Introduction
The latest sensation in today’s digital era is cryptocurrency. Cryptocurrency has fundamentally altered our interaction with money and the economy. Cryptocurrency is a digital representation of value that is trade in electronic form and performs multiple functions – a medium of exchange, an investment and as a unit of account. Cryptocurrency exists only in electronic form. Further, it is not ascribed to any state, government or central regulatory body. The most popular cryptocurrency, with the highest market capitalisation is the ‘bitcoin’. Its invention is is attributed to Satoshi Nakamoto. Presently, there are multiple alternatives to bitcoin such as ‘dogecoin’, ‘namecoin’, ‘Ethereum’ etc. that are gaining traction.
Kinds of cryptocurrency
There are two kinds of cryptocurrencies, coin based, and token based. The former refers to cryptocurrencies built on its own independent blockchain network. They are generally used as mediums of exchange and perform functions akin to physical currency. Conversely, the latter refers to cryptocurrencies that do not have their own blockchain network. For example, a user can create a digital token on Ethereum using Ethereum’s core coin – Eth.
How does cryptocurrency work?
Cryptography is the primary pillar on which cryptocurrency works. To maintain authenticity, prevent pilfering of information, check creation of additional units and verify transfer of assets cryptography employs advanced technologies to encrypt data and information such that only the parties involved have access to it and can process it. Further, Blockchain is the technology that facilitates cryptocurrency. To illustrate, every transaction involving a bitcoin is stored on a global ledger, called the ‘blockchain’, eliminating the need for a central authority.
Regulatory Challenges
Decentralized form of currency: The absence of a central regulatory authority essentially eliminates government intervention. This is causing worry amongst governments globally. Further, institutions such as banks may become redundant with increased usage of cryptocurrency.
Security concerns: With the value of cryptocurrencies running in millions, hacking and security concerns have arisen. In 2019, Ethereum Classic, a kind of cryptocurrency, was hacked, where the same cryptocurrency was used twice resulting in loss of around $1.1 million.
Lack of Traceability and Illicit Funding: Since cryptocurrencies work on a peer-to-peer network, transactions are highly secured and spread across jurisdictions. It is, therefore, difficult to trace the transaction. This opacity permits use of cryptocurrency for illicit activities such as money laundering, drug transactions etc.
Ambiguity surrounding jurisdiction: Usage of multiple servers in conjunction with crypto’s digital nature challenges implementation of uniform laws to govern it. Further, transactions are spread across the globe, making it hard to locate an exact jurisdiction. For example, varied tax rates apply for digital transactions and if multiple countries are involved, regulatory burden is increased.
Volatility of Cryptocurrency: Cryptocurrencies are made by the different private companies, and sometime in order to increase the revenue, the currencies are made/mined without taking into the factors of demand and supply, which contributes to the volatility of their prices.
Carbon Emission: The transactions using cryptocurrencies is also responsible for huge energy consumption. A single bitcoin transaction has an estimated carbon footprint of around 359.04 kg CO2 – equivalent to the carbon footprint of 795,752 VISA transactions or 59,840 hours of watching YouTube. Further a Bitcoin mining consumes a huge amount of electricity and has a large carbon footprint, which equal to the annual carbon emissions of the London city.
Regulatory Approaches
Permissive Approach To Cryptocurrencies – USA
Several state governments in the US such as Colarado have a favorable approach, as in cryptos are exempted from state security regulations. The US Securities and Exchange Commission (“SEC”) has indicated that it considers cryptocurrencies to be securities and applies securities laws to digital wallets comprehensively in an approach that will affect both exchanges and investors alike. By contrast, The Commodities Futures Trading Commission (“CFTC”) recognizes Bitcoin and Ethereum as commodities and allow other virtual and cryptocurrency derivatives to trade publicly on exchanges that it regulates or supervises. The Justice Department continues to coordinate with the SEC, CFTC, and other agencies over cryptocurrency regulations to ensure effective consumer protection and more streamlined regulatory oversight.
Restrictive Approach to Cryptocurrencies – China
China does not consider cryptocurrencies to be legal tender. The Chinese government did not regulate cryptocurrencies at all, despite a thriving bitcoin economy in China that went beyond just transactions and included mining, initial coin offerings (“ICOs”), cryptocurrency exchanges etc. The People’s Bank of China (“PBOC”) banned financial institutions from handling Bitcoin transactions in 2013. China has prohibited cryptocurrency fundraising and trading platforms. However, citizens are not banned from holding them, with mining permitted and still flourishing in the country.
While it cracks down on decentralized cryptocurrencies, the government has been working on an official digital currency known as the Digital Currency Electronic Payment (“DCEP”). To preserve the authority of the Central Bank, the DCEP is aimed at reducing handling charges, promoting financial inclusion in difficult circumstances like the coronavirus pandemic and making cross border payments seamless.
Cryptocurrency in India
The government of India has stated that cryptocurrencies such as bitcoin are not legal tender in India. While the government has not yet enacted a regulatory framework for cryptocurrencies, the Reserve Bank of India (“RBI”) had advised caution on their use and has issued notifications. On 13 November 2017, the Supreme Court (“SC”) admitted a Public Interest Litigation writ petition seeking regulatory framework against the Union of India and issued a notice to the Ministry of Finance, Minister of Law and Justice, Ministry of Electronics and Information Technology, Securities and Exchange Board of India, and RBI.
Despite this, RBI, in April 2018, issued a notification prohibiting banks, lenders and other regulated financial institutions from “dealing with virtual currencies (“VCs”)”.
Moreover, the RBI stated that “Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.”
In March 2020, SC struck down this order by the RBI. The court ordered the government to take a position and draft a law on the matter. Soon after the RBI lifted the ban, multiple domestic cryptocurrency exchange platforms and trade markets came up. Besides, many international crypto exchanges also set up shop in India. WazirX grew 400% in March 2020 and 270% in April 2020 on a month-on-month basis.
At this moment, and especially after the SC verdict, one can buy and sell virtual currency, but there is no legal framework available, making it risky. As per the Lok Sabha schedule, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is slated for introduction, consideration and passing. The bill is based on a recommendation given by SC Garg Committee formed by the Centre. The Committee had recommended banning cryptocurrencies and allowing an official digital currency. The law is intended –
to create a facilitative framework for an official digital currency issued by the RBI; and
to prohibit all private cryptocurrencies in India.
However, there have been recognition that the report by the Garg Committee and the Bill which is based on the report are no longer in line with the developments that the cryptocurrency market has witnessed since the release of the report. Therefore, the government has decided to set up an expert panel to regulate cryptos as a digital asset and not as a currency. The panel will also look into blockchain technology and ways to operationalize RBI’s digital rupee.
Conclusion
It is important to note that the Indian population has shown significant interest in cryptocurrency, with India estimated to contribute to between 2-10% of the US$430 billion virtual currency market worldwide. If the new Bill imposes a ban on private cryptocurrencies, it can in fact lead to the formation of an underground market wherein genuine investors may be forced to operate in unmonitored environments. More and more technological advances are bound to take place and each advancement will entail certain threats. It is important to keep amending the law to keep it consistent with modern developments. Therefore, the aim of any proposed law should be to circumvent the risks through efficient regulation as opposed to a ban.