In recent weeks, discussions about cryptocurrency have been everywhere. Decentralised digital currencies secured by cryptography were the subject of a prime ministerial meeting, a statement by the Reserve Bank of India governor and were featured in a barrage of advertisements during cricket matches. On November 23 came the news that the Lok Sabha is set to table a draft legislation on cryptocurrencies.
There has been a great deal of speculation about whether the law will prohibit cryptocurrencies or merely 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 say that digital currencies lower the cost of transactions and bring more transparency to the financial system. But sceptics say they are wary about the lack of governmental control over such instruments and that they could be used to finance 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 the Parliament said the government will introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The Bill aims “to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India”.
“The Bill also seeks to prohibit all private cryptocurrencies in India,” the bulletin said. “However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
Officially, this is all that is known about the Bill. But news reports have speculated about what it could contain. Some suggest that while the government might not be in favour of an outright ban, the Reserve Bank of India is. Some reports say that a few cryptocurrencies may be allowed and that cryptocurrency gains may be heavily taxed.
Another report suggests that the government will ban all cryptocurrencies and lay down an exit period for those who currently possess cryptocurrencies.
What is cryptocurrency?
A cryptocurrency is protected by cryptography. This refers to a method of encrypting communication using a code so that it can be only be accessed by people for whom it is intended. Cryptocurrency is produced by “mining” it: powerful computers are deployed to break these codes, for which they are rewarded with the currency.
This is done without any central authority or intermediary, by using blockchain technology: “a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network”, explains technology giant IBM. Each block contains only some information. Once data is added to one block, it becomes extremely difficult to change it, since all subsequent blocks are connected and would have to be changed too. As a consequence, cryptocurrency is considered to be almost impossible to duplicate.
The blockchain ledger is distributed across the nodes of a computer network. No single person has the information about the chain of blocks. Rather it is stored in a peer-to-peer network, which everyone has access to.
At its core, cryptocurrency is valuable because users consider it to be valuable, just like the paper money in a wallet.
Why did the Supreme Court reverse the ban on cryptocurrency in 2020?
In 2018, citing risks associated with virtual currencies, the Reserve Bank of India issued a circular that 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, banned the use of cryptocurrency in India.
Two years later, the Supreme Court struck down this circular on grounds of proportionality. While it acknowledged that the Reserve Bank has the power to regulate virtual currencies, which would include cryptocurrencies, the court said that the regulation has to be proportionate to the risk of damage posed. In this case, since the government had also not been able to decide on the legality of cryptocurrency, the Reserve Bank’s blanket ban should be struck down, the court held.
This judgment may also become relevant in testing the legality of the 2021 Bill.
Have there been other attempts to legislate cryptocurrencies?
The Reserve Bank ban is not the only step that has been taken to regulate cryptocurrency. In 2018, an Inter-Ministerial Committee drafted a Crypto-Token Regulation Bill, which allowed for the regulated sale and purchase of cryptocurrency.
However, in 2019, the same committee issued its final report, along with a proposed law titled Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, which sought a complete ban on cryptocurrency. It said that no person should “mine, generate, hold, sell, deal in, issue, transfer, dispose of or use” cryptocurrency in India.
This 2019 Bill was criticised for its vague definition of cryptocurrency, which could include discount coupons, gift cards, and for its harsh punishment of up to 10 years for violations. The Bill was never tabled before the Parliament.
Why is there a demand to regulate cryptocurrency?
The global cryptocurrency market is valued at around $3 trillion.
In recent months, there has been a huge rise in the number of cryptocurrency users in India. In August, India ranked second in the world in terms of the cryptocurrency adoption rate, according to Chainalysis’s 2021 Global Crypto Adoption Index. Driving this was a splurge in advertising 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.
Though no official study exists, newspaper reports suggest that there might be 1.5 crore to 2 crore cryptocurrency investors in India, with total investments of around Rs 40,000 crore. However, as per the Reserve Bank Governor Shaktikanta Das, these numbers might be exaggerated. He suggested that 70%-80% of investors have invested between Rs 500-Rs 2,000 in cryptocurrencies.
All this is happening without any regulation. This may have triggered the regulators since concerns about cryptocurrency have been raised for some time.
One of the biggest concerns discussed in the report of the Inter-Ministerial 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 non-official virtual currencies are widely used”, the report says.
Cross-border transfers could also affect the flow of money, and hurt a country’s monetary policy.
As per the report, instances of fraud and hacking are also common with regard to cryptocurrency. For example, an Ernst & Young study found that around $400 million of the total $3.7 billion funds raised in cryptocurrency offerings to date have been stolen. In November, there were reports that the Indian police could not locate Rs 9 crore worth of Bitcoin, the world’s most popular cryptocurrency, that it had seized from a hacker in Bangalore. A newspaper report said that the criminal “appears to have tricked the police”.
Cryptocurrencies are also volatile. Bitcoin has always seen massive fluctuations in price. As the price of Bitcoin price soars (one Bitcoin is currently valued at around Rs 40 lakh), many believe the market is a bubble.
The anonymity that cryptocurrency provides could also fuel criminal activities, critics say. There have been reports of cryptocurrency being used to finance drug trafficking and illegal weapon sales worldwide. On November 10, the Delhi Police arrested three people for buying marijuana using Bitcoin.
However, despite these concerns, there are benefits. The Inter-Ministerial Committee report says that cryptocurrency technology can be useful for facilitating payments, especially small cross-border payments, since it can be more cost- and time-effective than traditional forms of payments, which often involve several intermediaries.
Cryptocurrencies could also pave the way for innovation. For instance, blockchain, which forms the basis for most cryptocurrencies, can also be used to keep tax, insurance and land records and to automatically enforce 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. The same month, China’s central bank put a blanket ban on all cryptocurrencies. The United Kingdom considers cryptocurrency as property, but not legal tender. It does not have a law to regulate cryptocurrency.
In October, Venezuela announced that it will allow travellers to buy air tickets using cryptocurrency.
Corrections and clarifications: This article has been edited to reflect the fact that the cryptocurrency market is valued at around $3 trillion.