“A new technology, an old problem and a big idea turn into an innovation”Dean Kamen
This ideology is also the genesis of the advent of crypto-currency. The current and wacky monetary systems are lengthy and regulatory. This has caused the people to increasingly eye at alternative currency systems, the most lucrative being the virtual currency. One of the forms of digital currency is Crypto-currency. It uses a technique called cryptography to work out the transactions. Cryptography is the method of converting intelligible data into encrypted codes, making them hard to crack. This technique has been in use since time immemorial. But in the recent era of virtual technology, the technique has been put in line with blockchain technology to give rise to the digital monetary system.
Blockchain uses a distributed ledger technology (DLT), wherein there is an openly auditable and decentralized ledger that can be shared and viewed by all users. The conception of the technology is that it cannot be traced back with certainty but commonly it is believed that blockchain technology was integrated during and as an aftermath of the 2008 global financial crisis. Many investors had become wary of the centralized banking system and started looking for alternatives to shift from the garb of these centralized authorities to more liberalized online forums.
By the virtue of this ‘trustless’ technology, each transaction is first turned into a cryptographically secured hash, which is a fixed-length alphanumeric string that is then used by the blockchain as an identifier for transactions. These hashes are based on public and private keys, which are generated by individuals using the blockchain. Once the transaction is hashed, it is grouped with other transactions into a block and validated by the blockchain using agreed-upon consensus protocols. Each validated block contains a link to the previous block, forming a chain, giving the name – the block-chain. The users by the virtue of this chain can trace the transactions back to the first block of transactions lending authenticity to the system. The founder of bit coining, one of the types of cryptocurrency, Satoshi Nakamoto described Bitcoin as an “electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
This parallel system of crypto-currency has been on the rise, incentivizing the investors with each passing year. In India, during the drive of demonetization, there was an unprecedented plummet in the number of investors putting faith in the digital currency to an extent that nearly 2,500 Indians invested in Bitcoin daily in the mid-2017. The system alongside providing a safety net to the investors ensured a laissez-faire system with the least regulations and barely any political or economic interference. Yet again in the wake of COVID-19, there is a tumultuous escalation in the numbers around the globe.
With an upsurge in the use of virtual currency, there is an equivalent rise in the dilemma of the government about considering recognition of the currency as a legal tender. Despite offering a thriving advantage to investors, concerns like terror financing, money laundering still loom large in the potentially unregulated sector. With the ambiguity over the safety of money still a facet and a history of investors losing a huge stack of money in the blink of an eye, the government has to cautiously put the weights in the balance.
CRYPTOCURRENCY – EXPLORING THE TERM
Defining the term ‘cryptocurrency’ in the regulatory space isn’t an easy undertaking, with no universally accepted definition available at the moment. Taking a comprehensive approach in consideration of the views of global developmental agencies, a general meaning can be attributed to the term, “a cryptocurrency is a digital representation of value that (i) is intended to constitute a peer-to-peer (P2P) alternative to government-issued legal tender, (ii) is used as a general-purpose medium of exchange independent of any central bank, (iii) is secured by a mechanism known as cryptography and (iv) can be converted into legal tender and vice-versa.”
In recent times, mushrooming of laws dealing with cryptocurrencies has been witnessed worldwide. Such legal developments are often attributed to the exponential rise in the popularity of cryptocurrencies, especially bitcoins. Ergo, a need has arisen to regulate this mechanism, prompting governments across the world to give this decentralized entity a codified and definite form through the introduction of legislations governing the legality of and taxation on cryptocurrencies.
These laws and regulations vary from country to country and so does the terminology used to describe their subject matter. Cryptocurrency is referred to as digital currency in Argentina, Thailand, and Australia, as crypto-tokens in Germany, as payment tokens in Switzerland, as cyber currency in Italy and Lebanon, as electronic currency in Colombia and Lebanon, and as virtual assets in Honduras and Mexico.
Jurisdictions such as Russia and Canada facilitate the use of cryptocurrencies as trading commodities for other goods and services. Moreover, cryptocurrencies find use as a mode of payment in countries like Japan, Switzerland, and Thailand. Investment is also done via cryptocurrencies.
On the contrary, China strictly prohibits any and all kinds of transactions involving cryptocurrencies. A robust legal framework fortified by a recently chalked-out cryptography law ensures that the emerging regulatory and legal challenges in cryptography usage are well catered to.
