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A prudent approch needed to curb craze for cryptocurrencies

Dr. Ashwani Mahajan

Dr. Ashwani MahajanSep 28, 2021, 04:14 PM IST

A prudent approch needed to curb craze for cryptocurrencies

Shutting the doors on digital currencies should not be the way forward. Effective safeguards should be put in place to free the world from the  ill-effects of cryptocurrencies like Bitcoin and regulate their usage

 

In his Budget speech on February 01, 2018, then Union Finance Minister Arun Jaitely made reference to cryptocurrencies for the first time. He said, “The Government does not recognise crypto currency as legal tender or coin and will take all measures to eliminate the use of these crypto assets in financing illegitimate activities or as part of the payments system”. Primarily, that reference was pertaining to Bitcoins. Since then, the Reserve Bank of India (RBI) has declared ‘Bitcoin’ to be illegal. Despite being either declared illegal or under severe attacks from official circles, bitcoin has been gaining ground globally, not merely in terms of its acceptability but also in terms of trading and value. Many virtual currencies are in circulation, which are not issued by any authority of the government(s); however, transactions are still being made using these currencies. These currencies are created by computer systems and are also termed as cryptocurrencies. Out of all cryptocurrencies, the highest circulated currency is Bitcoin. Transaction in bitcoins takes place directly between two parties, and there are no intermediaries between the two. These transactions are verified by the network and recorded by a public account in the name of  ‘blockchain’.

Origin

This currency (Bitcoin) was founded by a computer programmer or a group of computer programmers called ‘Satoshi Nakamoto’. This name itself is seemingly a fake name, and all efforts to identify ‘Satoshi Nakamoto’ have been proved futile. This currency was brought in circulation in 2009 through open-source software. The speciality of transactions in this currency is that it takes place directly between two parties, and there are no intermediaries. Bitcoin has become the safest bet for money laundering and anybody can transfer any amount to tax heavens by sending money through ‘Bitcoin wallet’. Security systems all over the world are finding it impossible to catch bitcoin transactions by criminals. Sometime ago, due to severe cyber attacks by cybercriminals, nearly two lakh computers were affected in nearly 150 countries. The whole world was stunned, as ransom was demanded, in ‘Bitcoins’, for restoring the data.

Understanding the increasing acceptability and popularity of cryptocurrencies and their ability to curb the same effectively, the government is considering to only regulate cryptocurrencies. The shape of the legislation will be clear in days to come. However, in the meanwhile, RBI has now decided to launch its digital  currency, which can meet the demand for the digital world and may not be having disadvantages attached with non-official digital currencies

Generally, we transact online, using debit cards, credit cards, online banking etc. All these transactions are legal and are recorded properly. Information about the parties engaged in these transactions is available or is traceable. However, the distinction of Bitcoin transactions is that the ‘Block Chain’ method is used and is browsed on ‘Dark Web’, making it impossible to trace the particulars about the transactions. Further, these transactions are irreversible and cannot be undone. Due to these features of ‘Bitcoin’, it’s becoming very popular among criminals, as security agencies would not catch them. The increasing use of ‘Bitcoin’ in crimes is making it intricate for security agencies and financial authorities to trace the trails.

Popularity among Criminals

Despite being warned by the Government and RBI, a number of people investing in Bitcoin is rising. Despite warning from the Government that money put in ‘Bitcoin’ would be treated as ‘money laundering’, millions of people have downloaded the Bitcoin network in India. Bitcoin does not have the approval of any central bank globally, and until recently, it was not a legal tender anywhere in the world. Recently, El Salvador announced to accept bitcoin as a legal tender. Before this, Switzerland became the first country where a local body announced that it could accept local taxes in ‘Bitcoin’. Since any bank/central bank does not issue it, no tax is applicable on Bitcoins. Perhaps this is the reason for its rising popularity, especially among criminals.

Advantages associated with bitcoins make them popular among those with unaccounted, illegal, criminal and terror monies. And it’s limited supply is leading to an unprecedented hike in its value. In 2010, 1000 Bitcoin were just equal to the price of a pizza; by September 2021, its value went up to 50,000 US dollars per Bitcoin, that is Rs 37,00,000 per Bitcoin. It’s notable that when Prime Minister Narendra Modi announced that notes of Rs 500 and Rs 1000 notes will no longer remain legal tender money, demand for bitcoins increased abruptly, leading to a spike in the price of bitcoins in India. On Indian exchanges, the Bitcoin prices were being quoted at 25-28% higher than is world price. The largest bitcoin exchange, Zebpay’s downloads, increased by 50 per cent then, indicating increased attraction for bitcoin to park unaccounted money at the time of demonetisation.

