Author: A. Gemma Maria Suzzana
Introduction:
Cryptocurrency is a digital medium of exchange. Cryptocurrency is a stabilized, transparent and decentralized digital currency.[1] Cryptocurrency is decentralized as it is not controlled by any authority like Indian Rupee, US Dollar, and other fiat currencies. Cryptocurrencies are new, novel and many are utilizing cryptocurrencies as an asset. One can buy ordinary goods and services by using cryptocurrencies but many tend to invest in it because it is considered as an asset like stocks and other valuable metals. According to CoinLore, there are more than 5,000 cryptocurrencies in circulation. Bitcoins and Ethereum are some of the most popular versions of cryptocurrencies. Bitcoins are the first cryptocurrency introduced by Satoshi Nakamoto in 2009 with an intention to create a Peer-to-Peer transaction.[2]
Bitcoins increased the growth of many small-scale businesses and startups in the world since there are no middlemen in bitcoins. Bitcoins are introduced to buy and sell goods anonymously. Bitcoins at their earlier stage were decentralized. This does not mean it cannot be regulated by the government. The government can control and have supremacy over bitcoins and other cryptocurrencies. Over the course of years, some countries like the US, UK, Canada, and Australia are regulating cryptocurrencies. Some countries like Algeria, Bolivia, Bangladesh, Ecuador, and Nepal consider transactions through cryptocurrencies as invalid and illegal. In India, bitcoins are technically legal with some restrictions. Bitcoins are not used as a mode of payment in India. The Indian Government is planning to launch a law that bans private cryptocurrencies (Bitcoins, Ethereum, etc.) and introducing official Indian cryptocurrencies (CBDC), and regulate the same. Now let’s see a quick overview of how cryptocurrencies work and see a detailed analysis on how the Cryptocurrency Bill, 2021 creates an impact on the digital economy of our country.
Cryptocurrency-Overview:
Cryptocurrencies are encrypted which means they are concealed and protected through codes. Satoshi Nakamoto said that cryptocurrencies work on cryptographic proof instead of trust. This statement by Satoshi Nakamoto reflects the security and privacy features of cryptocurrencies.
- What is a BlockChain?
The BlockChain is a ledger that is distributed across all the computers around the world, to record the financial transactions in code. In other words, a BlockChain is a checkbook that accurately records the day-to-day electronic financial transactions in the form of codes and keeps the records identified and secured. Therefore, BlockChain records in the form of Blocks are connected with the previous cryptocurrency transactions in the form of Chain.
Cryptocurrencies use two different validation techniques to validate the transactions on a blockchain. They are:
- Proof of Work- Validating the blockchain by allotting mathematical problems and algorithms. The computer which cracks down the problem first will be awarded some amount of cryptocurrencies and in this way, the cryptocurrencies are verified.
- Proof of Stake- The validator or the stake-owner will be allotted with the transactions which equal the number of cryptocurrencies he is holding. So, the number of transactions will be limited to the number of cryptocurrencies he has.
In both cases, the computers are operated manually and this process is known as mining, and the persons operating the computers are known as miners.
Cryptocurrency in India-overview:
Between 2012 to 2017, the cryptocurrency has achieved steady growth and is on a right track. The price of Bitcoins increases from $5 to $1,000, between 2012 to 2017. This is the period when Cryptocurrency exchange markets like Zebpay, Koinex, Coinsecure, and Unocoin started blooming in India. There were two RBI press releases regarding the arrival of Cryptocurrencies in India[3].
- RBI Circular ‘Virtual currencies are not regulated by RBI’ vide dated 24 December 2013.
- RBI Circular ‘The value of cryptocurrencies are not supported by assets’ vide dated 1 February 2017.
But the arrival of cryptocurrency is a boom because of the demonetization, happened in 2016. When people ran out of cash digital money and payment methods favor the people and techies who searched for alternative payment methods. In 2017, two PILs were filed to ban cryptocurrencies and to regulate them. In November 2017, the government appoints a committee to research the consequences of cryptocurrencies in India. By April 6, 2018, the RBI issues circular banning cryptocurrencies. Cryptocurrency has faced an existential threat and the trade volume falls by 99% and 95% of the jobs depended on cryptocurrencies vanished. In 2019 The committee appointed by the government completed the report and recommended a ban on Cryptocurrency.
But by March 4, 2020, the ban on cryptocurrencies was lifted by the Supreme Court. The Supreme Court termed the ban as unconstitutional and said that the ban on cryptocurrency has been lifted because cryptocurrencies are unregulated and not illegal.
According to research by Paxful, a Global Cryptocurrency Exchange, India is the Second Biggest Bitcoin nation in Asia, where China captures first place and India is the Sixth Biggest Bitcoin nation in the world, where United States, Nigeria, China, Canada, and the United Kingdom are in the first 5 places[4].
