Editorials

Cryptocurrency and Regulation of Official Digital Currency Bill, 2021: Will the Uncertainty End?


Author: Yash Prakash Yadav, 1st year student of Campus Law Centre, Faculty of Law, University of Delhi.

In recent times the technology has made progress and led to innovations at a speed which is leaving behind the conventional frameworks and thus, forcing the current sphere of governance to rethink about the setups in almost every field. And the market for financial assets is no exception. Cryptocurrency is one of the recent innovations which have knocked the door of every nation’s market. The process of acceptance and rejections is taking place all over the world on nation-by-nation basis. The Government of India has announced that a bill will be introduced in this budget session to ban private cryptocurrencies. The bill has been named as ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’. This article will revisit the recent history of cryptocurrency, for India in particular and present the views for potential outcomes of this bill.

Cryptocurrency: A brief introduction

There are many different definitions for the asset in discussion here that we choose to call cryptocurrency, many nations, like U.S.A, have different definitions which vary from department to department.

Following is the introduction of the concept of cryptocurrency:

Technology behind the Cryptocurrency

Cryptocurrencies are stored in a geographically distributed decentralized network of many computers called nodes, using blockchain technology. Blockchain is a type of database but different from a typical relational database. A typical relational database stores the data as tables, whereas blockchain stored the data as blocks. It is nothing but a fixed storage space used to store information. With respect to cryptocurrency, blocks are typically used to store the transaction details and the blockchain serves as a ledger for transactions.

How does it work?

Once a block is completely filled with data, it is chained to the block just before it, thus making the data chained in chronological order. Every block will have a unique hash on its own and also store the hash of the block before it, to which it was chained to. As soon as a new block is added to a blockchain, the entire blockchain record is updated in all the nodes that are part of the blockchain network, thereby creating a lot of replications of the blockchain so that even if one computer is corrupted or compromised, the entire blockchain data is available in all other nodes. Public keys and private keys are tied to a wallet. The public key is used to receive cryptocurrency and the private key is used to post a transaction in the public ledger, vis. transferring a cryptocurrency to somebody else. Cryptocurrencies are usually not backed by any real or physical asset, like gold or treasury bonds.

The example: A record of point of concerns for policy makers

Bitcoin is the first decentralized cryptocurrency. It made the headlines during the end of 2017 when the asset’s price skyrocketed, as evident by the below graph. While on the run it led to highly speculative behavior among the investors and the market was not able to justify the rise. But this did not continue for the time indefinite and the price of the Bitcoin came down as fast as it went up. This led to the concerns in mind of policy makers, as they saw an asset which was out of their sphere of control or influence but yet had the potential to influence the general behavior of the investors and that too at such a magnitude that it led the fluctuations in the other markets, and even money supply (note, money supply is considered to be controlled by the central bank, RBI in case of India).

India and the cryptocurrency: A policy yet to be decided.

The above concerns were shared by the Indian policy makers also and thus an inter-ministerial committee on “Virtual Currency” was constituted under the chairmanship of S.C Garg (then the finance secretary). Committee in its final report supported the ban on private cryptocurrencies in India by enacting a law. The committee had, however, suggested the government about introducing an official digital currency. Former finance minister Arun Jaitley, during his February 2018 budget speech, said “the government does not consider cryptocurrencies legal tender or coin….” One simply cannot ignore the fact that cryptocurrencies have risks.

The 2019 Bill defined cryptocurrency as: –

Any information, code, number, or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.”

 But this bill (reportedly sought to ban cryptocurrency) was not introduced in parliament. And complete details of the bill were never released for general public. However, after the ban of old currency notes in 2018 by the Government, the Reserve Bank of India banned the trading of cryptocurrencies, as a result of a string of frauds reported at that time. But the cryptocurrency exchanges filed a case in the Supreme Court of India asking to revoke the ban. Finally, after almost two years, the ban was lifted in March 2020, bringing cryptocurrency trading back in India.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021: The latest one or also the finale one?

As per the official words this bill will be leading the direction towards creating a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India and prohibits all private cryptocurrencies in India.

Implementing the ban may be easy now, compared to earlier attempt. As US anti-virus software guru and crypto bull John McAfee tweeted (at the time of 2019 when the committee chaired by S.C Garg gave the recommendation to ban cryptocurrencies) “India announces it plans to ban all crypto. Banning mosquitoes after a rain in the summer would stand a better chance of being enforceable.”

Before taking a stand, one must look at the pros and cons of the issue.

Cryptocurrencies pose risks to consumers. They do not have any official backing by any sovereign power, hence are not legal tender. They are also highly volatile, for example, the value of Bitcoin moved as high as USD 20,000 in December 2017 but then came down to as low as USD 3,800 in November 2018. Security is also a concern, if they lose their private key then they cannot recover their assets (unlike traditional digital banking accounts, this password cannot be reset). In some cases, these private keys are kept as a record by technical service providers (cryptocurrency exchanges or wallets), but they themselves are prone to undesired technical activities, such as hacking. Cryptocurrencies are said to be more vulnerable to criminal activities and money laundering, due to their highly secretive nature. They provide greater anonymity than many of the payment methods since transaction cannot be directly linked to an individual. And most importantly central bank cannot regulate the supply of cryptocurrencies in the economy. If their use becomes widespread this could pose a risk to the financial stability of the country

But still The Cryptocurrencies are gaining popularity. Reasons are mostly user friendly (even if that means hardship for regulators), like they have single valuation globally, and the transaction fee is extremely low, as low as 1%. Due to the elimination of third-party clearinghouses, costs are kept down and even the transactions take lesser time to clear. Transactions over cryptocurrency platforms, whether domestic or international, are equal. Another plus point is “Lower Entry Barriers”, they are free to join, high on usability and the users do not require any proof for income, address, or identity. Cryptocurrencies offer the user a reliable and secure means of exchange of money outside the direct control of banking system. Due to their nature and method of working these cryptocurrency provide immunity from government-led financial retribution, governments have the authority and means to freeze or seize a bank account, but it is infeasible to do so in the case of cryptocurrencies. For citizens in repressive countries, where governments can easily freeze or seize the bank accounts, cryptocurrencies are immune to any such seizure by the state. And at last a plus point for the regulators also, since cryptocurrency is created by cryptography and uses blockchain technology it is much harder to counterfeit than paper currency.

Final words for now

It is logical for any reasonable thinker to compare pros and cons and then decide on the issues, but in my view, I believe that the agents with power to take decision in this game of forming regulations and adoption of this new era concept are not fully aware of the spirit of the game. It is the question of confidence, in the absence of experience. Although I should make clear that I do not question the intelligence of our policy makers. I am just trying to insist here, that the concept of cryptocurrency has gained popularity due to factors which are not much different than the reason why capitalism has prevailed as one of the most if not the most adopted economic structure of the economy in the world. In my views the reason is simple, that is, any alternative which give people the power to choose and not to be told what to do has prevailed over all other. But one must keep in mind popularity is not equivalent to being right and efficient always. Regulations are needed, but not as a guiding stick for a herd but as tool of soft touch which is there to ensure that economic incentives do not lead us to a path where we compromise with the core values of our society.

Thank you for your patience.


References

  • https://www.prsindia.org/sessiontrack/session-alert/846439
  • https://en.wikipedia.org/wiki/Economics_of_bitcoin#Political_economy
  • S.C Garg committee report 2018-19
  • https://finezza.in/blog/blockchain-cryptocurrency-in-india/
  • https://www.thehindubusinessline.com
  • Lecture notes of professor Sameer ( Economics department of Kirori mal college, DU)

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