Cryptocurrency in India: Regulation or Ban?

Introduction:

Cryptocurrency is a digital token which can be send electronically from one user to a different user, anywhere in the world. No single person or company runs the cryptocurrency network. Instead, it’s a decentralized network of computers round the world that keep track of all Bitcoin transactions. Because there is no central authority, company and Government, users can’t be forced into revealing their identities. Bitcoin come into existence by the validation of transactions on the bitcoin network, through a method call mining. People performing this validation are referred to as miners. Currently there are approximately 18.5 million bitcoin that have been mined. It is estimated that by 2140 there’ll be 21 million bitcoins. Bitcoin work on the concept of block chain.

Blockchain:

Blockchain refers to a database of transaction that is shared and maintained by a group of people or institutions. The vast majority of blockchain involve virtual currencies like Bitcoin, Ethereum, Ripple. But governments and corporations have also become interested in ways to use the technology to store large amounts of data.

Altcoins:

Altcoins are cryptocurrencies apart from Bitcoin. They share characteristics with Bitcoin however are totally different from them in other ways. For instance, some altcoins use a unique consensus mechanism to produce blocks or validate transactions. Or, they distinguish themselves from Bitcoin by providing new or further capabilities, like good contracts or low-price volatility. As of March 2021, there were almost 9,200 altcoins within the market.[1]

Buy on an Exchange:

Marketplaces known as “bitcoin exchanges” enable people around the world to buy or sell bitcoins using alternate currencies. Binance is a leading exchange, along with Uniswap, Wazirx, Bitstamp and Bitfinex. However, security can be a concern: in 2016  Bitfinex was hacked and bitcoins worth seventy two millions of dollars were stolen.[2]

Mining:

Bitcoin mining is the process in which transactions between users are verified and added to the blockchain public ledger. Process of mining is also responsible for introducing new cryptocurrency into the existing circulating supply and also one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a central authority, company and government. Mining is performed using very sophisticated computers that solve extremely complex computational math problems.

Bitcoin wallet:

Cryptocurrency wallet is a software program in which cryptocurrency are stored. For every individual who has a balance in a cryptocurrency wallet, there is a private key/secret number corresponding to the Bitcoin address of that wallet. Cryptocurrency wallets facilitate the sending and receiving of cryptocurrency and give ownership of the Bitcoin balance to its user. The Bitcoin wallet comes in many forms. The four main types are:

  • Hardware
  • Desktop
  • Web
  • Mobile

History:

2008: A pseudonymous developer by the name of Satoshi Nakamoto published a paper titled ‘Bitcoin: A Peer to Peer Electronic Cash System’.[3]

2010: First sale of an item using Bitcoin takes place, with a customer swapping two pizzas for ten thousand Bitcoin. This attaches a cash value to the Bitcoin for the first time. 

2011: Other cryptocurrencies began to emerge, including Namecoin, Swiftcoin and Litecoin. Bitcoin involves in a controversy over claims it is being used on the dark web to pay for guns and drugs among quite a lot else.

2012-2017: Bitcoin steadily gain traction. At the start of the 2012 the price of Bitcoin was around $5 to almost $1,000 at the end of 2017. This period also sees cryptocurrency exchanges growing in India, including Coinsecure, Unocoin, Zebpay, Pocket Bits and Koinex.

  • RBI also have a press releases on cryptocurrencies.

The first, dated December 24, 2013, says:

1. Virtual currencies are not backed by Reserve bank of India.

2. And cryptocurrency value is not underpinned by an asset and thus a matter of speculation.

The second, dated February 1, 2017,says: 

Reserve bank of India has also clarified that it has not given any licence/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any Virtual currency.[4]

Oct-Nov 2017: Two PILs are filed in the Supreme Court, one asking for regulation on cryptocurrencies in India, the opposite for ban buying and selling cryptocurrencies in India.

  • In November, the government of India forms a committee to study issues around cryptocurrencies.

Dec 2017: The Ministry of Finance and the Reserve Bank of India issue statements. Reserve Bank of India compares cryptocurrency to a Ponzi schemes.[5]

April 6, 2018: Suddenly, everything changes. The Reserve Bank of India issues a circular preventing business and co-operative payments banks, small finance banks, banks and NBFCs payment system supplies from: 

  • Dealing in virtual currencies
  • Providing services to all entities which deal with cryptocurrency.[6]

All Cryptocurrency exchanges in India, unable to access banking services, find their businesses crippled overnight. Trading volumes fall by 99%. 

May 15, 2018: On May 15, 2018 several India exchanges filed a writ petition in the Supreme Court. 

July 2019: The committee submits its report, recommending of banning on private cryptocurrencies in India. 

March 4, 2020: The Supreme Court in the case of Internet and mobile association of India Versus Reserve Bank of India[7] strikes down RBI’s banking ban on crypto, terming the April, 6th circular unconstitutional. One of the Supreme Court reasons for overturning the ban is that cryptocurrencies are unregulated but not unconstitutional. All Exchanges see a sharp increase in interest as the Supreme court ruling coincides with a crypto boom. The price of Bitcoin increase more than 700% between April 2020 and February 2021.

