UPSC Exam   »   Cryptocurrency: The Way Ahead

Cryptocurrency: The Way Ahead

Introduction

  • Crypto-currency is becoming very popular in the country and the world.
  • A report of a private company states that more than 100 million people in India have cryptocurrency. This is the highest in any single country in the world. According to the report, 7.3 per cent of India’s population has crypto holdings.
  • That is, investment in these digital assets from Indian citizens is also increasing.

Context

  • The Standing Committee on Finance Issues of Parliament met on 15 November 2021 and discussed all the aspects in detail.
  • Also, a few days ago Prime Minister Narendra Modi discussed the issue of cryptocurrency with various ministries and senior officials of the Reserve Bank.

What Government is Planning?

There is a churning going on in the government that what distance can be kept from cryptocurrency or it can be opened for trade? What should be the framework for this and what are the challenges?

About Sydney Dialogue

  • The Sydney Dialogue is an annual summit of cyber and critical technologies to discuss the fallout of the digital domain on the law and order situation in the world.
  • Recently, delivering a keynote address at the Sydney Dialogue, PM Modi referred to “cryptocurrency or bitcoin” and said: “It is important that all democratic nations work together on this and ensure it does not end up in the wrong hands, which can spoil our youth.”

What is Cryptocurrency?

  • A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
  • Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.
  • A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
  • The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable.

What Is Bitcoin?

Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”

RBI’s Concern

  • RBI is looking for more debate and discussion before cryptocurrencies are adopted in India.
  • There could be an adverse impact on monetary policy, possibly on the currency and fiscal stability.
  • What new cryptos can mean for financial stability given they can be used to manipulate markets.
  • It is not clear who is going to audit the portfolio and whether the asset portfolio is liquid enough to withstand large redemptions in a short time.
  • There are concerns about cross-border transactions.
  • While this can mean more efficient, faster and cheaper transfers of remittances, for instance, without adequate controls, it could also mean the transfer of illegal money.

The countries adopting cryptocurrency can be categorised under four broad categories

  1. Accommodative or liberal – like in Japan;
  2. Heavily regulated like in the USA,
  3. Not currently regulated, like in India; and
  4. Prohibitive, like barring financial institutions within their borders from facilitating transactions involving cryptocurrencies, like in China.

Centre working on tax framework to regulate cryptocurrencies

  • For holders and traders of digital currencies, deliberations are underway to explore the possibility of imposing short term and long term capital gains tax
  • For service providers in the cryptocurrency ecosystem, the option of imposing GST at the rate of 18 per cent, in line with the rate for most services in the financial sector, is being explored.
  • A key aspect is considered to bring cryptocurrency players under the regulatory ambit is broadening the definition of a brokerage to include entities that undertake or facilitate digital asset trades.
  • since cryptocurrencies are likely to be defined as an asset and not as a currency or medium of exchange, the main route to tax them would be through direct tax.

How bitcoin is performing?

Bitcoin came into the mainstream, it has not delivered on its promise as a medium of exchange because the prices are volatile, unstable; it turns out to be quite slow, expensive and cumbersome. However, it has, paradoxically, become a financial asset, with investors believing the value will gain.

Way Ahead

  • One thing is clear that cryptocurrencies can’t be ignored even if they cater for a very small class of affluent people.
  • Perhaps the RBI committee’s report, expected next month, will shed light on the risks and rewards of these virtual assets and how we can go about regulating them.
  • So, while an outright ban would probably deprive the country of a promising technological avenue and may also foster an illegal market, we need a top-class regulatory framework to ensure private cryptocurrencies do not end up becoming a fertile ground for a nefarious activity like drug trafficking, terror financing or money laundering.

Conclusion

So, while an outright ban would probably deprive the country of a promising technological avenue and may also foster an illegal market, we need a top-class regulatory framework to ensure private cryptocurrencies do not end up becoming a fertile ground for a nefarious activity like drug trafficking, terror financing or money laundering. Since the mandate of ensuring financial stability rests with the central bank, RBI must be allowed to steer the discussions, and to have the last word.

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