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Cryptocurrencies: What’s to like, and what’s to fear

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Context Of Cryptocurrencies:

An Inter-ministerial committee (IMC) that was set up to assess the viability of virtual currencies has recommended that India should ban private cryptocurrencies such as Bitcoin.

Background:

  • The inter-ministerial committee believes it is, going so far as to draft a law that mandates a fine and imprisonment of up to 10 years for the offenses of mining, generating, holding, selling, dealing in, transferring, disposing of, or issuing cryptocurrencies.
  • But six of the seven jurisdictions that its report cites have not banned cryptocurrencies outright.
  • Many of them, including Canada, Thailand, Russia, and Japan, seem to be moving on the path of regulation so that transactions are within the purview of anti-money laundering and prevention of terror laws.

Virtual currencies:

Virtual currency is a digital representation of value that can be digitally traded and functions as:

(a) a medium of exchange

(b) a unit of account

(c) a store of value

but unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government. A cryptocurrency is a subset of virtual currencies, and is decentralized, and protected by cryptography.

Inter-ministerial committee (IMC) take on virtual currency:

  • It recognizes the potential of DLT and Blockchain and accepts that internationally, the application of DLT is being explored in different areas.
  • The areas covered are of trade finance, mortgage loan applications, digital identity management or KYC requirements, cross-border fund transfers and clearing and settlement systems.
  • It recommends the Department of Economic Affairs to take necessary measures to facilitate the use of DLT in the entire financial field after identifying its uses.
  • It also recommends that regulators RBI, SEBI, IRDA, PFRDA, and IBBI explore evolving appropriate regulations for the development of DLT in their respective areas.
  • It has recommended a ban on private cryptocurrencies i.e. open to a cryptocurrency that the RBI may unveil.
  • It also noted that the RBI Act has clauses to permit the central government to approve a Central Bank Digital Currency (CBDC) as a legal tender in India.

Reasons provided for banning private cryptocurrencies:

  • The technology used in virtual currencies has immense potential, without a central regulating authority, they can have numerous downsides.
  • Non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors. Ex: Gain Bitcoin in India
  • Such currencies often experience tremendous volatility in their value.
  • Scaling up such a currency system over a large population would require crippling levels of energy resources. Currencies such as Bitcoin require humongous processing power.
  • According to a report by the Bank of International Settlement, Bitcoin processing already uses as much energy as is used by Switzerland calling an environmental disaster.
  • It is worrying that if private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over the monetary policy and financial stability.
  • The anonymity of private digital currencies makes them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult.
  • There is no grievance redressal mechanism in such a system, as all transactions are irreversible.

Criticism:

  • Some argue that the total global power consumption of banks and the internet is approximately 100 TWh and 2,500 TWh per year, respectively whereas Bitcoin uses 66.7 TWh per year globally.
  • The committee points out China as an example banning the use of cryptocurrencies but now, they are believed to be changing approaches to that.
  • Recommendations on government-owned Digital currencies lack clarity on its implementation, scaling for billions of Indians, the inclusion of the unbanked,
  • The question arises whether India possesses the necessary infrastructure for rolling out a digital currency of this magnitude needed.
  • It has taken a stand to ban cryptocurrency without really understanding its architecture and associated benefits while taking note that blockchain technology is nascent and suffers from weaknesses and acknowledging that the technology will improve over time.

Way forward:

  • Global experts have pointed out that cryptocurrencies are not yet a popular medium of exchange because there is very little acceptance.
  • Even in India, the report of the Government’s Working Group on FinTech and Digital Banking (2018) suggests that the use of digital currencies does not pose an immediate threat to the economy.
  • It acknowledges that cross-border use of such currencies makes it difficult for national regulators to enforce laws.so, in order to address concerns regarding the protection of users and fraud prevention, existing laws can be revisited.
  • Cryptocurrency exchanges, users and other market players can be brought under the purview of anti-money laundering laws or KYC norms. Like the US, sectoral regulators can monitor aspects of cryptocurrency for the purpose of taxation or monitoring large transactions.

While it is important to put mechanisms in place to deter bad actors, a blanket ban on all forms of cryptocurrency transactions will result in India missing out on what may become one of the biggest technology revolutions since the Internet.

SOURCE: THE HINDU

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