeded its power of regulatory framework of the RBI Act or Banking Regulation Act, 1949, as it dont lie under the ambit of credit system or payment system under the Payment and Settlement Act,2007.
The court observed that the RBI fails to administer a single event where exchange of cryptocurrency has impacted entities like nationalised banks/ scheduled commercial banks/ cooperative banks/NBFCs directly or indirectly regulated by RBI.
The court on march 4 set aside that circular as the court found it disproportionate. Also, the court found that the RBI did not consider the availability of alternatives before issuing the circular.[5]
Government's scheme regarding cryptocurrency
Stand of Indian government had been pretty clear that they do not want cryptocurrency as a legal tender. Moreover, they want to discourage their citizens from investing and dealing in the same. There was a banking ban on cryptocurrencies from July 2018 to March 2020. On March 4, the Supreme Court lifted the ban and through that instance, the government should have understood that they cannot put an absolute restriction on cryptocurrencies.
A committee was formed to study the use of cryptocurrency and precautions, measures or regulations to be taken. The committee sent its report on 28 February, 2019 recommending prohibition of all private cryptocurrencies, except any virtual currencies issued by the state.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (ODC Bill) has been proposed with the target of making a facilitative framework for creation of the official digital currency to be issued by the Federal Reserve Bank of India (RBI) and prohibit all private cryptocurrencies in India. However, it'll support and use underlying cryptocurrency technologies.
If the proposed creation of digital currency happens, the RBI will join other central banks including that of China, where it's electronic yuan.
Present situation of Cryptocurrency in India
It is interesting to note that currently there is no law which bans cryptocurrency in India. It is perfectly legal to own and trade in cryptocurrency. There had been a ban on banking entities to not support crypto transactions but that circular of RBI was set aside on March 4 by the Supreme Court and there is no regulation or legal framework guiding cryptocurrency upto this day.
It should also be noted that it is not a legal tender. Legal tender is mentioned in section 26 of Reserve Bank of India Act, 1934 as:
... guaranteed by the central government of India. So, to declare cryptocurrency as legal tender, the government will have to notify it in the official Gazette notification but until then it cannot be legally enforced.[6]
What can be done
India needs a regulatory framework just like other countries need. It is no secret that a lot of Indian investors are there who are investing in cryptocurrency and waiting for their opportunity, but the government doesn't want them to continue. Government needs to acknowledge that this could be the tool Indian economy was waiting for. Prima facie the government is only looking at the negative side of cryptocurrency that it could be used for illicit activities like money laundering and terror funding but it can control these drawbacks by bringing a framework to control the use of cryptocurrency.
Recent developments in China
China has become the first major economy to launch blockchain powered cryptocurrency as it has started to issue digital Yuan. People in China were already accustomed with the app based digital transactions therefore, the transactions of digital Yuan which can be done through an app shouldn't be a hiccup.This knowledge on how people spend money will only grow with the implementation of the digital Yuan, even though the country's Central Bank has said it will limit traceability and create what it calls controllable anonymity.
Bloomberg identifies India and three other countries South Africa, Pakistan and Thailand, with concrete plans to launch their own official cryptocurrencies soon.[7]
What could be expected from future for Indian crypto investors
Government's stand is pretty clear that they do not want decentralised currency. RBI is also looking to prohibit the use of cryptocurrency without looking at the alternatives to regulate and control the cryptocurrency and its transactions. But emphasis should also be given on the interview of Finance minister Mrs. Nirmala Sitharaman in which she said from our side, we are very clear that we are not shutting off all options, to India Today News Director Rahul Kanwal.[8]
Conclusion:
Change is the only thing constant in human life. From barter system to rupees and from physical transactions to online money transactions there has been an upgrade in the form of money and in the form of interface of their transactions, on which the parties carry on business. And now it is time for cryptocurrency as it is seen as a safe transaction method and a promising investment. In upcoming years, the government may try to ban unauthorized cryptocurrencies after launching its own currency, but in the long term it will have to make way for the upcoming surge of crypto investors.
End-Notes:
But, all this scope of cryptocurrency is useless when the government and the Reserve Bank of India (RBI) is not supportive of it. The Reserve Bank was giving circulars to discourage the crypto investors for some time until it decided to ban all its entities from supporting cryptocurrency transactions. This circular was put aside by the honourable Supreme Court of India as it was found disproportionate.
Today there is a need for a regulatory framework which is supported by both the Reserve Bank of India as well as the government. Because, cryptocurrency is here to stay for a long time and it can not be banned absolutely. So, why not regulate it.
Cryptocurrency And Its Scope In India
Introduction
A cryptocurrency is a virtual currency which is based on blockchain technology. This type of currency works on cryptography. It is decentralised meaning that no authority is there behind it to regulate and control it.