On April 6, 2018, the RBI issued a circular prohibiting virtual currencies (VCs) dealing. The circular said, “In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or setting VCs”. On March 4, 2020, Supreme Court quashed that order. However, banks continued to warn their customers against trading in Bitcoin and other VCs. As a result, RBI had to issue a clarification, directing the Banks not to warn the customers against trading in cryptocurrencies. Therefore with judicial intervention, RBI had to soften its stand against cryptocurrencies, and now it’s clear that there may not be a complete ban on cryptocurrencies; rather the Government may only try to regulate cryptocurrencies. This clarification of the RBI also indicates that banks will now facilitate deposits and withdrawal of cryptocurrencies. This has given confidence to those trading in cryptocurrencies. However, the RBI has made it clear to the banks that transactions in cryptocurrencies should not be used for fraudulent activities and tax evasion. And standard regulations should be followed with regard to Know Your Customer (KYC), Anti Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligation of regulated entities under Prevention of Money Laundering Act (PMLA), 2002. We must understand that Bitcoin and other cryptocurrencies are becoming a cause of financial indiscipline and encouraging money laundering and crimes. Their increasing usage is an alarm bell for the world. Their use does not benefit economies; rather, it spoils the legal channels. Need of the hour is that effective steps are taken to free the world from these illegitimate currencies like Bitcoin. However, market forces are coming in the way of effectively curb/ ban these cryptocurrencies; even the judiciary has failed to appreciate the risks attached with cryptocurrencies and has even set aside RBIs circular of declaring transactions in cryptocurrencies illegal. We can say that cryptocurrencies like bitcoin etc. are illegitimate as they pave the way for illegal activities like tax evasion, money laundering etc. The reason why they facilitate such illegalities is the fact that their transactions lack intermediation. Being facilitated by such a technology (block chain), which makes it impossible to trace the trails of transactions, attracts miscreants to use these currencies. Despite losing the legal battle against cryptocurrencies, the RBI remains apprehensive about these instruments. 

Impacting Bharat’s Financial Stability

The Governor of the RBI has once again expressed concerns regarding the impact of cryptocurrencies on India’s financial stability. He also said that RBI has conveyed the same to the government. The largest public sector bank (State Bank of India) has also barred cryptocurrencies on its UPI platform. However, it’s now clear that a complete ban on cryptocurrencies is not forthcoming. In the meanwhile, the government is seriously considering legislation on cryptocurrencies. Finance Minister also said in July 2021 that a cabinet note is ready for consideration.

Understanding the increasing acceptability and popularity of cryptocurrencies and their ability to curb the same effectively, the government is considering to only regulate cryptocurrencies. The shape of the legislation will be clear in days to come. However, in the meanwhile, RBI has now decided to launch its digital currency, which can meet the demand for the digital world and may not be having disadvantages attached with non-official digital currencies. The digital rupee, which RBI has proposed, is expected to be launched by December 2021. The push for digital currency comes from the decline in cash usage and growing interest in bitcoin type cryptocurrencies. Not only RBI, even China, UK, and other European countries are also are exploring the possibilities of issuing central bank digital currencies. RBI is adopting a very cautious approach to this and is studying various aspects, including its likely impact on India’s financial sector, monetary policy, and currency regarding digital currency circulation. RBI is also weighing the possibilities of the central registry and distributed ledger technology (DLT). In China, real-world trials are already on.

Bitcoin does not have the approval of any central bank globally, and until recently, it was not a legal tender anywhere in the world. Recently, before El Salvador announced to accept bitcoin as a legal tender. Before this, Switzerland became the first country where a local body announced that it could accept local taxes in ‘Bitcoin’

The difference between the cryptocurrencies and these Central Bank Digital Currencies (CBDCs) is that CBDCs would be legal tender in digital form. Say in India; digital currency would be called digital rupee. Unlike cryptocurrencies, CBDCs would be fully regulated and will be under a central authority (Central Bank). These digital currencies would not be tradable assets with fluctuating prices; CBDCs would be more like their official counterparts (conventional legal tender money) and would have widespread acceptance.

New Method for Corporate Investment

Till now we know only about Initial Public Offer (IPO), which a company makes to attract equity or other investments under given rules and regulations. Nowadays, in some countries, companies have started raising capital through cryptocurrencies, and the method for the same is called Initial Currency Offer (ICO). In this method, an ICO company would issue a limited amount of virtual currency, which investors can later exchange.

Under the garb of digital currency, Bitcoin and other cryptocurrencies are becoming a cause of financial indiscipline and encouraging money laundering and crimes. Their increasing usage is an alarm bell for the world. Their use does not benefit economies; rather, it spoils the legal channels. Need of the hour is that effective steps are taken to free the world from the ill effects of these illegitimate currencies like Bitcoin and regulate their usage. 
 

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