Cryptic currency: the way forward
Cabinet discussions indicate digital currency will be regulated by SEBI rather than being banned outright
Posted on 01.04.22, 12:41 AM
“Crypto-regulation” is a hotly debated issue. What are cryptocurrencies? These are privately produced virtual currencies, of which Bitcoin is the most popular. Designed by Satoshi Nakamoto, it uses the decentralized blockchain network to enable secure digital transactions. The idea of Bitcoin quickly caught on, giving rise to over 5,000 cryptos.
Not all cryptos are the same. Their versatility varies according to their environment. Since cryptos are not a form of fiat money, they do not derive their value from any underlying asset and are not guaranteed by the sovereign. They operate tax free in all territories, given the strong decentralization and anonymity of blockchains.
Cryptos are mined using a blockchain. It is a form of digital ledger that stores data in the form of blocks, chained together in a chain. The blocks are created using a computationally intensive process called “mining”. The blocks are distributed to all participants of the blockchain network. It is also called the internet of value for anything that has value that is digitally available and can be stored in blockchains. All cryptos are blockchains but not all blockchains are cryptos.
Even though the Reserve Bank of India has been at odds with cryptos, banks have taken advantage of the opportunities. Whenever an Indian investor joins the crypto market, banks join in the fun by authorizing the purchase. The RBI has issued a warning repeatedly, describing cryptos as unsustainable and posing a threat to the country’s financial and monetary stability. The world of cryptography is, indeed, plagued by major concerns in terms of evaluation and security. Bars of conventional economics dealing with the unquantifiable. There is no record of ownership and management of cryptos. Anonymity has enabled its use in ransomware payments, money laundering, and other crimes. The Karnataka Bitcoin scam is a glaring example of the security hole where a bug in the data center helped the hacker launder Bitcoin money to his Bitcoin address. The supply and source of the cryptos remains unknown. There is no data as to whether the cryptos are mined in India or imported. Information available in the public domain indicates that the sources of the Indian crypto ecosystem are threefold. The first is the flash-up supply chain where the parts released by the developer are popularized and exchanged by successive stakeholders. Alternatively, the cryptos are provided to developers to be sold to other stakeholders who then trade them on Indian stock exchanges. The second is the Arbitrage Trader Route where cryptos bought overseas at lower prices are sold in India. The third is the intermediary platform which does not use banking channels but provides crypto from abroad. Here, the intermediary makes a collective purchase of USDT / Tether which is considered relatively stable, Going through the local exchange, on behalf of the substitute, then moves it overseas to exchange it for a demanded part that may not be sufficiently available in India. While concerns about crypto are viable, the majority of central banks around the world, including the RBI, are considering the creation of official digital currencies called “central bank digital currencies.”
Parliament is considering the cryptocurrency and regulation of the Official Digital Currency Bill, 2021. The Lok Sabha List describes it as a framework to facilitate the creation of the official digital currency to be issued by the RBI, which had sought to ban all cryptocurrencies. Cabinet discussions, however, indicate that crypto should be regulated by the Securities and Exchange Board of India rather than being banned outright.
Certain clarifications must be made to avoid any ambiguity. The scope of the underlying technology – the blockchain – should be described. Cryptos that do not record peer-to-peer transactions are private cryptos in the crypto universe. However, the bill likely contextualizes all cryptos not backed by the sovereign into private cryptos, thus warranting clarification. It can also be noted that the Court of Justice of the European Union has pointed out that virtual currencies escape net VAT. The law should address tax, currency and disclosure standards.
(Chandan Goswami and Trisha Shreyashi are legal professionals)