In the recently conducted budget session of the parliament on January 29, 2021, a list of 20 new bills was introduced. One of them was the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The Bill is based on the 2019 Bill of the same name and aims at the creation of an official digital rupee. The agenda report states, “To create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India. The bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
So, the new bill can be assessed on the two points of contention:
- The creation of an official digital Rupee.
- Prohibit private cryptocurrency in India; barring certain exceptional cases.
The Bill has been drafted by an inter-ministerial committee under the leadership of Subhash Chandra Garg, former secretary of the Department of Economic Affairs. The reasons given for the ban on private cryptocurrency were the risks attached to their operation.
Overview of Cryptocurrency in India
A cryptocurrency is a digital form of currency mostly used for trading and transactional objectives. Cryptocurrency is decentralised and is based on blockchain technology. Therefore, the government does not regulate or oversee its operation. The digital currency operates on the cryptography rules and principles whereby it protects its data through the usage of codes so that only those people can read and access the information for whom it is intended for.
Some of the most common examples of cryptocurrency are Bitcoin, Ethereum, Litecoin, etc. Bitcoin was the first cryptocurrency to hit the market in 2009 and it made way for many other types and variations of cryptocurrency to launch in the market. In India, cryptocurrency gained popularity due to the ease of interaction, security, and speed of a transaction. But in 2018, the Reserve Bank of India (RBI) vide its powers granted by the RBI Act, 1934 assessed the risks of the use of cryptocurrency and banned the use of cryptocurrency for trading and investment purposes by issuing a circular. The circular detailed how dealing in virtual currencies is prohibited and although it did not entirely ban the use, RBI’s move was aimed at reducing the usage of virtual currency in India’s economic market.
The ban was criticized by regulators and the government on the ground of harsh and draconic regulation and therefore, a plea by the Internet and Mobile Association of India (IMAI case) was brought to the Apex Court. The petitioners challenged RBI’s circular as violating the fundamental rights of traders under Article 19(1)(g) of the Constitution of India and could not be seen as a reasonable restriction due to the blanket ban that it places on all entities.
Therefore, in March 2020, the Apex Court through a three-judge bench comprising of Justices Rohinton Nariman, Aniruddha Bose, and V Ramasubramanian overruled RBI’s decision and lifted the ban on virtual currencies in India. The court held that the ban was arbitrary and disproportionate while reiterating that the judgment does not affect the regulatory powers granted to the RBI. This was not the first time that the courts interfered in the crypto domain, as in 2017 an inter-disciplinary committee was set up to recommend legislative changes for the trade and usage of cryptocurrencies in India.
In 2019, a committee under the Finance Ministry had worked on a bill that aimed at banning the trading, issuing, and investing of cryptocurrency; making it a punishable offence with a fine of up to 25 crores INR or imprisonment of up to 10 years or both. However, the bill was never passed in Parliament.
Creating an Official Digital Currency
CBDC or Central Bank Digital Currency is a legal tender in digital format. It has all the features of a physical currency and fulfills all traditional criteria thereby being at par with denominated cash currency. The benefits to introducing CBDC range from curbing money laundering, hacking, terror funding, tax evasion to tracking currency and easy transfer of money in real-time leading to an increase in the overall efficiency and transactional fluidity.
A well-framed design can ease cross-border transactional activities and increase economic stability in the country. In countries like Sweden, there has been a rise in cashless transactions and the presence of physical money is on the wane. Hence, a CBDC model based on the DLT is a susceptible and futuristic alternative to cryptocurrencies currently available in the market as it drastically reduces the likes of hacker attacks or money laundering incidents to occur.
The Reserve Bank of India has been facing problems with regulating cryptocurrencies since the last decade and the last section is a testimony to the fact that cryptocurrency is not an evil that should be obliterated but instead, there should be the formation of a robust framework that regulates and governs the ambit of virtual currency. Therefore, the idea of a digital Rupee is not unreal. In 2019, RBI released a vision document that elaborated on improvements that could be made to render a better financial system. This expounded on the use of ‘Distributed Ledger Technology’ or DTL, and similarly, RBI released a circular exploring the uses and DTL and Blockchain technology as part of a CBDC project.
While a roadmap for the launch of CBDC is not clear at the moment, the presence of digital Rupee will definitely entail a progressive economy, in line with the government’s Digital India campaigns. With a cryptocurrency that is regulated by the Central Bank, a digital currency might also have a huge impact on India’s shadow economy. Presently, there are a few countries that have tested their versions of a digital currency like, China. Canada, the USA, and Singapore have also begun to work on their digital currencies. India, by virtue of its superiority in the technological space, must also examine the nitty-gritty and chalk out a map for the future of CBDC.
Impact of Prohibiting Cryptocurrencies
The reasoning behind the potential ban can only be understood when looked through the lens of the security threats that private cryptocurrency poses to the economic market of India, like:
- Through the use and transfer of virtual currency, hackers and other malicious users can break into the system and manipulate or steal the virtual currency.
- Another serious issue that can be understood is the funding of malicious and illegal activities owing to the anonymity feature of cryptocurrencies.
- In addition to this, cryptocurrency systems are connected to the real monetary system thereby affecting their demand and supply. As this system is prone to fluctuations and instability in prices, it negatively impacts the demands of the real-world currency.
Due to the stringency in the formal bank sector, these funding procedures are more likely to happen through the cryptocurrency routes; enabling the sector to be more prone to manipulation. Financial institutions have a system in place to decipher and detect any suspicious financing activity or money laundering instances but the same cannot be said about virtual currency. In 2019, around the world cryptocurrency scams amounted to $4.3 billion of virtual money.
From the year 2017 to 2019, investors in India have suffered accumulated losses in cryptocurrency scams amounting to more than $500 million. It is in this background that the Central government is apprehensive of the risks associated with this sector. In the 2018 budget session, there were discussions of reducing the usage of cryptocurrencies and replace it with distributed ledger technology or blockchain so that organisations are capable of recording the transactions in order to authenticate their origin and obliterate the role of intermediaries. Despite the government’s persistent efforts to slow down the popularity of cryptocurrencies, India has become a hub for crypto-assets. This brings up the problem of protection of the investors who deal in crypto instruments. As there are no international instruments that govern the rights of investors engaging in the use and trade of cryptocurrency, they are left high and dry without a regulatory framework in place.
Since the stir caused by the Crypto Bill, it has been majorly unclear what the phrase ‘private cryptocurrencies’ actually refer to. The common cryptocurrencies like Bitcoin and Ethereum are public cryptos and therefore, the Bill shows an uncertain picture as to whether it applies to Bitcoin, Ethereum, etc. Moreover, it is also unclear whether the government plans on banning the usage, trading, and dealing in cryptocurrencies because that would infringe on the fundamental right to trade as laid down in the IMAI case. The last decade has seen the setting up of cryptocurrency exchanges and blockchain tech start-ups and hence a blanket ban would be a cog in the wheel for these businesses. On the other hand, this Bill could be the framework that India needs to organise the contours of the crypto sector. One reasonable option could be launching its own Central Bank Digital Currency which will overcome all the hurdles that cryptocurrencies are susceptible to and at the same time, aids in catapulting India ahead in the technology arena.
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