- What is cryptocurrency?
- How are Cryptocurrencies used?
- Arguments in favor of the ban
- Arguments against the proposed ban
- Key Facts
- IT’s Input
- Way Forward
Cryptocurrencies- Should Ban or Regulate?
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- An inter-ministerial committee (IMC) that was set up to assess the viability of virtual currencies has recommended that India should ban private cryptocurrencies such as Bitcoin.
- If the suggestions are implemented, anyone who holds or trades in cryptocurrencies like Bitcoin and Ethereum in India can be sent to jail.
- The IMC recommended a fine of up to ₹25 crore and a jail term of up to 10 years for anyone found to be owning or handling private cryptocurrencies.
What is cryptocurrency?
- A cryptocurrency is a form of digital asset that relies on a peer-to-peer network of users.
- Cryptocurrencies rely on distributed ledger technology which enables the authentication of transactions without them needing to be handled by a central authority.
- It is a subset of virtual currencies, and is decentralised, and protected by cryptography.
- A virtual currency is a digital representation of value that can be digitally traded and functions as (a) a medium of exchange, and/ or (b) a unit of account, and/or (c) a store of value but unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government.
How are Cryptocurrencies used?
- Cryptocurrency is fundamentally a decentralised digital currency transferred directly between peers and the transactions are confirmed in a public ledger, accessible to all the users.
- The process of maintaining this ledger and validating the transactions, better known as mining, is carried out in a decentralised manner.
- The underlying principle of the authenticity of the present to historical transactions is cryptographic proof, instead of trust; different from how it happens in the case of traditional banking systems.
Arguments in favor of the ban
- Governments and economic regulators across the world are wary of private cryptocurrencies, as they are deemed a threat to the official currency and monetary system.
- Cryptocurrencies operate on decentralised networks outside central banking systems and are subject to fluctuation.
- Consumer and market protection, and lack of accountability of users and exchanges are major reasons for the proposed ban.
- The inter-ministerial committee has recommended a ban on “private” cryptocurrencies and is open to a cryptocurrency that the RBI may unveil.
- The IMC’s concern is that non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors.
- The IMC is worried that if private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over the monetary policy and financial stability.
- The anonymity of private digital currencies makes them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult.
- Lastly there is no grievance redressal mechanism in such a system, as all transactions are irreversible.
Arguments against the proposed ban
- Banning the consumption of a good or service, does not stop consumption of it, the market for the banned good or service simply goes underground and becomes hard to track. And so the market continues to exist, but the government cannot track it or tax it to gain revenue.
- Thus the proposed ban will create an underground black market for cryptocurrency.
- As per the critics, consumption for cryptocurrency mining which is stated as a reason for the ban appears to be conjecture and merits a separate evaluation for India, as the total global power consumption of banks and the internet is approximately 100 TWh and 2,500 TWh per year, respectively and Bitcoin uses 66.7 TWh per year globally.
Following other nations footsteps:
- The committee points out China as an example that has banned the use of cryptocurrencies after a Chinese court recognized cryptocurrency as digital property, while countries such as China have adopted harsher regulation in the past, their changing approach to cryptocurrencies cannot not be ignored.
India not ready for indigenous Cryptocurrency:
- The committee proposes a new form of digital currency, the digital Rupee however the recommendations lack clarity on its implementation.
- Some challenges that the digital Rupee will face are scaling for billions of Indians, inclusion of the unbanked, and whether India possesses the necessary infrastructure for rolling out a digital currency of this magnitude.
- It would create a lot of problems in the form of contradictions in existing regulations and the government will have to deal with severe mismatches in regulations, and digital currency issued by the RBI that gets misused by criminals can affect trust in the existing fiat currency protocol.
Lack of understanding the concept of Cryptocurrency:
- Critics of the ban argue that the committee has taken a stand to ban cryptocurrency without really understanding its architecture and associated benefits.
- Most people equate cryptocurrencies with block chain, but there is a huge difference between them, cryptocurrency is just one application of the underlying block chain technology and the block chain technology has a lot more potential beyond cryptocurrencies.
- While the IMC is opposed to the idea of private cryptocurrencies, it has called for a national cryptocurrency backed by the RBI, which would probably be based on the block chain.
Cryptocurrencies don’t require backing of sovereign government:
- An issue raised against cryptocurrencies is that they aren’t really backed by an underlying commodity or a sovereign government, but the way money is defined is that it is a generally accepted medium of exchange. Therefore, in terms of cryptocurrency as long as people hold the expectation that a particular asset will have value, it is sufficient.
- For example, in Somalia, the central bank and all the concerned institutions had ceased to work at some point. But people still continued to value the Somalian currency.
Anonymity is beneficial:
- Cryptocurrencies allow people to conduct anonymous transactions and the price of bitcoin is driven by the access to the anonymity that it offers its users.
Implications for innovation:
- In 2018, in the Silicon Valley alone, almost $2.9 billion worth of private venture funds have gone into block chain start-ups and tech hubs across the world, are investing billions into the block chain technology, in this scenario if a blanket ban is put on all cryptocurrencies, then our technology entrepreneurs will lose the incentive to work in the sector.
Police not well-equipped to investigate:
- The draft law states that all offences under the law will be investigated by the police. But the policymakers must first assess whether the police and traditional investigation tools are equipped to investigate crimes of this nature.
- The price of cryptocurrencies, especially bitcoin, has been volatile because, it is designed in such a way that its supply rises rapidly first, but later very slowly, before stopping at a certain point.
What is Mining in terms of cryptocurrency?
- Mining is the process of ledger keeping and validating transactions. It is also a truly decentralised and distributed process, open to everyone. Miners are the backbone of a cryptocurrency.
- Every new block in the chain brings a monetary reward to the miner whose block is accepted, and this injects wealth into the cryptocurrency system.
- The process of mining also generates value for the miners in the form of transaction fees, which is optional and very low as compared to traditional banking systems.
- Existing laws can be revisited, to address concerns regarding protection of users and fraud prevention.
- Cryptocurrency exchanges, users and other market players can be brought under the purview of anti-money laundering laws or KYC norms.
- Regulators in India like the RBI and SEBI can monitor aspects of cryptocurrency for the purpose of taxation or monitoring large transactions, like it is practiced in the U.S.
- One of the most comprehensive sets of regulations for cryptocurrencies is being brought in by the European Union it is called the AMLD-5. It has a lot of very stringent KYC regulations and self-declaration laws which every holder of a crypto wallet or user needs to adhere to and Crypto exchanges are all expected to maintain a database that is transparently shared between countries.
- A set of regulations for cryptocurrencies could be the best way to go forward rather than putting a blanket ban on cryptocurrencies, because the presence of cryptocurrencies is very important for the further development of the block chain.
- It is important to consider a reasonable policy that suitably balances technological innovation and protection of users and economic interests.
- If the government is bringing in a state-backed currency, it will be better if the other currencies are also allowed to operate with sufficient regulations.