Cryptocurrency: India set to chart middle path between ban and free trading

cryptocurrency bill in indian parliament
The government has listed the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 for introduction in the winter session of Parliament.

The Narendra Modi government plans to bring in legislation in the ongoing winter session of Parliament for regulating cryptocurrencies. The Cryptocurrency and Regulation of Official Digital Currency Bill is yet to be cleared by the Union cabinet. The market is rife with speculation that the proposed law will set a deadline for holders of cryptocurrencies to declare their assets. Rumour has it that the government is likely to appoint a regulator to oversee cryptocurrencies.

A Bloomberg report cited unidentified sources as saying that the government may set a high threshold for crypto investment to protect small investors. The government had earlier said that it was planning an outright ban on private cryptocurrencies. The Economic Times reported this morning that the new law will require crypto exchanges to obtain licences from the government.

India has the highest number of crypto owners globally at 10 crore. Indians have already invested $6.6 billion in cryptocurrencies and the country is among the fastest-growing markets in the world. This is the reason why the government is rushing through a bill, unusual for a country with a slow legislative process in financial regulation.

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The rise of cryptocurrency

One needs to understand why there is a huge demand for cryptocurrencies. Investors world over became sceptical of the global financial system after the financial meltdown of 2008. The crisis was the result of weak financial regulation and lack of government policies. The rise of cryptocurrencies can be attributed to this crisis of confidence.

In 2009, Satoshi Nakamoto created a cryptocurrency named Bitcoin. The value of cryptocurrency lies in the fact that the digital/virtual money is available only in limited amounts. For example, there are only 21 million bitcoins available in the world. An asset assumes value when people recognise its worth.

Cryptocurrencies are protected under cryptography, a blockchain technology. All crypto transactions are done through the blockchain where transactions will be recorded in such a manner that it is almost impossible to tweak them. Interestingly, the blockchain technology negates the necessity of any authority or regulator to oversee transactions which makes cryptos a decentralised system.

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One can say cryptos became popular because people find the cryptographic system more trustworthy than the national authorities that issue currencies. This is the reason why a large number of countries are either accepting cryptos or trying to bring them under regulation. There is widespread fear that zero regulation of the crypto economy could lead to anarchy in the financial world. Several countries contemplated a ban on cryptocurrencies, but realised that banning cryptos may not work because of its decentralised nature.

Will the efforts to regulate them work? The backers say cryptocurrency transactions are recorded at multiple places which makes the entire process transparent and accountable. Crypto investors see no harm in virtual money and emphasise on maintaining its decentralised nature, while the governments predict massive damage to the world economy if cryptos are not regulated.

Several countries like China have banned cryptocurrencies. However, the ban resulted in illegal mining and trading activity. Some other countries have regulated cryptocurrency in one way or the other. Regulation becomes necessary because no country can afford to allow a parallel digital currency alongside the national currency.

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India and cryptocurrency regulation

India has made several attempts to ban cryptocurrencies since 2018 when the Reserve Bank of India issued a ban. But the Supreme Court reversed the RBI ban in 2020 on the grounds of proportionality. While acknowledging the authority of the RBI to regulate virtual currencies, the SC said that the ban/regulation has to be proportionate to the risk of damage posed. In the same year, an inter-ministerial committee drafted a crypto-token regulation bill, which allowed regulated trading in cryptocurrency.

The committee’s final report, released in 2019, proposed a law named Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019 which suggested an outright ban on cryptocurrency. The bill came under criticism for its vague definitions and was never tabled in Parliament. Finally, the government has listed a bill in November 2021, the Cryptocurrency and Regulation of Official Digital Currency Bill.

The global cryptocurrency market is valued at around $3 trillion. The Chainalysis Global Crypto Adoption Index 2021 ranked India second in the world in terms of cryptocurrency adoption rate. It is estimated that 70-80% of India’s cryptocurrency investors have invested between Rs 500 and Rs 2,000. The regulation could be the middle path between an outright ban and complete freedom in cryptocurrency trading. This is the right thing to do for any government as the future of cryptocurrency is still uncertain.

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