Jan 29, 2021: The government says it’ll introduce a bill to create a sovereign digital currency and at the same time ban all private cryptocurrencies. The industry realises it faces a second existential threat. Bill seeks to ban all private virtual currency in India. However, it might permit certain exceptions to promote the underlying technology of cryptocurrency and its uses,” the government says[8].

Disadvantages of cryptocurrency:

Cryptocurrency technology comprising 2 major technological innovations of high-end cryptography “which makes hacking next to impossible” and distributed ledgers “all records are shared with and kept by all participants”, has huge potential to supply and create digital merchandise, programming platforms, currency, assets and services in ways very different than the planet has seen to the point and at price, security and convenience highly extremely useful to society. A dominant feature of the technology is creation of its own stock and currency, mentioned as crypto-tokens or just tokens or coins, to boost capital and create payment for services rendered in creating and dealing the blockchain platform.

Blockchain technology is extraordinarily versatile and has been used to create programming and sensible contract services platforms (Ethereum), international cash transfer platforms (Ripple), music delivery services (opus) and various alternative digital applications. A pure-play cryptocurrency platform (Bitcoin), that happens to be the most sought-after digital asset today with valuation exceeding $1 trillion (equal to 40% of India’s total equity market capitalization), has created blockchain technology and cryptocurrencies one and therefore the same factor in common perception.

Many folks round the world see Bitcoins as assets of limitless price, they have invested millions in it. Over seven million Indians, who has reportedly made investments in Bitcoins and cryptocurrency intermediaries, like exchange, not amazingly, have developed a deep and unconditional interest in wanting the show to travel on forever.[9]

It is this backdrop that the government intimated Parliament of its intention to maneuver the ‘Cryptocurrency and Regulation of Official Digital Currency Bill 2021’[10] throughout the Budget session. The proposed Bill doesn’t have the words “banning of” in its name, that was counseled by the inter-ministerial committee of ministry of finance, RBI, ministry of electronics and information technology and SEBI in 2019. Because the text has not been free, it’s not glorious whether or not the Bill proposes to ban cryptocurrencies. However, the background of the Inter-Ministerial Committee Report[11] and general discomfort of the government and RBI with cryptocurrencies has made exchanges, investors and other intermediaries nervous, concern the worst.

The factor concerning blockchain platforms and its internal currency—crypto-tokens despite of what they’re called—is that they have become inseparable Siamese twins. This suggests that if you ban a cryptocurrency, the concerned blockchain platform also will not survive.

Government, because the repository of public interest, have a tough choice. They can’t permit the use of crypto-tokens as currency for businesses and people to make and receive payments, substituting official fiat currency. They additionally permit its citizens, with imperfect information of cryptocurrencies, to get trapped in the asset bubble that Bitcoin truly is at present. At an equivalent time, it’ll not want to throw the baby out with the bathwater and stymie the big potential of blockchain technology for growth and job creation in the county.

The solution lies within the government having the ability to separate the chaff (use as currency) from the grain (all alternative applications) and also the blockchain industry developing technology and crypto-tokens in such a way that its use as currency becomes not possible. Besides this, solving the bitcoin muddle will also require determining the true nature of crypto-tokens. The crypto tokens are the heart, soul and blood of the blockchain technology ecosystem. It acquires the character of stock when capital is raised by the blockchain start-ups by creating initial coin offerings (ICOs), similar to initial public offerings (IPOs) by typical firms. It acquires the character of internal currency when used in paying the miners and pricing and creating payments for blockchain platform merchandise and services.

Crypto-tokens, like equities, are assets and should, be treated as an asset. SEBI, as the regulator, should therefore be mandated to manage the crypto-tokens as assets. Profits made on purchase and sale of crypto-tokens should be treated as capital gains for income-tax functions. The services rendered by blockchain platforms, paid for in Bitcoins and alternative crypto-tokens, do not as is the case with other services, require any regulation. Of course, the services buying and selling should be subjected to Goods and Services (GST).

This hydra-like phenomenon of crypto-tokens a fragile and cerebral treatment. The package of action should include banning its use as currency however permitting blockchain technology to survive and thrive by treating crypto-tokens as assets, with tight rule and regulations the profits made as capital gains. Such a policy can spur investments and create lots of jobs.

Advantages of cryptocurrency:

As long as there’s internet, crypto transections can’t be stopped. Even if a ban is obligatory, it’ll neither be monitorable nor enforceable as cryptocurrencies are not controlled by any single entity. People are already familiar with use of remote desktops and VPNs that make any kind of restrictions on internet sector useless. A ban will be like giving the internet however claiming to ban google communication.

The reasons RBI wants to ban cryptocurrency in India because it can be used for financing illegal activities, money laundering or for doing transactions in the dark internet. However, as cryptocurrency are based on blockchain technology which is open source, crypto is the transparent, most secure, and public approach of exchange of cash. The technology also provides transparent and inspect trial of money not like cash transactions. In countries where crypto is regulated, crypto exchange can become anchor points for tracking the flow of funds as they’re following strict Know Your Customer (KYC) norms like banks.