THE INDIAN FRAMEWORK
Bitcoins, when initially introduced in India, gave promising hopes and were set to emerge as a successful ‘Virtual Currency’. In 2012 and 2013, small-scale crypto transactions were taking place and some companies had begun to accept payments in Bitcoin. Cryptocurrency exchanges, Over-The-Counter crypto shops, and Bitcoin ATMs came up due to Bitcoin’s increasing popularity. Start-ups developed an aim to provide crypto trading platforms. However, this changed with the demonetization in 2016, where 86% of cash circulating in the economy was no longer accepted as legal tender. Due to the economic uncertainty, people with a large amount of cash needed a reliable way to convert this wealth while avoiding tax burdens and governmental regulation and scrutiny. The use of cryptocurrencies as a way to commit tax evasion led to a crackdown from the government and Reserve Bank of India and this hindered the adoption of Bitcoin further. In 2018, the RBI issued a statement clarifying that cryptocurrencies, like Bitcoin, were not to be accepted as legal tender. While it did not explicitly ban its use by creating a regulatory framework, it wasn’t exactly keen on encouraging its use either as evident in the judgment given by the Supreme Court of India in the writ petition filed by the Internet and Mobile Association of India against the Reserve Bank of India (Internet and Mobile Association of India v. RBI). As stated in the judgment, the RBI had issued circulars where it had directed entities regulated by the RBI to not deal in Virtual Currencies “VCs”, nor to provide services facilitating the dealerships of this nature, and to exit the relationship with entities dealing with VCs. The RBI had apprehensions that swapping banknotes and opting for digital currencies would affect the monetary policy and the banking system. Concerns over consumer protection and monetary scams that may arise due to the anonymity and lack of regulation involved in trading with cryptocurrencies were flagged. However, it did not reject the concept of cryptocurrencies entirely. It kept the option open for the implementation of the decentralized and mutually verifiable blockchain technology as long as it was not used for trading with VCs. In 2019, the report of the Inter-Ministerial Committee recommended a ban on cryptocurrencies along with the draft of the Bill “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” which was the final step towards banning the use of VCs.
Landmark development came in March 2020 when a three-judge bench of the Supreme Court pronounced its verdict in Internet and Mobile Association of India v. RBI, quashing the Reserve Bank of India’s ban on providing banking services to cryptocurrency dealers. In an attempt to fathom the identity of virtual currencies, the Apex Court examined various definitions adopted by International bodies such as the International Monetary Fund, Financial Action Task Force, European Central, and several governments and observed that the opinion is unanimous among all regulators and the governments of various countries that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and that they are capable of functioning as (i) a medium of exchange and/or (ii) a unit of account and/or (iii) a store of value.”
The Apex Court further emphasized the capability of virtual currencies in performing most functions of real currency, even if they weren’t recognized as legal tender.
“But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as much truer that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency.”
A common thread found in most of the legislations governing cryptocurrencies is that most governments and central banks tend to discourage the use of Bitcoins. This discouragement has varying degrees and depends on the economic framework of the country concerned. Such decrees passed by them tend to educate the common citizen about what a cryptocurrency is and of the hazards and risks associated with trading them. Some of these concerns flagged by the central authorities are legitimate such as the lack of legal options available in case of fraud due to their decentralized nature. Also, unlike an economy where the central bank has command, the high rate and range of fluctuations in the value of crypto-assets make it an unpredictable asset with unreliable returns. Another problem that arises due to the lack of checks on the rampant use of cryptocurrencies is the diversion of funds to finance and engage in illegal and anti-national activities such as terror funding, unlawful arms and ammunition acquisition, trafficking, drug dealing, and smuggling.
It can, as a result, be acknowledged that there is a lacuna of reach between the central institutions of a state and the cryptocurrency market that needs to be filled with the introduction of appropriate laws and ordinances. Such laws often require widening the scope of existing laws as cryptocurrency affects IT laws, contract laws, and statutes regarding currency and legal tenders.
PRACTICAL IMPLICATIONS OF THE PROPOSED BAN ON CRYPTOCURRENCIES
A detailed analysis of the extent and scope of this comprehensive ban would bring to light the following observations. It might be such that entities dealing in illegal activities would go underground and continue engaging in them. Secondly, India would be giving up on an excellent opportunity to enhance research and development institutions and the resources available. It would also prevent the emergence of new start-ups that would bring in economic profits given the rising popularity and market value of the cryptographic technologies. However, all is not lost as the underlying technology of cryptocurrency, that is, blockchain can be integrated and adopted to foster a more conducive and transparent mechanism that would enable the institutions to function effectively and efficiently. The concept of blockchain can be used to keep an updated and trustworthy record as it would require the assent of all parties involved. Blockchain can be used to facilitate smart contracts, keep a reliable and accurate record of land transfers, regulate the sale and supply of pharmaceutical drugs, arms and ammunition and ensure that large scale government schemes are accessed by the intended beneficiaries without any interference from middlemen or corrupt bureaucrats. In all of the mentioned fields where blockchain can be integrated, the implicit process is that all people part of that network, be it individuals or government agencies, can verify the legitimacy of the block of information to be added and create a distributed ledger accessible by all.
