Cryptocurrencies and the new way of banking
Recently in 2020, the Supreme Court of India delivered a significant judgment that lifted the ban that was earlier imposed on the banks that served its customers relating to virtual assets. But what was the reason that led the apex court to lift such a ban? Made the decision of the court, in any way, paved the way for the legislature to come up with a law regulating virtual currencies in India? The answer for this has already been reported in the news, which was the recent address by the PM and also the introduction of the cryptocurrency bill of 2021 during the winter session of parliament between November and December 2021. This article will give a brief idea of what cryptocurrencies are, how they differ from that standard banking system or the financial system, and what India’s concerns are in matters relating to the regulation of cryptocurrencies in India, which is unregulated till today.
What are cryptocurrencies?
The debate on regulating these so-called virtual currencies or virtual assets arose way back in November 2017, and as a result, such a committee was formed by the Department of economic affairs under the Ministry of Finance to analyze the issues and concerns relating to virtual currencies and to make recommendations on matters concerned therewith. So, the committee recommended and made key observations relating to those virtual currencies such as defining what virtual currency and cryptocurrency are. Firstly let us understand what virtual currency is, followed by cryptocurrency, and how they are similar and different they are from each other. As per the report submitted by the committee in February 2019, virtual currency is nothing but a digital form of value that is helpful in exchanges and is tradable in nature. In other words, they act as a medium of exchange to store the value or a unit of account in a particular form. The report states that as there is no legal tender status on such virtual currencies, a legal tender shall be made by the union government, and the parties to the exchange are required to comply with that as the mode of payment.
Now, let us see the definition of cryptocurrency. As per the Cryptocurrency act of 2019 proposed by the said committee report in 2019, cryptocurrency means the information or a code or a number or token which does not form part of official digital currency and is generated through cryptographic means and provides the digital value representation for the purposes of exchanges in any business activity which may involve risk of loss or an expectation of profits and includes those which are investments and not limited to investment schemes.
In simple terms, cryptocurrency is a part of virtual currency, with a value-added currency that is protected by cryptographic encryption techniques, like what we see in blockchain technology, where there is no central authority to record the transactions. There is a number of distributors in this chain of technology called ledger technology.
Cryptocurrency and Banking system:
Having seen what cryptocurrency and virtual currencies are, let us turn to focus on how these currencies would form part of the banking system or, be specific, the financial sector of a country. Taking India as an example, our central currency is issued, maintained, and regulated by the Reserve bank of India, and this will also apply to cryptocurrencies as well; if there is any introduction of such currency in the market, the central government and RBI should approve it. But what are the new ways that crypto or virtual assets provide to an ordinary, traditional bank customer?
It has been reported that cryptocurrency allows its investor to gain interest similar to what a depositor would gain in the case of depositing money. But this interest would substantially be more than what we can expect from an average interest rate. In the United States, the government is considering introducing a digital currency of its own and not from private entities to make a stable financial transactions. As per the reports, the United States plans to introduce a digital currency in the name of US Digital dollar currency. If there is no central currency, then the possibility of maintaining stability would become problematic because if all the investors borrow their money at once the entire system might get collapsed. This issue threatens all governments, because of which they strive to regulate as soon as possible to protect those from cyber attacks as much as possible. Also, if there is an attack by cybercriminals, the blockchain technology for such cryptocurrency will restrict the lending and borrowing of money of the investors, which is again a concern.
India and Cryptocurrency:
Let us look into what are the concerns that India ought to notice before proper implementation or coming up with a new policy on regulating cryptocurrency. One of the major threats is the identification of individuals involved in cyber acts in cryptographic technology. In order to reduce such problems, proper detection of individuals and their activity would help. Post the judgment in the Internet and Mobile association case, there are various concerns that India faces right now. The existing scenario is in imbalance as on one side, the government of India has not banned the investors from investing in those currencies also, and on the other hand, there is no structured regulation in place other than the introduction of a bill in that matter. There are chances where this would result in fraud or misuse as well. So, there are many critical and interesting questions that regulators should answer before allowing or regulating these virtual assets or currencies.
Way forward:
We conclude by noting that there has been an initiative in the form of the bill named ‘The Cryptocurrency and Regulation of Official Digital Currency bill, 2021’, which has been numbered and listed in the parliament for its introduction. As per the report, this bill seeks to ban all the private cryptocurrencies in India completely. At the same time, it is noted that such restriction has certain exceptions on the basis of promotion. Another great thing to note is that, as we discussed earlier, the bill seeks to introduce a major digital currency that shall be regulated and issued by the Reserve Bank of India. We hope the bill avoids all the confusion that is in place and ensures the protection of bonafide investors in start-ups across the country.