The number of types of cryptocurrency is increasing on a regular basis. There are over 4000 cryptocurrencies as of early 2021 but it is believed that top 20 cryptocurrencies hold the market share upto 90%.[1] Earlier people used to invest in gold as an asset to protect their money against inflation. Over the past couple of years, more people found Bitcoin to be a better alternative asset. Even institutional investors are converting their cash into Bitcoin to protect their finances against inflation.
Who can own Cryptocurrency
Anyone whether an individual or a corporate entity can purchase cryptocurrency. There is no restriction to who can own cryptocurrency.
How to earn cryptocurrency
Cryptocurrency is based on the term cryptography which means solving codes or to generate a key for any encrypted program. The currency is hidden behind the encryption which can only be seen through a key.The process to get to this key is called mining.
Mining is not easy as it sounds. It really is a hard way to earn because a person will have to use computer systems, a stable high internet connection and hard labour combined with a bit of luck to solve the encryption.
Another way to earn cryptocurrency is to just pay for it. A person can pay for it to those who have cryptocurrencies and are willing to give it for real money. Lastly a person can accept the payment of cryptocurrency for any kind of services provided by him.
Risks assimilated with cryptocurrency
Cryptocurrency is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value. Since, cryptocurrencies are not backed by any bank or organisation therefore if it goes down it all goes down.
With the changes going around, criminals have also accustomed them with modern ways. Frequency of cyber crimes are increasing day by day and with the increase in popularity of cryptocurrency it is rapidly becoming a hotspot for them. They mostly target the service providers, investors, storage houses because the amount will be bigger with big players and service providers. Also, its very difficult to catch the culprit and once they get their hands on the keys to the wallet. They can use the currency just like its owner.
If the keys to the account are stolen, lost or deleted, then there is no way to retrieve the cryptocurrency back.
Government may prevent the use of Bitcoin owing to its complexity and decentralized nature.[2]
High risk high gain proposition
Cryptocurrency emerged in the year 2009, if a person would have invested even 1000 rupees in them at that point of time. He would have been a millionaire by now. But now the value of cryptocurrency is already very high and from here either it can go to new limits or it can crash. Investors can not rely on any authority because there is no authority behind the transactions of cryptocurrency or to regulate it. Price of cryptocurrency is a highly fluctuating one and it is near impossible to predict the behaviour of the market.
Risk of illicit activities
Cryptocurrency works on cryptography which ensures security and anonymity to the transaction. But this feature is very dangerous when it comes to terror funding, smuggling, scams and other money laundering acts. Because it is very difficult to find the source and other necessary details due to the encryption.
Impact of COVID-19 on cryptocurrency
COVID-19 a disease from which millions of people died and every person was affected. COVID-19 is a highly communicable disease, therefore almost every country in the world imposed lockdowns due to which people were forced to stay at home and work from home. During this pandemic, financial markets become unstable as anyone could have predicted. But, to the surprise cryptocurrency market remained stable, especially Bitcoin. It can be termed as proof that bitcoin has become a full-fledged element of the financial market. So, COVID-19 pandemic has verified cryptocurrencies positively.[3] It has emerged as a hedge against the uncertainty of COVID-19.
Stand of Reserve Bank of India
The Reserve Bank of India (RBI) has always advised about the potential risks involved with the use of cryptocurrency. But in 2018 Reserve Bank took a firm step by banning its regulated entities from supporting transactions related to cryptocurrency and providing any services dealing with the same.This ban was seen as bad by the cryptocurrency holders and investors and soon after petitions were filed in the honourable Supreme Court of India.
Reasons for ban by the Reserve Bank of India
The Reserve Bank is responsible for financial stability and credit system in India. It also manages foreign exchanges under the Foreighn exchange management act, 1999. There was a significant number of scams related to cryptocurrencies in the market. These scams are raised further by the demonetisation in India. Ponzi schemes are also one of the reasons for this banking ban. Ponzi schemes are basically scams in which interest is paid to the earlier investors by the money invested by the later investors.
Intervention of The Supreme Court
Aggrieved by the restriction imposed by Reserve Bank, the Internet and Mobile Association of India, filed a petition questioning the legality of the circular issued by the RBI. Soon after, another petition was filed by the corporates interested in dealing with cryptocurrency along with few individual traders.[4] The case was filed in the year 2018 under the name of Internet and Mobile Association of India v. Reserve Bank of India.
In this case, it was argued that the circular of the Reserve Bank banning its subsidiaries was against the fundamental right of to practise any profession, or to carry on any occupation, trade or business provided by Article 19(1)(g) of the Indian Constitution.
Their main argument being that Reserve Bank has exceeded its power of regulatory framework of the RBI Act or Banking Regulation Act, 1949, as it dont lie under the ambit of credit system or payment system under the Payment and Settlement Act,2007.
