Cryptocurrency has been in the news due to the Cryptocurrency & Regulation of Digital Currency Bill, 2021. This legislative proposal seeks to bar Indian citizens and companies from using crypto assets like bitcoin. With bitcoin’s market capitalisation exceeding $1 trillion and virtual currencies gaining acceptance among investors worldwide, we are analyzing the future of crypto in India.
Context
Cryptocurrency is a digital medium of exchange that can be used for online trading or stored in a ledger like gold assets. Unlike fiat money like INR or USD, crypto is decentralized and remains unregulated by a central bank.
Ever since Fund Manager Paul Tudor Jones first embraced bitcoin as an investment, crypto has come a long way, from high-profile investors to large companies like Tesla getting on the bandwagon. What do these recent steps mean in the context of India? Has crypto really achieved legitimacy and acceptance?
On the one hand, there are investment banks like JP Morgan Chase that project bitcoin to surge upwards as an asset class in the long run. On the other side, there are governments planning to ban all private cryptocurrencies. As the Cryptocurrency Bill awaits presentation in the Indian Parliament, here are both angles on the issue.
Virtual currency growing for the better:
Virtual currencies are finding increased adoption globally. The COVID-19 pandemic has also opened up doors for the mainstream public. As nearly every industry faced the impact of economic uncertainties, the crypto market grew significantly with multiple use cases coming to the fore. With mass acceptance, the volatility issues are expected to ease.
The Indian industry is responding to the rise of bitcoin with better awareness, technology adoption, and self-regulation. Today, there are over 1 crore Indians who are saving, investing, and earning through the thriving crypto economy. Virtual exchanges have, thus, become a lifeline for Indian traders. Prohibiting its growth would set the country back by several years. According to a recent Financial Express article, a ban on crypto would be akin to blocking the internet back in the 1990s. “It is sad to see the lens with which Indian regulators are looking at a noble technology that can only bring transparency and align people to contribute positively at a scale,” says the CEO of bitcoin exchange Binance.
In March 2020, the Supreme Court of India gave a landmark judgment that lifted an RBI-imposed ban on cryptocurrency. The RBI had barred regular banks from providing accounts for virtual exchange, thereby curtailing consumers from trading, but the SC order made electronic money operational again (check either/view’s article on this issue here).
Evidence from foreign countries also suggests that a ban may not be beneficial. It can lead to the emergence of fake exchanges or drive-up over-the-counter markets for virtual currencies. Back when the Russian government ruled to make crypto a digital financial asset, they recognized the fact that legalizing its use can bring transparency and lessen fraud. A complete disqualification may lead to creation of black markets.
Challenges of sustainable regulation:
Despite crypto asset’s advantages of anonymity and security, central banks around the world are concerned about their non-regulatory nature. They can prove to be a sinister force by funding terrorists and fueling illegal trade, among other crimes and illicit activities. This was partly why the RBI was closely watching the developments of virtual currencies in India.
The absence of regulation spells catastrophe for the global economy; we can’t rely on self-regulation alone. To manage cryptocurrency sustainably, we need comprehensive legislation to register and monitor it. Despite the popularity, the relative obscurity of electronic money makes it harder to regulate. This may leave markets vulnerable to fraud and manipulation. National regulatory bodies, along with intergovernmental organizations like the UN, and Interpol, need to engage in this process. And crypto exchanges would have to comply with Anti-Money Laundering, KYC, and other transactional norms. Even financial experts back home have spoken in favour of regulation. Speaking to the Economic Times, Akshay Aggarwal (Managing Trustee of Blockchained India) acknowledged the need of a foreign exchange management policy for cryptocurrency. This would be integral to weed out bad actors from virtual exchanges.
Another concern is crypto pollution or unsustainable energy usage. Research studies have pointed out that the bitcoin system is powered by more electricity than what is required by the entire population of Denmark. So, the regulatory aspect would have to consider the environmental aspect of such blockchain applications.
So, one could argue that the regulations are not about posing hindrance to a growing sector but targeted at protecting broader consumer interests. By the time we have safer options available, the future of crypto in India remains vague.