“The old question ‘Is it in the database?’ will be replaced by ‘Is it on the blockchain?’”-William Mougayar
Progressively becoming popular, especially amongst millenials, cryptocurrency is defined as any form of digital currency that usually doesn’t have a central issuing or regulatory authority but rather uses a decentralized system for recording transactions and managing the issuance of new units, and depends on cryptography to preclude fraudulent transactions and counterfeiting. People consider cryptocurrencies to be reliable because these aren’t affiliated to the world governments and thus their stability doesn’t get affected by any turmoil in a particular country. Cryptocurrency is predicted to dominate the future of money for it protects identity and money, makes trading process relatively transparent and has a potential to be profitable. In 2019, the global cryptocurrency market was estimated at USD 792.53Million, and by 2026, it is expected to grow to USD 5190.62 Million. In the Indian context, in 2018, when the digital currencies were found to be fraudulently being used, the Reserve Bank of India banned the banks and other regulated entities from facilitating dealings with crypto exchanges; however, in 2020, the Supreme Court lifted the ban stating that the digital currency isn’t illegal in India. This article aims at discussing.
Debate on the Virtual Currency
The newly developed and rapidly flourishing business phenomenon of cryptocurrency has, every now and then, triggered debates about its safety, volatility, legitimacy, and what not? In 2018, in the case of Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India (RBI), RBI, acting according to the powers granted by the RBI Act of 1934 and the Payment Settlement Systems Act of 2007, issued circular directing entities (a) neither to support any virtual currency transaction nor to provide services enabling any entity r person in transacting with or settling digital currency; and (b) severe ties with such entities or persons if they were providing them with such services. RBI imposed the ban citing concerns for consumer protection, money laundering, market integrity, etc. The challenging party, IAMAI submitted that RBI surpassed its statutory authority when prohibiting an economic activity that falls under the ambit of the economic policy and not the regulator; and the court seconded with IAMAI’s another submission that the pre-emptive ban violated the fundamental right to practice any profession, or to carry out any business, trade or occupation as granted under Article 19 (1) (g) of the Indian Constitution, but of the ones who carry out crypto exchanges as a part of their business/ occupation and their survival depends on them. The court, while lifting the ban in 2020, held the circular to be arbitrary, non- reasonable, and disproportionate, however, observed the virtual currency to be within the remit of regulatory powers of the central bank. It noted that cryptocurrency has the potential of being accepted as legitimate payment to purchase goods and services and that the payment systems can be regulated by the apex bank. However, since the government doesn’t consider cryptocurrency as legal tender, the fear of it getting banned prevails. RBI is in the favor of banning cryptocurrency on the basis of possible usage for money laundering, dark market transactions, and illegal activities.
The CEO of WazirX, Nischal Shetty, said that crypto is gradually coming forth as a conventional investment class and Bitcoin has become a new alternative asset class. He added that crypto is looked at as a hedge to shield fiat portfolio and that its value as a hedge lies in its inflation-whipping caliber. The Report on Crypto- Asset Markets by the Financial Stability Board (FSB) assessed illiquid and fragile markets, volatility in prices, leverage related trouble for holders and creditors, reputational implications for the financial institutions, and operational and technological loopholes as the main risks pertinent to crypto-assets and their markets. Taking the instance of the most outstanding cryptocurrency, Bitcoin doesn’t establish its value from any earning or asset and thus its price can easily sway as per the will of the investor to pay for it. The trajectory of volatility strips the digital currency off of the status of the best medium of exchange.
Regulations for the Cryptocurrency
Since the 2020 Supreme Court order, the Indian cryptocurrency industry hasn’t been provided with any regulatory status or been prohibited. The crypto transactions have witnessed a substantial rise, and during the period from March 2020 to December 2020, trading in cryptocurrency saw a growth by 500% across the top four crypto exchanges.
In 2017, crypto- companies establish the Digital Assets and Blockchain Foundation of India which is a non-government organization aimed at, while remaining a neutral and impartial platform, uniting blockchain technology stakeholders in India towards the mission of forwarding the country’s economic growth. For India to usher in the digital economy, it is significant for India to proactively explore blockchain technology. Countries like UK, Canada, etc. have a proper regulatory system for crypto-trading and check upon the associated risks through ensuring compliance with norms of anti-money laundering/ combating terror financing.
In January 2021, the Ministry of Electronics and Information Technology (MeiTY) of India released a Draft Strategy i.e. Draft National Strategy on Blockchain that purports to develop a National Level Blockchain Framework, a multi-layered blockchain infrastructure accessible via a National Blockchain API, committed to creating sector-wise blockchains. Considering the challenges related to privacy, technological complications, regulatory system, and RBI’s skepticism of cryptocurrency, the strategy provides a roadmap for the adoption of blockchain technology. The strategy recognizes that the framework can help in emerging shared infrastructure, developing cross-domain applications, and scaling deployments for created applications. It also proposes the integration of e- sign, DigiLocker facility, and E-Pramaan with the unified framework of blockchain. For planning and executing the framework, it has advised a multi-institutional Centre for Excellence consisting of National eGovernance Division (NeGD), State Governments, National Informatics Centre (NIC) and National Informatics Centre Services Inc. (NICSI), Centre for Development of Advanced Computing (C-DAC), Standardization Testing and Quality Certification Directorate (STQC), premier academic institutes, MeiTY and other relevant ministries, and industry and startups.
In January 2021 itself, the government revealed its plan to introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 based on the recommendations of the Garg Committee of Supreme Court, although lately it was indicated that it has been held up for a while. The bill aims to create a framework that could facilitate the creation of official digital currency to be issued and regulated by RBI, and prohibiting all private virtual currencies, but with certain exceptions for encouraging fundamental crypto- technology and its uses. The government and RBI are receptive to central bank digital currency (CBDC) for they identify that fiat currency isn’t prone to the kind of fluctuations and volatility observed in cryptocurrencies, and for implementation of CBDC, central banks are examining Distributed Ledge Technology (DLT). According to the RBI Report on Currency and Finance for 2020-21, RBI finds the opportunity of promoting financial inclusion, ameliorating aggregate demand, and improving the speed of monetary policy transmission through CDBC. For the investors who have or are investing in private digital currencies, the bill poses a risk, but the bill would provide such holders up to six months for liquidation, post which levying of penalties will be followed.
Currently, RBI, Security and Exchange Board of India (SEBI), etc don’t have authority to regulate cryptocurrency because it doesn’t fall within the purview of currency, asset, security, or commodity. Hence, it is imperative to create a legal framework to ease its situation in India. However, in the absence of any notification for identification of a particular government authority as a regulatory body for cryptocurrency, the Ministry of Finance (Economics Department), the Ministry of Electronics and Information Technology, SEBI, and RBI could have the regulatory power over crypto assets and crypto asset-transacting businesses.
The government of India is open to providing a platform for the cryptocurrency market to flourish yield profits; however, there are a few concerns that the central government and RBI have about private cryptocurrencies. Cryptocurrency being decentralized doesn’t allow the government to have a control over it like it has on the sovereign currency. With no legal framework in place, the risk of private digital currency prevails and confuses the people. There is an urgent need to formulate legislation-related policies establishing a firm stand of India with regards to cryptocurrency, infusing confidence in the citizens, and having a seamless regulatory system. The exceptions pertinent to banning private crypto must reflect the embodiment of the principles of proportionality and proactiveness. The regulatory framework must not encompass strategies that are excessive but directed towards extenuating the concerning risks.
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Navin Kumar Jaggi