The legality of crypto currency has always been a point of contention as there is no law or specific guidelines governing them. In the lack of backing of traditional government or an explicit system regulating cryptocurrency as a mode of exchange and transaction, crypto currency and its legality has become a mystery for the public. In such a scenario bit coin as a crypto currency began to be used for transactions, exchanges and trading in regulatory vacuum. In this backdrop the Reserve Bank of India issued a circular in 2018 in relation to cryptocurrency. The circular of RBI prohibited all banks and entities regulated by it from providing any form of services to entities or businesses in relation to virtual currencies. Though the circular did not ban cryptocurrency, but it effectively banned the banks from providing any form of services in relation to cryptocurrency.
Cryptocurrency is a form of virtual currency that uses digital mode for transactions. Bit coin a popular crypto currency was introduced in 2008 by Satoshi Nakamato. Crypto currencies have taken over number of economies across the world and many countries have adopted it as a mode of payment. Crypto currency is guided by the DLT technology and provides a decentralized mode of transaction. In 2018 RBI issued a circular as per which it prohibited all banks and entities under it from dealing with any transaction of crypto currency. The circular was recently quashed by the Supreme Court on the grounds that it violated the constitutional right of people to carry on any trade or profession.
The circular of RBI was challenged in the Supreme Court by different entities trading in crypto currency. Recently, in the Internet and Mobile Association of India v. Reserve Bank of India, the Supreme Court quashed the RBI circular. The Supreme Court rejected the appeal that RBI had overused its powers in issuing the circular and stated that as crypto currency is capable of being used as a mode of payment for goods and services, it was within the power of RBI to regulate this system of payment. However, the Court accepted the appeal that the circular violated the constitutional right of people to carry on any trade or profession as mentioned under Article 19(1) (g). The Supreme Court noted that RBI had not yet suffered any loss or any other form of adverse effects from the use of crypto currency and further there have been no such instances where crypto currency had actually impacted banks or entities regulated by the RBI. Hence, in the lack of proof of any “proportional damage” suffered by RBI or any of its regulated entities in dealing with businesses operating in crypto currency and failure of RBI in exploring any alternative and less intrusive measures in the form of regulatory mechanism etc, the Supreme Court struck down the RBI circular.
What Are Crypto Currencies? And How Do They Work?
Virtual currency is a digital form of currency which uses internet based medium for trading and exchange. Virtual currency uses a network of computers along with programmes and algorithms to form a system of exchange and trading. Crypto currency is a subset of virtual currency that uses cryptograph (a code which protects the system). Crypto currency uses the Distributed Ledger Technology (DLT) and block chain technology. Bit coin is the first cryptocurrency announced in the world in 2008 by an unidentified person who is known as Satoshi Nakamato. Cryptocurrency gained prominence due to rise of computational power in the world, increasing distrust towards fiat currencies (government issued currency which has the backing of government only and not of any other physical commodities like gold, silver etc) like rupee, dollar etc that are regulated by government who can change the currency system as per will or for vested interest and due to scarcity of assets to be stored as wealth for long term.
DLT indicates technologies that make use of different independent computers to record, share and synchronise transactions. This helps to overcome the need of centralising the data as is done in traditional systems like fiat currency. Virtual currencies like cryptocurrency use DLT by use of which value can be transferred from one user to another. The value could be variety of things that are used as digital assets like record of ownership of assets, money, land titles, specific information of one’s identity or health etc. Block chain is a type of DLT in which list of blocks (units of information) are concatenated to form a chain of information. Each block has a connection to previous and subsequent blocks and each block has a unique identifying code called hash. This information is shared, copied and stored across several computers that are a connected within the system. If a certain set of information is changed in any particular computer then it will modify the hash of that block which will cut off the block from its subsequent block unless the information is modified and verified across all the systems. This mode of functioning of block chain technology makes it decentralised as changes in any block need to be modified in all the blocks of the block chain in order to become valid and hence information stored cannot be changed or modified by any individual independently.
