PM Modi on Saturday chaired a meeting on the path ahead for managing the cryptocurrency sector where a consensus was reached on the Centre needing to take “progressive and forward-looking” steps while ensuring that an unregulated crypto market does not lead to “money laundering and terror financing”.
The government will keep a close watch on cryptocurrency as this is an evolving technology and will take proactive steps, multiple reports about PM Modi’s meeting on Saturday said.
The meeting was an outcome of a “consultative process as RBI, finance ministry, the home ministry had done an elaborate exercise on it as well as consulted experts from across the country and the world,” reports said. India is also going through the global examples and the best practices regarding crypto.
The meeting came on the heels of the Reserve Bank of India governor Shaktikanta Das cautioning investors about the digital currency. RBI Governor Shaktikanta Das expressed serious concerns over the credibility of cryptocurrencies. Speaking at Business Standard’s BFSI Summit, he said that it was similar to a marketing strategy to attract more public interest in cryptocurrencies. He was referring to a recent report of a research firm that claimed that at least 7.9 per cent of Indians have invested $10 billion dollars in virtual currencies, adding that the numbers were highly exaggerated.
With the interest in cryptocurrencies peaking, there is a newfound urgency by the Centre to formulate laws and policies to govern the virtual currency market. On Monday, a parliamentary committee on finance is likely to hold a meeting of top stakeholders of the crypto industry, according to multiple reports. The meeting, which is reportedly going to take place behind closed doors, will have participants from top crypto exchanges, members of the Blockchain and Crypto Assets Council (BACC) among others.
This haste in tackling the issue of cryptocurrency is because Indians are flocking to the virtual currency market like never before. As per reports, Indians had parked nearly $6.6 billion in cryptocurrencies until May this year, as compared to around $923 million until April 2020. India ranks second on the Global Crypto Adoption Index in terms of cryptocurrency adoption. The total investment were reportedly going to cross the $ 10 billion mark in the first week of November.
As Indians are increasingly warming up to the idea of investing in virtual currency markets, it is imperative to understand what cryptocurrency means and the challenges it poses.
What is cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for goods and services. At its core, it is a decentralised digital money designed to be used over the internet. They are usually not issued or controlled by any government or other central authority. Instead, they are managed by peer-to-peer networks of computers running free, open-source software.
For example, just like the US Dollar is managed by the American Reserve Bank and the Euro by the European Central Bank, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the Internet.
One of the biggest advantages of using cryptocurrencies is that it makes transfer value online without the need for a middleman like a bank or payment processor, enabling value to transfer globally, almost instantly, with low fees. The technology allows individuals to take full control of their assets, without being dependent on external factors such as banks, regulatory bodies, middlemen etc.
Besides, as is the case with conventional currencies, there is usually only one currency that each country’s government allows to be used for trade within its sovereign limits. However, in the case of cryptocurrency, there is no such barrier. Everyone who intends to participate in cryptocurrency can have his/her own digital currency. Many companies have issued their own currencies, often called tokens or coins, and these can be traded specifically for the goods or services that the company provides.
Think of these tokens or coins as arcade tokens and chips we buy at casinos in exchange for real currency. Not real currency, but these tokens and chips are accepted inside casinos for various games and other services. Similarly, cryptocurrency coins are used to avail services offered by companies that accept certain digital currencies. However, a majority of the users invest in cryptocurrencies purely as an investment and when their value increases, they exit the currencies by selling them on the secondary market.
Which are popular cryptocurrencies and the underlying technology that powers them?
The most famous cryptocurrency is Bitcoin, which was launched more than a decade ago, in 2008. The digital currency first outlined by Satoshi Nakamoto in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”, described the project as “an electronic payment system based on cryptographic proof instead of trust.”
By market capitalisation, the most famous cryptocurrencies are Bitcoin, Ethereum, Bitcoin Cash and Litecoin. Other well-known cryptocurrencies include Tezos, EOS, and ZCash. Some are similar to Bitcoin. Others are based on different technologies, or have new features that allow them to do more than transfer value.
Cryptocurrencies work using a technology called blockchain, a breakthrough technology only recently made possible through decades of computer science and mathematical innovations. Blockchain is a decentralized technology spread across many computers that manage and records transactions. Part of the appeal of this technology is its security. The system is highly secure and encrypted. A cryptocurrency blockchain is akin to a bank’s balance sheet or ledger. Each currency has its own blockchain, which is a continuous and ongoing, constantly re-verified record of every single transaction ever made using that currency.
Unlike a bank’s ledger, which is limited to the user alone, a crypto blockchain is distributed across participants of the digital currency’s entire network. No company, country or third party is in control of the ledger and everyone can participate in it.
Challenges posed by cryptocurrencies
The advent of cryptocurrency has brought with it a unique set of challenges. The most potent of them is the dilemma surrounding the legality of these digital currencies.
Banks have been reluctant to let their customers deal with cryptocurrencies due to the uncertainty regarding the legitimacy of the virtual currency market. That concern among banks was somewhat assuaged after the RBI asked banks not to cite its 2018 order as a reason to deny banking services to customers who dealt in cryptocurrencies. RBI had stated that their 2018 order had been set aside by the Supreme Court of India.
In its April 2018 order, RBI had directed banks to make sure customers dealing in cryptocurrencies were not allowed access to banking services.
However, despite the apex court’s softened stance on cryptocurrencies, challenges still exist. One of the major concerns that have a significant impact legitimising the digital currency system is the volatility in several cryptocurrencies. Over the past several months, cryptocurrencies have proven to be extremely volatile, engendering concerns of wealth erosion and other risks involved in the trading of digital currencies.
The illicit use of cryptocurrencies by criminals, most notably hackers and extortionists, have also sparked concerns among Indian authorities regarding its exploitation by offenders. The inherently decentralised nature that makes it difficult for government authorities to regulate has also added to the concern about cryptocurrencies.
Cryptocurrency transactions are normally irreversible. In many of the transactions after a number of blocks, the transaction is confirmed. Therefore, if fraud is committed, it would be practically impossible to reverse the transaction. The lack of control over cryptocurrencies would mean the government will not be able to address the grievances of victims.
Traditional financial products usually have strong consumer protections. However, if any cryptocurrency is lost or stolen there is no intermediary with the power to limit consumer losses.
This is one of the reasons why not just the Indian government but governments of other countries have also taken a cautious approach towards cryptocurrencies, fearing their lack of central control and the ramifications they could have on the financial security of the country.
Other arguments that challenge the viability of cryptos include the security risk they entail, along with the lack of solution when it comes to ensuring its effective inheritance. There are also misgivings about possible asset bubbles around such currencies due to over-leveraging with possible newer types of derived products.
From a governance perspective, the ambiguity over the legal status of cryptocurrencies is posing headaches for various government departments. For instance, even though if there is no order or guidelines on disclosing the capital gains made from cryptocurrency, the tax department is asking questions and sending notices about the crypto-transactions and the gains from them.