Should Cryptocurrency be banned as proposed? It can be traded even in a pen drive. Who needs complex networks to do it? Will black-market thrive then? Cryptocurrency is digital and also virtual. In as much as saying that all virtual currencies are digital, digital currencies are not virtual. “Crypto” in cryptocurrencies is a methodology of cryptography which allows creation and processing of digital currencies and their transactions. They are issued by a process called ‘mining’ and are used for payments, transmitting value similar to digital money. Is cryptocurrency security or commodity or property or legal tender? The clarity defines its regulatory regime.
Cryptocurrency’s security is cryptography, which makes it impossible to counterfeit or double-spend. Their transactions occur on online networks or on the internet and are issued by private organizations or groups of developers and are mostly unregulated. Though intermediaries are removed from the processes, speeding the transactions, they can be hacked and scammed.
No central authority issues cryptocurrencies which mean they are theoretically immune to government interference or manipulation. Are they also immune to private manipulation? Whatever it is, they indicate the purchasing power.
There are more than 10,000 cryptocurrencies as on November 19th 2021 says CoinMarketCap. Apart from Bitcoin being a de facto standard, there are others like Ethereum (ETH), Litecoin (LTC), Cardano (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XLM), Dogecoin (DOGE), Binance Coin (BNB), Tether (USDT) and Monero (XMR). They all use decentralized peer to peer networks supported on blockchain technology existing as digital tokens or “coins” on the Blockchain which is a distributed ledger formed out of disparate network of computers. Of all of them, Bitcoin, the most secure, leads in terms of market capitalization, user base, and popularity. Each bitcoin was worth roughly $60,000 as of November 2021, with a market cap of more than $1 trillion.
Some cryptocurrencies also issue credit cards. However, new ‘coins’, such as ‘altcoins’ or ‘shitcoins’ modelled after Bitcoins will evolve because of the need to handle more transactions per second or use more efficient consensus algorithms like proof-of-stake.
Sometimes Blockchain tokens are issued as utility tokens as in securities and stocks or to share files or provide decentralized DNS service for internet addresses.
Should India be really worried about cryptocurrency? Why does the government want to ban them? Not only ban but even issue its own cryptocurrency through RBI? The reason is simple. The technology allows individuals to engage in person-to-person financial transactions and enter into contracts. There is no need for a trusted third-party intermediary such as a bank, monetary authority, court, or judge to oversee the transaction.
How does one get fiat money then? Simple. Bitcoin transactions are converted to fiat currency like a Rupee or a Dollar. PayPal had announced that in 2021, consumers could use cryptocurrency as a “funding source for purchases”, meaning it will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency. Is this not a backdoor conversion to fiat money?
Should crypto investment firms be termed money service businesses (MSBs) or simply Banks? Should they not be covered under SEBI/CBDT regulations?
Currently, Bitcoin rallies and its effect on other stocks is driven by institutional investors. The government is justifiably worried that such rallying and transactions can disrupt the existing financial order. It can probably lead to unwanted transactions including institutional gambling. Could they fund terrorist activities? Could they be a means to money laundering? The collective market cap of cryptocurrencies is more than $2.5 trillion.
Compared to most investments, bitcoins are risky for they are highly volatile. Both big returns and big losses are possible. They are also risky for another reason. One need not trade only in large Bitcoins. One can also buy as little as $5 of bitcoin or buy fractional shares known as ‘satoshis’ which means even small-time traders are not immune.
Can Bitcoins be used as a hedge against inflation? Can it survive any economic or infrastructural collapse? Can it be compared to gold? If the answer to these questions is yes, then they can help the government as much as cause worries. Hedge funds in our country do not even need to be registered with SEBI, the market regulator or disclose their net asset value (NAV)s at the end of the day. But then, the supply of bitcoin is limited and is controlled by computer code.
Blockchain technology though is hard to crack, Bitcoin theft and fraud are possible. There is no technology that cannot be scammed today. Only the level of difficulty would depend on the number of security layers. However, each bitcoin transaction is documented on the digital ledger, the blockchain, where a user’s cryptocurrency “wallet” is represented as a unique series of random numbers and letters. Scammers can be traced decoding the encryption, but only after the fraud has been committed. That is the difficult part.
Our country like every other country, will take steps to protect its currency and its ability to tax the people. Should investors pay tax on short/long term capital gains? If the people believe this is an area for making money more than they actually deserve, then the government will intervene more.
Cryptocurrency will be a significant factor in the global investment landscape. India cannot be left behind in that space. In this scenario, the government seeks to bring a Cryptocurrency Bill 2021 in the Parliament this winter session. The bill is expected to make it illegal to issue, hold, mine, and trade in private cryptocurrencies, but will create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India.
The Bill does make exception understandably, on the Blockchain technology used, for it has several other uses which cannot be discounted. It is interesting to note that though Cryptocurrency trades most in US, that country still does not have a regulatory framework or mechanism in place.
Probably, rather than banning private cryptocurrencies, asking the crypto exchanges operating in the country to register with SEBI and comply with adequate Anti money laundering / Combating the financing of terrorism (AML/CFT) provisions may be a progressive step for trading can happen even without the exchanges. Certainly, much is at stake in the Crypto world as we see some monumental changes overcoming us.