Why RBI Opposes Cryptocurrency? Effect of Cryptocurrency on Indian Economy
There exist certain uncertainties with respect to bit coin and crypto currency. For example, the actual value of bit coin or any other crypto currency is unknown i.e. it cannot be ascertained that a specific amount of rupees or any other currency is the true value of crypto currency. Also, the long-term relative value of crypto currencies is unknown as it is not guided by differentials like purchasing power that control fiat currency. Further, each transaction in block chain contains only electronic addresses and not the identity of the person who is involved in the transaction. This serves as an effective way to cover one’s track of financial transactions and the veil of anonymity makes this mode of transaction more prone to criminal activities, money laundering, trade of illicit goods, terror financing etc. Crypto currency is volatile in nature which can be seen in the significant fluctuations in the value of bit coin in India over a short period of time. It is also said that allowing virtual currency to function as a legal tender will undermine the worth of traditional currencies like rupee and thereby it can result in RBI losing control over the monetary policy and financial stability will be adversely affected. Lastly, in the absence of any grievance redressal mechanism, the virtual currency system is considered as an irreversible mode of transaction which has the potential of causing extensive disruption and damage to the economy due to absence of feedback and regulation. These were the reasons because of which RBI opposes crypto currency and due to which it issued the 2018 circular banning banks and other entities to deal with crypto currency.
Crypto currency has the potential to revolutionise Indian economy as well as world economy. The decentralised mode of transaction that crypto currency promises will have significant impact on different sectors like agriculture, healthcare, real estate etc and will be beneficial for an emerging economy like India. Block chain technology has two parts namely public chains (transaction between unknown entities) and private networks (between known entities). The public chains will help India deal with number of issues. Block chain is a fast-growing skill set demand job provider that will result in job growth and India can use it for addressing its issue of unemployment. One such example is that block chain opens up a new channel for start up funding thereby motivating entrepreneurs. India has a strong IT ecosystem which can be utilised to strengthen block chain network in India which will result in global capital inflow into India. Decentralised system will have myriad of benefits like it will help in eliminating middlemen, providing data security, reducing corruption, increasing speed of service delivery etc. Further, emerging technologies like artificial intelligence, internet of things etc will converge in the future and block chain will provide a space where the future tech giants will be created and by allowing block chain technology and effectively crypto currency, India will gain an upper hand in the global tech competition.
Steps Taken by India And Other Countries
Besides the RBI circular on crypto currency, India has also taken other steps to deal with crypto currency. In 2017, an inter-ministerial committee (IMC) was formed by the government in order to examine the future of crypto currencies. The committee submitted its report in 2019 in which it has suggested to ban private crypto currencies like bit coin. However, the IMC recommended the Department of Economic Affairs to adopt adequate measures to facilitate use of DLT in the financial infrastructure of India. It also recommended the regulatory bodies like RBI, SEBI, IRDA etc to form appropriate regulations and guidelines that will help in development of DLT. The IMC has recommended that government take necessary steps for introduction of official digital currency. The committee had initially recommended the Crypto-token Regulation Bill of 2018 which would govern sale and purchase of digital crypto assets only at recognised exchanges. But later, the committee changed its stance and called for a total ban on private crypto currencies and also recommended the Banning of Crypto currency and Regulation of Official Digital Currency Act in 2019.
Different countries have adopted different steps to deal with crypto currencies. China has put a ban on private digital currencies like bit coin. However, countries like Japan, Australia, Switzerland, Thailand, Canada etc have accepted crypto currency as a legitimate payment method. These countries have decided to move ahead with regulatory mechanisms in place of complete ban so as to reduce the chances of misutilisation of virtual currencies. These countries have set on a path to reap the benefits of crypto currencies by putting in place regulatory measures to minimise criminal activity. Even the American tax authorities have accepted crypto currencies as a part of “property” and they charge capital gains tax on it. Countries like Malaysia, Philippines etc have formalised license for market operators dealing with crypto currencies. The European government has been working on developing anti-money laundering directive called as AMLD5 under which crypto currency transactions will be subject to strict know your customer guidelines and the crypto wallet custodians working in Europe need to be registered with local authorities who would be required to report any form of suspicious activity to relevant authorities.
Crypto currency is a recent technological revolution that has numerous benefits. The decentralised system using block chain technology that is the basis of such currencies will prove to be beneficial for economies across the world. Crypto currency is not free from lacunae but with efficient and proper regulatory mechanism it can deliver a plethora of benefits in the form of efficient and fast service deliver, reduction of corruption, elimination of middlemen etc. India as an emerging country needs to examine all aspects of the currency system and then adopt necessary steps to welcome technologies like DLT. An outright ban on crypto currencies will deny India to reap the benefits that it promises. India can take a cue from countries like Europe and put in place effective measures to deal with frauds, money laundering, terror financing etc. Adopting a middle path with proper regulatory measure and quality monitoring system will prove to be beneficial for India and will help India to strengthen its position in the global tech arena.