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We all know how “money” has evolved from time to time, starting from our very initial Barter system, then gold and coins, which further improvised to currency notes and cheques and even better NEFT and RTGS. Out of all these types of money, Crypto-currency is the most advanced form of virtual money. Crypto-currency is binary data designed to work as a medium of exchange.
How does the cryptocurrency economy work?
Cryptocurrency markets are decentralized, which means they are not issued or backed by any central authority or Government; instead, they work by running along a chain of computers. These are bought and sold via the Internet and are stored in digital wallets. These exist only as a shared digital record of ownership and are held in blockchain.
What is blockchain?
Blockchain is the technology that enables the existence of Cryptocurrency. It is a digital register of recorded data. This holds the transactional history of every crypto unit and shows how ownership has changed over time. The blockchain system is a highly secure chain network and is recorded in blocks.
Cryptocurrency Mining is how new cryptos are entered into circulation and is also a critical component of the maintenance and development of document ledgers. It is performed utilizing exceptionally modern PCs that tackle very mind-boggling computational mathematical questions.
Cryptocurrency mining is meticulous, exorbitant, and just inconsistently fulfilling. In any case, mining has an attractive interest for some, financial backers inspired by Cryptocurrency, and those miners are remunerated with crypto tokens.
Effects of Over-mining
Cryptocurrency mining requires a large amount of electrical energy due to computers and other devices, essential for the mining process. It is identified that the bitcoin network alone uses as much energy in one year as the country of Argentina. Due to the high usage of electrical energy, carbon emissions have also subsequently increased, affecting the environment as a whole. Over-mining of Cryptocurrency has also led to a drop in fossil fuels in countries like China which extract electricity from coal. 65% of the total crypto-miners reside in China. Iran has banned bitcoin mining as its city suffered power shortages and blackouts.
Crypto banks’ savings rates are ten times greater than the high street, but are they safe?
The top crypto banks are BlockFi and Nexo, and they are very attractive among people. Customers can earn an annual percentage yield of up to 12% compared to other savings accounts whose interest rates are sub -1%.
Nexo bank pays interest up to 12% on pounds, Us dollars, and euros. These crypto banks only allow you to save in cryptocurrencies such as bitcoin and ethereum or stablecoins such as Tether and USDC, which trades one for US dollars. Usually, high-interest rates are given for stable coins, around 12% by Nexo and 8.6% to 9.3% by BlockFi.
The transactions with these banks are done only through cryptocurrencies or stablecoins. So, this is done via a crypto exchange such as Binance or coinbase. Another method which can be practiced is directly transferring US dollars to BlockFi and automatically convert into Gemini USD stablecoin. But this method increases the cost of purchasing as BlockFi notes that buying crypto is 1% higher than the market price.
Both these banks do not guarantee a constant interest rate for a certain period. The interest rates decrease as the length of time increases. For example, on BlockFi, the 5% bitcoin rate is only for deposits up to 0.5%. On Nexo, 12% APR for tether and USDC is only for those who paid in Nexo tokens, and these tokens are not stablecoins, it can fluctuate.
Crypto bank working model
The basic principle is to borrow capital at the interest rate in which depositors pay and then lend it at a higher rate. Crypto banks safeguard their position in two methods. One is by lending out less than what they have received through deposits. Another way is that they make borrowers provide collateral for their loans. This involves a loan to value LTV to find how much collateral is required to secure a loan. BlockFi reserves the right to liquidate collateral when LTV reaches 80%.
For example, to borrow US$5,000 from BlockFi, it is required to put up BTC0.25, which is currently valued at US$9,448. But if that bitcoin value fell to US$6,250, then the bank would sell some part of the collateral to return the LTV to a required level.
When there is a sudden and prolonged crash in the crypto market, then these bank deposits are worthless when lent out in the market in that situation, and these banks can even become insolvent under specific government issues. BlockFi says that they will not be liable for any loss incurred as a result. As the crypto market is getting more attention, the risk factor is also increasing, so it’s one’s own decision to hold on to the funds with no fixed return.
Is Cryptocurrency legal in India?
To answer this question, let’s look back at the years 2013 and 2017 where RBI gave out two important press releases:
- December 24, 2013: Central Bank does not back the virtual currencies and their value is supported by an asset and thus a matter of Belief.
- December 2017: The Ministry of Finance and the RBI issued statements regarding cryptos, and the ministry compared Cryptocurrency to fraud.
- On April 6, 2017, the RBI issued a circular announcing a ban on the sale or purchase of Cryptocurrency. Several businesses overnight since the crypto exchanges through banks.