Cryptocurrency and regulation of Official Digital Currency, 2021 and its Impact:
By January 29, 2019, the government said that it will introduce a bill, which will create a sovereign official digital currency and will ban other private digital currencies like Bitcoins, Ethereum, etc. The Cryptocurrency and Regulation of the Digital Currency Bill have been introduced during the budget session in the parliament. The bill is yet to get passed. But there are chances that the proposed bill might be another existential threat for Private Cryptocurrencies like Bitcoins, Ethereum, etc., after the 2017 ban. Finance Minister Nirmala Sitharaman on February 9 2021 said that a high level of Inter-Ministerial Committee (IMC) will be created to research the cryptocurrencies and provide remedies for the same. The IMC come up with a report that all the cryptocurrencies will be banned except the crypto will be released by the government. However, it is still unclear that the proposed bill will prohibit the circulation of Private Cryptocurrencies such as Bitcoins, Ethereum, etc.
The bill has both positive and negative impacts. The negative impact is obvious. The negative impact is the ban of Private Cryptocurrencies which makes the investors cry foul. The positive impact is the introduction of CBDCs, nothing but the official cryptocurrencies which will develop the Indian Economy Digitally.
- Negative Impact
India is home to 200 blockchain startups that deal with various cryptocurrencies and 8 million people are holding cryptocurrencies as assets, which has a value of about 100 billion rupees ($1.4 billion). The proposed bill will have a big impact on those 8 million Indian residents and those 200 blockchain startups. There will be an unaccountable loss for those who depend on cryptocurrencies. The bill has proposed to ban the movement of private cryptocurrencies in India and introduce an official digital currency for India. Banning those cryptocurrencies will burden the crypto holders and affects the digital economy severely. The crypto-holders will suffer a lot. But the foreign exchanges won’t face any loss. They will move to some other country. The bill will take the transactions from Indian crypto-holders worth a million dollars and gift them to foreign exchanges. This ban will also lead to the creation of a Black Market for Private Cryptocurrencies. But it has been said by the government that crypto-holders will be given a 3 to 6 months gap to end all the ties with cryptocurrency exchanges.
- Positive Impact
The introduction of Central Bank Digital Currency (CBDC) will develop the economy once it has been introduced. CBDCs are nothing but the official digital currency of a country. CBDC has government backing and is regulated by the government and the central bank. The value of CBDC equals the value of the fiat currency of a country. It is centralized and has autonomy. There will be more financial stability if it is fully backed by the government. Countries like Sweden, China, The Bahamas, The European Union, and The Marshall Islands are having CBDC.[5] RBI says that it is working on the creation of Digital Currency for India (CBDC).
CBDC will turn down the black market of cryptocurrencies. Most importantly one can sue and be sued in cases of fraud. Distributed Ledger Technology (DLT) is the one that safeguards cryptocurrency users by verifying and recording the transactions[6]. Whereas in CBDCs there will be double layer protection because one, there will be a verification system by DLT and another one will be a verification done through a centralized system.
It is difficult to explain the different aspects of the bill because the specifications of the bill are still unclear and unavailable.
Conclusion:
To conclude, India is one of the biggest economies in the world. Introduction CBDCs will surely make India the biggest digital economy all over the world. But prohibiting Private Cryptocurrencies will give a bad impact on India’s Digital economy because it eliminates crypto assets worth millions of dollars and gifts them to international exchanges. And also, it put the lives of Indian people who depend on Crypto in vain. So, the Indian Government, on the proposed bill, by keeping in mind, should give some relaxations and exceptions in the interest of the 8 million Indian crypto holders who hold assets over 100 billion rupees.
[1]Jake Franken Field, Cryptocurrency, INVESTOPEDIA (Updated on March 7, 2021), https://www.investopedia.com/terms/c/cryptocurrency.asp
[2] Shankar Sharma, Satoshi Nakamota: The Enduring Mystery of Bitcoin’s Founder, KHALEEJ TIMES(Filed on May 5, 2021), https://www.khaleejtimes.com/editorials-columns/satoshi-nakamoto-the-enduring-mystery-of-bitcoins-founder
[3]Cryptocurrency in India: The Past, Present and the Uncertain Future, THE ECONOMIC TIMES | TECH (Last Updated on March 9, 2021),https://economictimes.indiatimes.com/tech/trendspotting/cryptocurrency-in-india-the-past-present-and-uncertain-future/articleshow/81410792.cms
[4]Adavit Palepu, Guide: A complete Low-Down on Cryptocurrency Regulation India, MEDIANAMA (Published on February 9, 2021), https://www.medianama.com/2021/02/223-guide-crypto-currency-regulation-india/
[5]Which Countries have CBDCs?,CRYPTOPEDIA Powered by GEMINI (Updated on March 15, 2021), https://www.gemini.com/cryptopedia/cbdcs-digital-currency-us-china#section-the-marshall-islands
[6]Jake Franken Field, Distributed Ledger Technology (DLT), INVESTOPEDIA(Updated on March 31, 2021), https://www.investopedia.com/terms/d/distributed-ledger-technology-dlt.asp