Cryptocurrency: RBI wants govt to prohibit cryptocurrencies

Finance Minister said that RBI had expressed concerns over cryptocurrencies.

The RBI mentioned that cryptocurrencies are not a currency because every modern money needs to be issued by the central bank or the government.
The value of fiat currencies is anchored by monetary policy and their status as legal tender.
- On the other hand, the value of cryptocurrencies is solely based on speculation and high return expectations, which are not well anchored.
- And also, it can destabilise a country’s financial and fiscal stability.
Cryptocurrencies are borderless by definition, necessitating international collaboration to prevent speculative trading.
- Therefore, any legislation for regulation or banning such currencies can be effective only after significant international cooperation evaluates the risks, benefits, and evolution of common taxonomy and standards.

A cryptocurrency is a form of digital or virtual currency based on a network that is distributed across a large number of computers.
It is nearly impossible to counterfeit or double-spend.
Many cryptocurrencies are decentralised networks based on blockchain technology.

Cryptocurrencies are generally not issued by any central authority.
Therefore, it makes them theoretically immune to government interference or manipulation.

2008: A person or a group operating under the pseudonym ‘Satoshi Nakamoto’ publishes a paper outlining the concept of Bitcoin.
2010: The first commercial transaction takes place in Bitcoin.
2013: Cryptocurrency exchange Unocoin launches, making it accessible for Indians to buy and sell Bitcoin.
- In the same year, RBI Issues First Circular Regarding Cryptocurrencies
2016- 2018: Demonetisation and RBI banned banks and other regulated entities from supporting crypto transactions.
2019: Inter-ministerial committee recommended banning all private cryptocurrencies.
2020: SC struck down the ban on cryptocurrency trading as unconstitutional.
2021: Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 introduced.

Easy to Use:
- Since Cryptocurrency uses modern technology like the Internet, smartphones, and other devices,
- Funds can be transferred directly between the parties without the involvement of third parties like banks.
Low Transaction Cost:
- Since a cryptocurrency removes the intervention of third parties like banks in the transaction, its transaction cost is lower in comparison to the conventional banking system
Transparency:
- In Cryptocurrency, every transaction is recorded on the blockchain
- Blockchain keeps the information about every transaction
Decentralisation:
- Since blockchain does not store any information in a central location.
- Data is distributed across networks of computers, making it difficult to tamper with.

Price volatility:
- Bitcoin’s price fluctuates because it is influenced by supply and demand, investor and user sentiments, government regulations, and media hype.
- All of these factors work together to create price volatility.
- So, it isn’t very easy for investors to trust the ecosystem.
High energy consumption for mining activities:
- Bitcoin requires computers to solve ever more complex math problems to verify transactions. This proof of work consensus mechanism is drastically more energy-intensive.
Cybersecurity Concerns:
- Cryptocurrencies are prone to cybersecurity breaches and hacks.
- For example, the Swiss blockchain company, Trade. i.e., has reported that almost $8 million crypto tokens have been stolen from their cold wallet.
Dark activities:
- The possibility that the new money will nurture illicit activities and markets like drug selling, weapons etc., through Darknet is always high using Cryptocurrency anonymously.
Disrupt Monetary control and economic behaviour:
- People will exchange their national currencies for the new digital currency and will buy and sell many products priced in it.
- This will further affect banks’ profitability and pressure their balance sheets.

The legal status of cryptos varies from country to country.
There are three types of countries based on legalising cryptos
1. Countries which have legalised Cryptocurrency
2. Countries which have considered Cryptocurrency illegal
3. Countries which have not illegalised but impose some restrictions.

India has levied a 30 per cent tax on crypto investors and a 1 per cent Tax Deducted at Source (TDS) on every crypto intra-traders.
Currently, India has not regulated cryptos but won’t legalise them.

There was a banking ban on cryptocurrencies from July 2018 to March 2020.
- On March 4, the Supreme Court lifted the ban.
A committee was formed to study the use of Cryptocurrency and precautions, measures or regulations to be taken.
- The committee sent its report in February 2019 recommending the prohibition of all private cryptocurrencies, except any virtual currencies issued by the state.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (ODC Bill) have been proposed.
- With the target of making a facilitative framework for the creation of the official digital currency to be issued by the Federal Reserve Bank of India (RBI)
- And also to prohibit all private cryptocurrencies in India.
- However, it’ll support and use underlying cryptocurrency technologies.

Pic Courtesy: freepik

Content Source: Indian Express