RBI Seeks Ban on Cryptocurrency

• 19 Jul 2022

For Prelims: Cryptocurrency, Bitcoin, Blockchain

For Mains: Cryptocurrency & Related Issues, Government Policies & Interventions

Why in News?

The Reserve Bank of India (RBI) has recommended a ban on cryptocurrencies citing ‘destabilising effects’ for the country’s monetary and fiscal health.

• China has declared all cryptocurrency transactions illegal, effectively imposing a complete ban, whereas El Salvador has permitted Bitcoin as legal tender.

What is the Current Status of Crypto?

• At the moment, there is no legislature that covers cryptocurrencies in India. In India, owning cryptocurrencies is still not illegal. In 2020, the Supreme Court had struck down a ban on trading of crypto currency in India, which was imposed by the Reserve Bank of India (RBI).
• Central bank has been cautioning people against the use of virtual currencies since as far back as 2013.
• In April 2018, the RBI had prohibited regulated entities from dealing in virtual currencies or providing services for facilitating any person or entity in dealing with or settling them. The directive was set aside by the Supreme Court in March 2020.
• Subsequently, in May 2021, the central bank advised its regulated entities to continue to carry out customer due diligence processes for transactions in such currencies, in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering, Combating of Financing of Terrorism, obligations under Prevention of Money Laundering Act, 2002, etc. and Foreign Exchange Management Act (FEMA) Norms for overseas remittances.
• The Union Budget 2022-2023 also proposed to introduce a digital currency in the coming financial year.

What are the RBIs Concerns?

• Not a Fiat Money:
  • Cryptocurrencies are not a currency because every modern currency needs to be issued by the central bank or Government.
• Speculative and Destabilising:
  • The value of fiat currencies is anchored by monetary policy and their status as legal tender, however the value of cryptocurrencies rests solely on the speculation and expectations of high returns that are not well anchored, so it will have a destabilising effect on the monetary and fiscal stability of a country.

What is Cryptocurrency?

• About:
  • Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions.
  • Cryptocurrencies don't have a central issuing or regulating authority, instead use a decentralized system to record transactions and issue new units.
    • It is supported by a decentralized peer-to-peer network called the blockchain.
• Benefits:
  • Fast and Cheap Transactions: Cryptocurrencies are way cheaper to use to execute international transactions because the transactions don't have to be handled by a series of intermediaries before they reach their destinations.
  • Investment Destination: There is a limited supply of cryptocurrency – partially like gold. Moreover, the last few years have seen the price of cryptocurrencies rising faster than other financial instruments.
    • Due to this, cryptocurrencies can become a preferred investment destination.
  • Anti-Inflationary Currency: Due to the high demand for cryptocurrency its prices have largely remained on a growing trajectory. In this scenario, people tend to hold more cryptocurrency than spending it.
    • This will cause a deflationary effect on the currency.

What are the Concerns Associated with Cryptocurrency?

• Bombardment of Advertisement: The crypto market is seen as a way to earn quick profits. Due to this, there is bombardment of advertising, both online and offline, to lure people into speculating in this market.
  • However, there are concerns that these are attempts to mislead the youth through “over-promising” and “non-transparent advertising”.
• Counterproductive Utility: Unregulated crypto markets can become avenues for money laundering and terror financing.
• Cryptocurrencies are Extremely Volatile: Bitcoin skyrocketed from USD 40,000 to reach an all-time high of USD 65,000 (between January to April 2021).
  • Then in May 2021, it plunged and throughout June it remained below USD 30,000.
• Risk to Macroeconomic and Financial Stability: The extent of investment exposure of Indian retail investors in this unregulated asset class, poses a risk to Macroeconomic and Financial Stability.
  • According to a Group of Crypto exchanges, crores of Indians have invested over Rs 6,00,000 crore in crypto assets.
• Stock Market Issues: Securities and Exchange Board of India (SEBI) has flagged the issue that it has no control over the “clearing and settlement” of crypto currencies, and it cannot offer counterparty guarantee as is being done for stocks.
  • Further, whether cryptocurrency is a currency, commodity, or security has not been defined.

Way Forward

• India is yet to table the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which will lay down the regulatory framework for the launch of an “official digital currency”.
  • Thus, there is a need to expedite passing of the bill and design a regulatory framework to deal with cryptocurrencies.
• Regulation is needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams.
• A law to regulate or ban cryptocurrencies can only be effective once there’s some form of international agreement in place.
  • Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage.
• Therefore, any legislation for regulation or for banning can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.

Source: TH