Few months back I wrote on cryptocurrency, and the law being brought by Govt of India to regulate the same.
Before discussing the need for regulation and/or prohibition of Crypto or Virtual Currencies (VC), it is important to understand the constitution of VCs. Historically, currencies were devised as means to replace the barter system. Currencies that we regularly use are known as ‘flat currencies’ since they are backed by a convertible or a commodity. In simple terms, the currency that we use is issued by Govt and is a promissory note issued by Govt promising to pay the bearer the amount specified on the currency.
VCs are basically a collection of binary data, which is stored using cryptography to secure transaction records. VCs are not flat currencies and ate not backed by govt. VCs are based on the concept of decentralized control and have no single authority regulating their issuance. VCs do not exist physically. They are distributed over a vast network of computers. VCs have limit, every ASCII computer file specifies the quantity of coins. Eg., there are only 21 million Bitcoins released. Thus, as the demand for VCs increases, so does its value. It works on the principle of demand and supply.
VCs also have the advantage of eliminating third- party merchants such as Visa or Master Card and therefore an end user does not have to pay commission, bringing down the transaction cost. They are also irreversible. So, if a transaction is carried out, it can not be reversed. The VCs are stored in a digital wallet, which can only be opened by a private key. It is like an unbreakable vault, which can only be open with the set of keys provided. If you lose the key, you lose the contents in the vault.
However, the most vocal advantages of VCs are that they can be mined by a computer that involves a process of solving arithmetical problems or algorithms, which are used to verify transaction blocks to be added to the block chain, which is an ever-growing list of transactions. One can use a computer to validate these transactions and, as a reward, receive VCs.
The need for regulation
If VCs have so many benefits, then why are the Govts skeptical of considering them as legal tender. The short answer is privacy. VCs are based on blockchain technology, which is highly secure. A wallet is linked to a private key rather than an individual person. Therefore, the govts find it challenging to trace the origin of transactions. Because VCs use pseudonyms to carry out transactions, it has the potential of being used for illegal activities. Another concern is that since VCs are not backed by govt or any commodity and therefore can lose their values if the promoters of the VCs stop the trading activity. The latest example is Squid Game Crypto Scam, where it is estimated that the promoters scammed $ 3.38 million, by drawing in buyers and thereafter stop trading, leaving the buyers with tokens that have no financial value.
In India, RBI in 2018 prohibited the use of VCs, but this was set aside by Supreme Court (SC) in 2020. The contention of SC was that VCs are not banned. In 2019 the SC Garg Committee was formed to look into the legality of VCs, and their finding was “ All these Cs have been created by non- sovereigns and are in the sense entirely private enterprises and there is no underlying intrinsic value of these private VCs due to which they lack all the attributes of a currency”. According to the Committee report, VCs will not be able to act as currency since VCs are not consistent with the essential features of currency.
The Indian Govt is bringing a bill in Parliament, which seeks to ban all private cryptocurrencies including mining and trading therein. The Bill further seeks to promote the ‘Official Digital Currency that is to be issued by RBI and Central Govt. Further, the penalties prescribed under the Bill seem to be disproportionately harsher when compared with similar economic offences. The question now is whether banning all private VCs and having a single regulated ‘Official Digital Currency’ defeats the purpose of VCs in general or is justified given the volatility as well as the potential for misuse.
Countries like Canada regulate VCs under their money laundering laws, trading in VCs is permitted on an open exchange and their revenue generated is taxed under their income tax laws. VCs are also used to avail products and services. Further, Japan permits the use of VCs as a payment system.
In India, Crypto trading platforms are witnessing a substantial jump in volumes. As per the recent report, Wazir X, India’s biggest Cryptocurrency exchange registered an annual trade of over $ 43 billion. If properly regulated, the govt can tax the revenue generated, which can win-win situation for both the govt as well investors.
In fact, there are genuine concerns over the usage of VCs, regulation rather than prohibition could be a more viable option in India, and embracing VCs may have served as a way for India to lead the way into the future.
Waiting, for your views on this blog.
Anil Malik
Mumbai, India
18th January 2022