SUGGESTIONS AND THE WAY FORWARD
Cryptocurrencies in various forms and kinds were in use for quite some years, and have also increased manifolds due to the occurrence of some specific events in the past few years. Furthermore, with the lifting of the regulations by the apex court, which was put forth by the RBI, there has been an increased incentive with the forthcoming legality. Sumit Gupta, CEO of CoinDCX was seen quoting, “The March 2020 Supreme Court judgment was in favor of the crypto business. That news itself got 10 times sign-ups on the platforms.”
Investors are willing to place credence on the shifting beliefs in alternate systems. Sathvik Viswanathan, the CEO of Unicoin remarked, “Since March there has been a five times growth every month, and some of the good months it was 10 times…New customers signing up, logging in, doing transactions.” Nischal Shetty, Founder, and CEO of Wazir X (an Indian Bitcoin and cryptocurrency exchange & trading platform) claimed, “Our trading volumes grew over 1,000 percent last year. User sign-ups grew four to five times. The number of new people signing up almost doubled every two-to-three months.” While looking at a promising future, he also acknowledged that such growth of an unregulated sector may pose barriers to the industry, but which soon will be regularised with time.
The parliament had formed a committee to regulate the use of cryptocurrency in India, but with the apex court giving a liberal approach and rendering legality on the use of such currency, the government is eyeing to ban the currency amidst inherent concerns. The drawbacks range from difficulty in tax recovery to serious concerns like terror financing, hawala transactions, money laundering, and anonymity associated with the transactions. An innocent investor uninformed of the end of the money transfer can indirectly be financing terrorist activity. There was a report that a certain BTC wallet that belonged to ISIS received around $23 million in a single month at the height of its expansion in 2015. With the new system, comes inherent loopholes that dupe innocent investors. There have been instances of investors being scammed of large sums of money in the crypto form. Between 2017 and 2019, Indian investors are estimated to have lost more than $500 million in cryptocurrency scams.
There are without any doubt certain concerns with the use of cryptocurrency, but in our opinion, the government should not look at banning the use of cryptocurrency. The digital currency in India was in use even before the apex court rendered legality on such transactions and with ever-increasing technology today, people are increasingly likely to shift to alternate and less regulated systems like these. With India eyeing to go digital, the government cannot eliminate the aspect of virtual money from the system. Banning of the crypto-currency will not put a halt to the possible associated illegal activities, but on the contrary, will give rise to the clandestine activities. “Banning crypto can be a blow for the ease of global financial transactions.”
It will also be difficult for investors to seek remedies if they are duped. Unhindered by the scam which looted the investors of 85000 bitcoins, Japan went ahead to regularise the crypto-currency business. Canada has adopted a peculiar approach. It does not recognize the digital currency as a valid legal tender but allows its trade in the country. UK and Israel have developed systems to tax the gains which arise via crypto-currency.
Crypto-currencies can exhibit immense potential in making financial systems global. The speed and simplicity of paperless crypto-transactions, which are unregulated by any banking system, make them a genuine asset to the vast population which is underserved by the banking system. According to a 2018 report released by the World Bank, India is home to the second-largest unbanked population in the world.
As per our suggestion, the government shall recognize cryptocurrencies as a legal tender. This approach will be beneficial on various fronts. The investors will be incentivized to participate in the global transactions liberally. The recognition of hitherto unrecognized virtual money will give a boost to the economy. The government will be able to realize increased revenue by levying taxes on such digital incomes. This will give an impetus to the growth and development of the nation. The government shall develop appropriate legislation and formulate systems to integrate the digital monetary system with the traditional one while addressing the inherent setbacks rather than focusing on evaporating the same. Some of the approaches can be mandatory reporting of crypto transactions (to eliminate anonymity from the system and keeping track of the amount transacted); imbibing Know Your Customer and Anti-Money Laundering norms to truncate the risks; setting up a department to keep a close check on the modish system. Although we acknowledge the fact that at nascent stages, there will be challenges in its implementation, systematic and cautiously developed regulation of the system in a phased manner will bear fruits in the times to come.
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