Regulating Cryptocurrencies

Q What is the context ?

A With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Centre has been compelled to take a stance on the legal status of cryptocurrencies.

Q What is the Background ?

The Union Government is said to be considering a proposal to tax cryptocurrency transactions in the country.
The move would bring cryptocurrency trading, which has till date happened outside the ambit of the law, into the formal economy.

Q What is stand of RBI ?

RBI has been vehemently opposed to the idea of legalizing cryptocurrencies.
It had banned financial institutions such as banks from facilitating transactions involving cryptocurrencies back in 2018.
The RBI’s order was overturned by the Supreme Court in 2020, and this led to a tremendous surge in cryptocurrency transactions through exchanges.

Q Why did RBI propose a ban?

Financial stability: The RBI has characterized private cryptocurrencies as a threat to financial stability.
Threat to the sovereignty of Rupee: It perceives cryptocurrencies rise as a threat to the sovereignty of the rupee.
Beyond regulatory scope: The widespread acceptance of cryptocurrencies could interfere with the ability of the RBI to conduct monetary policy effectively.
Digital currency in the pipeline: It should be noted that RBI and other central banks are also looking to come up with digital versions of their own currencies.
Competition of currencies: The rupee or central bank digital currencies may not be able to outcompete cryptocurrencies just because they are digital.

Q What is Legislative opinion on Cryptocurrencies ?
A

Not in favour of ban: This week, a Parliamentary Standing Committee recommended that cryptocurrencies be regulated rather than banned.
Making a legal framework: The Government is also expected to table a bill that clarifies its position on cryptocurrencies in Parliament next year.
Taxing cryptocurrencies: There is a proposal to classify cryptocurrency exchanges as e-commerce platforms and tax them under the GST framework comes.

Q Why has the Government chosen to regulate rather than ban cryptocurrencies?

Popularity amongst Public: The growing popularity of cryptocurrencies among citizens may have played a role in the Government opting for regulation over an outright ban.
Lack of evident threat: There is no clear evidence of the misuse of cryptocurrencies and their risks.
Boosting with policy: The Union govt may also not want to kill the nascent cryptocurrency industry which many believe can be a hub for financial innovation.
Revenue generation: Fiscal revenues can be adversely impacted by the increased tax evasion opportunities that crypto-currencies can facilitate.
Capitalizing the market: The govt wants to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.
Financial innovation: Blockchain technology has multiple uses beyond just facilitating cryptocurrency transactions.

Q What are Issues with the ban ?

Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban.
Capital inflows will be restricted: If cryptos begin to get mined onshore, they will induce capital inflows.
Killing financial innovation: A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world.

Other generic concerns:

Safety (cyber-attacks and fraud)
Financial integrity (money laundering and evasion of capital controls)
Energy usage (outsized energy needs to mine cryptos)

Q What can be Way forward ?

Thus it can be inferred that cryptocurrency is better classified as an asset rather than as a currency, in order to gain acceptance and avoid a ban.
There is no doubt that the acceptance of cryptocurrencies by the Government is likely to be limited.
While cryptocurrencies may be accepted as speculative assets, it is highly unlikely that they will be accepted as full-fledged currencies competing against the rupee.