Another advantage is that efficiency in terms of each speed and price for the transfer of funds using crypto is unparalleled. The fee for transfer is negligible and is fixed no matter the quantity transfer from anywhere to anywhere in the world. These benefits make a bigger impact than the negative cases.

Coming to the aim of whether or not Bitcoin should or should not be prohibited in India, we need to understand the value of it as a decentralized cryptocurrency. We have recently saw the ban of a lot of Chinese social apps. Now imagine in the same manner, that some financial apps and internet platforms ban Indians from trading will be serious. The repercussions will be serious. With the decentralized feature of cryptocurrency, the money doesn’t lose its worth and is independent of any political boundaries.

When it comes to financial security of the state, particularly a developing country like India, cryptocurrency can facilitate in attracting foreign funds back to us. Banning will only ban the trillions of moneys flowing into India. Cryptocurrency work across borders, at the speed of interned, creating the foremost of the technology referred to as blockchain. Just like internet usage broke boundaries in India after Jio entered the market, the popularization and acceptance of usage of cryptocurrency is sure to happen.

We all know that RBI reserves the gold of the county to secure the Indian rupee. The value of 1 Bitcoin over a decade ago was almost nothing. Ten years ago, value of 1 Bitcoin was $ 1. On the day of writing this, 1 Bitcoin was worth $ 60,000.[12] It would make sense if some percent gold reserve of India was used to buy bitcoin, considering the growth we all are witnessing, rather than banning it.

In the past twelve years, the crypto market has been very bullish, giving returns of 10x at least every four years, and this can change the quantum of reserves by 2025. With the invention of cryptocurrency numerous brands, organizations, firms have mushroomed that support and are supported by the idea of crypto.

This not solely brings employment opportunities across states, nations and boundaries however brings other dimensions to national, social, professional, personal and finances.

The internet, couldn’t be stopped, and should not be stopped, the same goes for crypto too. Banning cryptocurrencies can end in a loss of investment opportunity. It is an insult to change and technology, innovation and advancement, money and smart investment. It also means that that India is going to fail in competing with the world in the domain of finance and we don’t want to do that to our country.

Few countries like Sweden and China which are trying to launch a cryptocurrency as a part of the monetary network in the country[13]. Given the very fact that it will be completely regulated by the central bank, it doesn’t seem to be very different from a mobile wallet provider that exists within the county.

The security, transparency, scarcity and trust that a cryptocurrency like Bitcoin is bringing to the table would be difficult to establish. Considering everything mentioned above, the manpower required even to attempt stopping the crypto transactions is humongous and would be an effort in vain. If we as a country want to come up as a powerful nation, we should understand and encourage Bitcoin instead of banning it.

Conclusion:

It is crucial to know that cryptocurrency has gained international momentum. In the year 2020, Bitcoin saw an enormous boost in valuation, as a result of which many new investors exhibited a strong inclination towards it. Further impetus was given by the 1.5 Billion Dollar investment into Bitcoin by Tesla and their announcement to acknowledge it as a mode of payment. Coinbase, a digital currency exchange based in United States, has declared that it’ll be going public. Therefore, it’s imperative to look at whether a ban is actually the solution to curb a possible misuse of cryptocurrency once many several notable developments are taking place in that sector on a global level. And recently Finance Minister Nirmala Sitharaman has indicated that not all windows for cryptocurrencies will be shut and a Cabinet note was being readied to formulate future steps on the problem.


[1] https://coinmarketcap.com

[2] https://fortune.com/2016/08/03/bitcoin-stolen-bitfinex-hack-hong-kong/

[3] https://en.wikipedia.org/wiki/Satoshi_Nakamoto

[4] https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462

[5] https://timesofindia.indiatimes.com/business/india-business/after-rbi-income-tax-department-puts-bitcoin-under-scanner-as-e-ponzi-scare-looms/articleshow/62049487.cms

[6] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF

[7] https://indiankanoon.org/doc/12397485/

[8] https://www.business-standard.com/article/finance/parliament-to-consider-bills-to-ban-private-cryptocurrencies-set-up-dfi-121012901949_1.html

[9] https://www.indiatoday.in/technology/news/story/govt-must-find-way-to-reimburse-7-million-indians-with-assets-over-1bn-if-cryptocurrency-is-banned-says-wazirx-ceo-1770381-2021-02-18

[10] http://loksabhadocs.nic.in/bull2mk/2021/29012021.pdf

[11] https://www.livemint.com/market/cryptocurrency/govt-committee-says-ban-all-cryptocurrencies-except-those-issued-by-state-fm-11612866715432.html

[12] https://coinmarketcap.com/currencies/bitcoin/

[13] https://fortune.com/2021/04/07/sweden-pushes-ahead-with-digital-currency-roll-outjust-dont-call-it-crypto-asset/

Author: Mayank Malik

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