In recent weeks, cryptocurrency talks have been everywhere. Decentralized digital currencies secured by cryptography have been the subject of a prime minister’s meeting, a statement from the Reserve Bank of India governor and were presented in a barrage of advertisement during cricket matches. On November 23, we learned that the Lok Sabha was going to introduce a cryptocurrency bill.
There has been a lot of speculation as to whether the law would ban cryptocurrencies or simply attempt to regulate them.
Already in March 2020, a Reserve Bank of India ban on cryptocurrencies was overturned by the Supreme Court
Supporters of cryptocurrency claim that digital currencies reduce the cost of transactions and bring more transparency to the financial system. But skeptics say they are wary of the lack of government control over such instruments and that they could be used to fund illegal activities.
This is what you need to know about the situation.
What is happening?
Last week the Lok Sabha bulletin listing the agenda for the winter session of Parliament said the government will introduce the Cryptocurrency and Official Digital Currency Regulation Bill, 2021. The bill aims to “create a framework facilitating the creation of the official digital currency to be issued by the Reserve Bank of India ”.
“The bill also seeks to ban all private cryptocurrencies in India,” the bulletin said. “However, it allows certain exceptions to promote the underlying technology of the cryptocurrency and its uses.”
Officially, that is all we know about the bill. But reports have speculated what it might contain. Some suggest that although the government could not to be in favor an outright ban, the Reserve Bank of India is. Some reports say that a some crypto-currencies can be authorized and that cryptocurrency earnings can be heavily taxed.
Another report suggests that the government will ban all cryptocurrencies and set an exit period for those who currently own cryptocurrencies.
What is cryptocurrency?
A cryptocurrency is protected by cryptography. This is a method of encrypting communication using a code so that it is only accessible to the persons for whom it is intended. Cryptocurrency is produced by “mining” it: powerful computers are deployed to crack these codes, for which they are rewarded with currency.
This is done without central authority or intermediary, using blockchain technology: “A shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a corporate network,” says technology giant IBM. Each block contains only some information. Once the data is added to a block, it becomes extremely difficult to modify it, because all subsequent blocks are connected and should be modified as well. As a result, cryptocurrency is considered almost impossible to duplicate.
The blockchain ledger is distributed over the nodes of a computer network. No single person has the information on the blockchain. Rather, it is stored in a peer-to-peer network, to which everyone has access.
At its core, cryptocurrency is valuable because users see it as valuable, just like paper money in a wallet.
Why did the Supreme Court overturn the cryptocurrency ban in 2020?
In 2018, citing the risks associated with virtual currencies, the Reserve Bank of India issued a circular which prohibited banks and financial institutions from dealing in virtual currencies or providing services to any person or entity dealing in virtual currencies. This, in effect, has banned the use of cryptocurrency in India.
Two years later, the Supreme Court canceled this circular two years later for reasons of proportionality. While it recognizes that the Reserve Bank has the power to regulate virtual currencies, which would include cryptocurrencies, the court said the regulation must be commensurate with the risk of harm posed. In this case, given that the government had also not been able to comment on the legality of the cryptocurrency, the general ban on the Reserve Bank should be overturned, the court ruled.
This judgment may also become relevant for testing the legality of the 2021 bill.
Have there been other attempts to legislate on cryptocurrencies?
The Reserve Bank ban isn’t the only step that has been taken to regulate cryptocurrency. In 2018, an inter-ministerial committee drafted a crypto token regulation bill, which allowed the regulated sale and purchase of cryptocurrency.
However, in 2019, the same committee published its final report, accompanied by a Law proposition titled Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, which aimed to ban cryptocurrency completely. He said no one should “mine, generate, hold, sell, trade, issue, transfer, dispose of or use” cryptocurrency in India.
This 2019 bill was critical for its vague definition of cryptocurrency, which could include coupons, gift cards, and for its severe punishment of up to 10 years for violations. As a result, the bill was never tabled in Parliament.
Why is there a demand to regulate cryptocurrency?
The global cryptocurrency market is valued at around $ 3 billion.
In recent months, there has been a huge increase in the number of cryptocurrency users in India. In AugustIndia ranked second in the world in terms of cryptocurrency adoption rate, according to the 2021 Chainalysis Global Cryptocurrency Adoption Index. This was prompted by an advertising craze for cryptocurrencies during the recent T20 World Cup in October. Cryptocurrency exchanges are estimated to have spent more than Rs 50 crores on advertisements during the event.
Although there is no official study, newspaper articles suggest that there is strength be 1.5 crore to 2 crore from cryptocurrency investors in India, with total investments of around Rs 40,000 crore. However, according to the Governor of the Reserve Bank Shaktikanta Das, these numbers could be exaggerated. He suggested that 70% -80% investors have invested between Rs 500 and Rs 2000 in cryptocurrencies.
All of this is happening without any regulations. This may have triggered regulators as concerns about the cryptocurrency have been raised for some time.
One of the biggest concerns discussed in the report of the interministerial committee on virtual currencies in February 2019 is that cryptocurrencies are outside the control of central banks. Therefore, “central banks cannot regulate the money supply in the economy if unofficial virtual currencies are widely used,” the report said.
Cross-border transfers could also affect the flow of money and harm a country’s monetary policy.
According to the report, cases of fraud and hacking are also common when it comes to cryptocurrency. For Example, a study by Ernst & Young found that approximately $ 400 million of the total 3.7 billion funds raised to date in cryptocurrency offerings have been stolen. In November there was reports that Indian police were unable to locate Rs 9 crore of Bitcoin, the world’s most popular cryptocurrency, which they had seized from a hacker in Bangalore. Newspaper report said the criminal “appears to have deceived the police”.
Cryptocurrencies are also volatile. Bitcoin has always seen massive fluctuations in price. As the price of Bitcoin skyrockets (one Bitcoin is currently valued at around Rs 40 lakh), many believe the market is a bubble.
The anonymity provided by the cryptocurrency could also fuel criminal activity, critics say. There have been reports of cryptocurrency being used to fund Drug traffic and illegal arms sales around the world. On November 10, Delhi police stopped three people for buying marijuana using Bitcoin.
However, despite these concerns, there are advantages. The interministerial committee report claims that cryptocurrency technology can be useful in facilitating payments, especially small cross-border payments, as it can be more profitable and faster than traditional forms of payment, which often involve multiple intermediaries.
Cryptocurrencies could also pave the way for innovation. For example, blockchain, which forms the basis of most cryptocurrencies, can also be used to keep tax, insurance, and land records and to automatically execute contracts.
What have other countries done?
In September, El Salvador became the first country in the world to accept Bitcoin as legal tender: Bitcoin is accepted as a means of payment in the country. In the same month, the Chinese central bank put a general ban on all cryptocurrencies. The United Kingdom considered cryptocurrency as property, but not legal tender. It does not have a law to regulate cryptocurrency.
In October, Venezuela announced that it will allow travelers to purchase airline tickets using cryptocurrency.