The court observed that the RBI fails to administer a single event where exchange of cryptocurrency has impacted entities like nationalised banks/ scheduled commercial banks/ cooperative banks/NBFCs directly or indirectly regulated by RBI.
The court on march 4 set aside that circular as the court found it disproportionate. Also, the court found that the RBI did not consider the availability of alternatives before issuing the circular.[5]
Government's scheme regarding cryptocurrency
Stand of Indian government had been pretty clear that they do not want cryptocurrency as a legal tender. Moreover, they want to discourage their citizens from investing and dealing in the same. There was a banking ban on cryptocurrencies from July 2018 to March 2020. On March 4, the Supreme Court lifted the ban and through that instance, the government should have understood that they cannot put an absolute restriction on cryptocurrencies.
A committee was formed to study the use of cryptocurrency and precautions, measures or regulations to be taken. The committee sent its report on 28 February, 2019 recommending prohibition of all private cryptocurrencies, except any virtual currencies issued by the state.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (ODC Bill) has been proposed with the target of making a facilitative framework for creation of the official digital currency to be issued by the Federal Reserve Bank of India (RBI) and prohibit all private cryptocurrencies in India. However, it'll support and use underlying cryptocurrency technologies.
If the proposed creation of digital currency happens, the RBI will join other central banks including that of China, where it's electronic yuan.
Present situation of Cryptocurrency in India
It is interesting to note that currently there is no law which bans cryptocurrency in India. It is perfectly legal to own and trade in cryptocurrency. There had been a ban on banking entities to not support crypto transactions but that circular of RBI was set aside on March 4 by the Supreme Court and there is no regulation or legal framework guiding cryptocurrency upto this day.
It should also be noted that it is not a legal tender. Legal tender is mentioned in section 26 of Reserve Bank of India Act, 1934 as:
... guaranteed by the central government of India. So, to declare cryptocurrency as legal tender, the government will have to notify it in the official Gazette notification but until then it cannot be legally enforced.[6]
What can be done
India needs a regulatory framework just like other countries need. It is no secret that a lot of Indian investors are there who are investing in cryptocurrency and waiting for their opportunity, but the government doesn't want them to continue. Government needs to acknowledge that this could be the tool Indian economy was waiting for. Prima facie the government is only looking at the negative side of cryptocurrency that it could be used for illicit activities like money laundering and terror funding but it can control these drawbacks by bringing a framework to control the use of cryptocurrency.
Recent developments in China
China has become the first major economy to launch blockchain powered cryptocurrency as it has started to issue digital Yuan. People in China were already accustomed with the app based digital transactions therefore, the transactions of digital Yuan which can be done through an app shouldn't be a hiccup.This knowledge on how people spend money will only grow with the implementation of the digital Yuan, even though the country's Central Bank has said it will limit traceability and create what it calls controllable anonymity.
Bloomberg identifies India and three other countries South Africa, Pakistan and Thailand, with concrete plans to launch their own official cryptocurrencies soon.[7]
What could be expected from future for Indian crypto investors
Government's stand is pretty clear that they do not want decentralised currency. RBI is also looking to prohibit the use of cryptocurrency without looking at the alternatives to regulate and control the cryptocurrency and its transactions. But emphasis should also be given on the interview of Finance minister Mrs. Nirmala Sitharaman in which she said from our side, we are very clear that we are not shutting off all options, to India Today News Director Rahul Kanwal.[8]
Conclusion:
Change is the only thing constant in human life. From barter system to rupees and from physical transactions to online money transactions there has been an upgrade in the form of money and in the form of interface of their transactions, on which the parties carry on business. And now it is time for cryptocurrency as it is seen as a safe transaction method and a promising investment. In upcoming years, the government may try to ban unauthorized cryptocurrencies after launching its own currency, but in the long term it will have to make way for the upcoming surge of crypto investors.
End-Notes:
- https://www.statista.com/statistics/863917/number-crypto-coins-tokens/
- https://www.rmahq.org/what-are-the-inherent-risks-associated-with-cryptocurrency/?gmssopc
- https://www.eurekalert.org/pub_releases/2020-11/thni-bic111220.php
- http://www.legalserviceindia.com/legal/article-4550-analysis-of-status-of-cryptocurrency-in-india-the-battle-of-advance-economy.html
- https://www.thehindu.com/news/national/supreme-court-sets-aside-rbi-ban-on-cryptocurrency-transactions/article30979301.ece
- https://www.financialexpress.com/money/investing-in-cryptocurrency-risks-safety-legal-status-future-in-india-all-you-need-to-know/2195319/
- https://thewire.in/world/china-becomes-first-major-economy-to-issue-digital-currency
- https://www.indiatoday.in/business/story/not-shutting-all-options-on-cryptocurrency-says-finance-minister-nirmala-sitharaman-at-india-today-conclave-1779328-2021-03-15
Award Winning Article Is Written By: Mr.Madhur Mittal
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