- And on March 4, 2020, in the case of Internet and Mobile Association of India vs. RBI, the Supreme Court struck down RBI’s banking ban on Cryptocurrency. It termed the April 6, 2017, circular unconstitutional.
- On January 20, 2021, the Government should introduce a bill in which all the private cryptocurrencies will be banned, and a sovereign digital currency will be created.
So, Cryptocurrencies aren’t illegal yet.
Are cryptocurrencies taxable?
That would be firm yes. If the transaction or exchanges are done through a banking system and if the receiver is an Indian tax resident, he would be automatically paying tax. However, peer-peer transactions without bank intervention are tax-free.
The Cryptocurrency and Regulation of official Digital Currency Bill,2021
The proposed law
- Prohibition of all private cryptocurrencies.
- The RBI will issue the creation of an “official digital currency” and,
- Promotion of the existing technology (Blockchain) and its uses.
A 3–6 month would be given to the cryptocurrency holders to dispose of the private Cryptocurrency.
In an Interview CNBC-TV18, Finance minister Nirmala Sitharaman has commented that the Government was “looking at how experiments can happen in the digital world and cryptocurrency” and further stated that “I can only give you this clue that we are not closing our minds,” which slightly bought hope to the present cryptocurrency holder.
We must wait for the law to get to the bottom of the issue and know the legality or illegality of holding private crypto-currency and introducing an official digital currency.
Consequences, when the cryptocurrencies are banned
- Panic disposal of the crypto assets
- Formation of shadow economy or underground economy
- Government can neither gain access nor seize the global network of computers mining cryptocurrency and maintain blockchain ledgers.
Even if a ban is imposed on private Cryptocurrency, the transactions might move to darker areas, i.e., the black market, thus making the complete dismissal of the crypto market would be nearly impossible. Further money laundering and terrorist financing may bud due to constant surfing in the black market/web.
India stands 11 out of 154 nations in cryptocurrency adoption, with a net value of $6.6 billion. Instead of enacting laws to prohibit Cryptocurrency, the Government can bring laws to legalize Cryptocurrency but bring strict rules to regulate them. If a ban is announced, cryptocurrency holders are left with only two options: liquidating the Cryptocurrency or moving their crypto assets to the black market.
Cryptocurrency has a considerable potential to add on to India’s GDP; India banning Cryptocurrency is merely a declination of a potential contribution to the GDP. In recent times, India has seen a sturdy growth in multiplication of startups that either do crypto-exchange or crypto-based blockchain software like Signzy, CoinDCX, HighKart, etc. Global investors like Mark Cuban have also invested in an Indian-based startup Polygon in Cryptocurrency. Banning of Private Cryptocurrency might pave the way to disinvestment and also people losing their jobs.
People having access to various cryptocurrencies might lead to money laundering and terror financing, but this led to another question, Does the Introduction of Centralized Cryptocurrency would be immune to such risks?
How does the cryptocurrency ban work?
Let’s take the example of China’s ban on Cryptocurrency in 2017. China banned the trading of cryptocurrencies and also made it illegal for startups to raise funds in cryptocurrencies. At first, the ban led to lower demand and prices, but after the river has calmed, the investments got back to normalcy. They gradually shifted from centralized exchanges to peer-peer exchanges.
RBI’s problem with private Cryptocurrency
T Rabi Sankar, Deputy Governor, RBI, said: “private virtual currencies” are at “substantial odds” with the historical concept of money. Any centralized authority doesn’t control cryptocurrencies. Private cryptocurrencies could damage the nation’s social and economic factors, so Central Bank Digital Currency was introduced. Private cryptocurrency exchanges can also destabilize the current banking systems. The introduction of CBDC minimizes the risk of volatility of the market fluctuations.
Supreme Court on RBI ban on Cryptocurrency
Several writ petitions complained against the RBI’s circular on April 2018, which prohibited the financial institutions from providing services to businesses engaged in exchanging or trading cryptocurrencies. The Supreme court has rejected petitioners’ contention that the Reserve Bank of India had used excessive power. The Supreme court held that “public interest, interests of depositors and interests of the banking policy.”
Trading cryptocurrency does not come under Article 19(1)(g) of The Indian Constitution, which only applies to trade, occupation, career, or company. Individuals who exchange cryptographic money can’t contend that the roundabout constrained them to close down their organizations since they might in any case exchange “crypto-to-crypto” combines or utilize the monetary standards in their wallets to make instalments for items and administrations to the individuals who will acknowledge them, regardless of whether in India or abroad.
