Regulating cryptocurrency poses big challenge

Nantoo Banerjee
The cryptocurrency and regulation of official digital currency bill 2021 is awaiting introduction during the current winter session even as Finance Minister Nirmala Sitharaman said in Parliament that the government has no proposal to recognise Bitcoin as a currency in the country. She also informed the House that the government does not collect data on Bitcoin transactions. Privately, however, cryptocurrency is very much in circulation in India as it is in many other economies across the world. No one really knows if it is being tracked by the government. The Supreme Court of India already overturned the ban on Bitcoin imposed by the Reserve Bank in 2017. The apex court struck down the restriction in March 2020.The court ruled that the ban was in violation of the freedom of business and profession under Article 19(1)(g) of the Indian Constitution. Thereon, cryptocurrency continues to be operated in the country in a legal vacuum.
The new cryptocurrency bill probably seeks to create a regulatory framework for transactions. It is possible that the government may come up with its own central bank digital currency or CBDC. In such a case, all other digital currencies in the market will be seen as private cryptocurrencies. Will the law be strong enough to deal with such private cryptocurrencies and exchanges? Thus, the confusion remains about the current and future status of cryptocurrencies in India, exchanges facilitating their transactions, RBI’s role as currency controller and the challenges before the government’s tax department. Going by the global trend, cryptocurrency is here to stay and even prosper. In coming years, it may as well pose a challenge to the central banking system. But, it is unlikely to become a substitute for central bank-controlled paper currency in the foreseeable future.
A cryptocurrency is a virtual currency secured by cryptography. This makes it nearly impossible to counterfeit. It is a peer-to-peer digital payment system that doesn’t rely on banks to verify transactions. Instead of being physical money that is carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database that describe specific transactions. When cryptocurrency funds are transferred, the transactions are recorded in a public ledger. One can store cryptocurrency in a digital wallet. Many cryptocurrencies are decentralised networks using blockchain technology. Blockchains are organisational methods for ensuring the integrity of transactional data and are an essential component of most cryptocurrencies. The most important feature is that cryptocurrencies are generally not issued by any central authority or central bank. This makes them theoretically immune to government interference or manipulation. They are praised for their portability, divisibility, inflation resistance, and transparency. Bitcoin is by far the most popular cryptocurrency, followed by other currencies such as Ethereum, Binance Coin, Solana, and Cardano.
According to Edul Patel, CEO and Co-founder of crypto investment platform Mudrex, there are more than 11,000 cryptocurrencies that are traded across exchanges. Cryptocurrencies like Bitcoin, Ether and others are available across centralised and decentralised exchanges. However, all of these cryptos are created by developers or companies, and not by governments. Bitcoin was introduced in 2008 by an unidentified group of programmers as a cryptocurrency as well as an electronic payment system, following the collapse of the traditional international financial system. It is said to be the first decentralised digital token where peer-to-peer transactions take place without any intermediary. Bitcoin is the world’s most popular cryptocurrency. Unofficial reports suggest that millions of Indians have already invested sums worth billions of dollars in cryptocurrency. This is not unusual. It is in keeping with the trend in many countries where cryptocurrency is officially banned. In India, cryptocurrency can be bought from exchanges such as Coinbase and Coindesk. Bitcoins can be had from Zebpay using one’s bank account, NEFT, RTGS, debit or credit card. A basic KYC is needed by submitting PAN and Aadhaar cards. As little as Rs. 500 can be invested in Bitcoin. The transactions go on without government recognition.
Incidentally, China does not recognise the virtual currency as a legal tender and follows a strict policy against cryptocurrencies. All financial institutions in China are warned against such payment processors and their dealings as Bitcoin can circumvent government-imposed capital controls and encourage flight of capital. Chinese citizens have an annual limit of $50,000 to purchase foreign currency. However, a report by Chainalysis, a crypto forensics firm, found that more than $50 billion moved from China-based Bitcoin wallets to wallets in other countries in 2020, meaning Chinese citizens may have converted the local currency to Bitcoin and transferred it across borders sidestepping government regulation. In Russia, the use of Bitcoin for payment transactions is illegal, but it is not regulated either. Although El Salvador became the first country this year to recognise Bitcoin as a legal tender, countries such as the USA, Germany, the UK, Canada and Australia have all generally favourable stance towards Bitcoin or cryptocurrency wallets and would like to wait and watch how they impact the central banking system and currency market. MasterCard in the USA allows certain cardholders to transact in specified cryptocurrencies.
While countries or governments have little choice but to recognise the power of digital currency, the immediate concern seems to be about how to regulate them. India’s bid to enact a law to regulate cryptocurrency offers no guarantee that the government will succeed in controlling the operation of cryptocurrency exchanges and illegal fund transfers. It is not clear why the government is in such a great hurry to regulate cryptocurrency without enough public information about how it is impacting or challenging the country’s central banking system and tax authorities. Rich Indians are known to be big hoarders of unaccounted or ‘black’ money and many use the ‘hawala’ route to illegally transfer such funds. Is the government worried about an increasing use of invisible currency making illegal wealth transfer by rich Indians easier?
The cryptocurrency’s ecosystem is still rife with scandals and criminals. Most countries around the world are still trying to figure out ways to regulate cryptocurrency. There are multiple strands to Bitcoin’s regulation problem in the context of changing narratives about cryptocurrency, the lack of transparency about its ecosystem and the approach towards formulation of laws. Cryptocurrency has the potential to decentralise and change the workings of the existing financial infrastructure, including the central banking system. In the words of legendary US investor Warren Buffet, Bitcoin is “probably rat poison squared”. Buffet said: “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” (IPA)