Introduction of Central Bank Digital Currency
A Central Bank Digital is a legal tender issued by the RBI. CBDC as the same value and functions of a fiat currency and also given an option to exchange with fiat currency. Unlike other digital private currencies CBDC has its well-built legality. Holding CBDC is nothing different from holding cash but in digital form, and it ends up on the Central Bank’s balance sheet as currencies in circulation.
RBI on CBDC
RBI is right now seeing approaches to dispatch the digital asset for general purposes on a mass populace scale. In doing as such lawful structures would likewise should be thought about. Amendments should be made to a few existing legal layouts and sections, for example, sections 24, 25 and 26 of the RBI Act just as to the Coinage Act of 2011. Furthermore, changes would be needed to the Foreign Exchange Management Act and the Information and Technology Act also.
RBI has been investigating the advantages and disadvantages of presentation of CBDCs since a long while. By and large, nations have executed exact reason CBDCs in the discount and retail portions. Going ahead, after examining the effect of these models, dispatch of universally applicable CBDCs will be assessed. RBI is currently running after a staged execution procedure and analysing use cases that could be carried out with practically zero disturbance to India’s banking or money-related frameworks.
Countries open to Cryptocurrency trade
Japan, one of the most advanced countries globally, has some of the most advanced cryptocurrency regulations. In 2017 the country had recognized Cryptocurrency as legal tender and had set clear tax guidelines for cryptocurrency holders.
Switzerland, Luxembourg, Hong Kong, Malta /are some of the countries where cryptocurrencies have been legalized and have very flexible cryptocurrency trade.
Legalizing Cryptocurrency has bought in advantages like market regulation and safety, more efficient and safer online payments, and increased blockchain-based products.
What happens when Cryptocurrency is banned in India?
- Indians will lose the assets themselves apart from Cryptocurrency being a digital form of currency; it is also seen as a breakthrough technology worth investing in.
- Billion-dollar Venture Capitalists like Draper, Sequoia, and Ayon have come forward in investing in Indian Blockchain startups, and a ban would lead to disinvestment.
- Several thousands of employees will lose their job, and several startups will be shut down.
- India will lose a significant hike in its GDP rate.
- Cryptocurrency investors would be forced to liquidate their crypto assets which might lead them into black market trade.
- Money laundering and terrorist funding will not be operational as the Government can check all the crypto transactions using the ledger.
- Several stock apps, money wallets would tear down.
- Blockchain-based products will be impossible to create.
What would happen if Cryptocurrency is not banned in India?
- Budding blockchain-based products like financial products, security products, etc., would be of great use to a developing country like ours.
- Sturdy and significant growth in GDP will be seen in the upcoming years.
- Many VCs and other investors would be interested in investing in India’s budding blockchain-based startups.
- The introduction of blockchain software in our banking system is one of the highly advanced features that would come into existence.
Analysis and Suggestions
The concept of Cryptocurrency is a very advanced feature that any country would be happy to accept and possess. As for India, it’s the same case many citizens are willing to invest in Cryptocurrency and are interested in crypto-mining too. But our Government of India and the RBI are not entirely inclined to the concept of private Cryptocurrency and are hooked to the idea of introducing a centralized cryptocurrency (CBDC). Intriguingly, the Ministry of Electronics and Information Technology has highlighted the benefits of Cryptocurrency in the Draft Nation Strategy on Blockchain. The Cryptocurrency and Regulation of official Digital Currency Bill,2021 must not put a blanket ban on private Cryptocurrency; instead, work on strict guidelines for regulating the crypto asserts and introduce a transparent taxing system which 2021. includes Cryptocurrency. The Government can also make use of the blockchain technology in our banking systems and utilize it for blockchain-based products too; this, in turn, can open employment opportunities.
Blockchain and crypto assets are seen as the bud of the Fourth Industrial revolution. Not only India, but no country would also be able to bypass this step of evolution. There must be a clear ideology in respect to cryptocurrency regulations in India which it is not. Regulatory guidelines, blockchain technology, crypto investors, crypto exchanges, and employees of this sector but be acknowledged and dealt with immediately as it is seen as an essential part of any growing economy. Subsequently, an effort to ban will additionally upgrade the dangers, referring to which the law is being rejuvenated. In the end, the investors will not be affected much through such bans because there are multiple markets for cryptocurrencies like bitcoin, whose acceptability globally is only rising.
Author: Sri Praneetha.V, Vellore Institute of Technology, Chennai
Editor: Kanishka Vaish, Senior Editor, LexLife India.