Overview of Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
This Blog is written by Jhimli Ojha from KIIT School of Law, Odisha. Edited by Ravikiran Shukre.
A cryptocurrency is a virtual form of currency. It is a medium of exchange for goods and assets. All the transactions take place online and there isn’t any presence of physical notes or coins. Cryptocurrencies are used for different purposes like trading, making transactions, and investment. They are speculative in nature and are currently not backed by any regulatory body in India. Some of the examples of cryptocurrencies are Bitcoin, Ethereum, Litecoin, etc. The first cryptocurrency to be created was Bitcoin which is also the most popular cryptocurrency yet. Different countries have different legal statuses regarding the recognition of cryptocurrencies. Australia, the USA, UK have already legalized cryptocurrency whereas Egypt, Iraq, Morocco, Nepal, Pakistan, etc. have banned it. The Indian government is also taking measures to regulate cryptocurrency. As of now, more than 7 million people in India have invested in digital assets worth more than $ 1 billion.
HOW DOES CRYPTOCURRENCY WORK?
To understand how cryptocurrency works, one needs to know about blockchains. Blockchains are, in layman’s terms, digital records of transactions. Each record is called a block which is linked together to form a chain using cryptography. While making transactions, these blockchains record and updates the balance of cryptocurrency or digital money one have spent or received.
When a cryptocurrency is being transacted, the address from where it was sent is recorded and the place from where the sender himself got the cryptocurrency (for example from some other transaction) is also recorded. This way there is always a footprint of where a cryptocurrency is going. This way the cryptocurrency can be easily traced which makes the system very transparent.
Cryptocurrencies are mainly decentralized. They are not issued or controlled by the government or the central bank and do not have any legal backing. They can either be bought with credit cards or be created by solving complicated computer programs. This process of solving programs to get cryptocurrency is called mining.
GOVERNMENT’S ATTEMPTS TO REGULATE CRYPTOCURRENCY
Indian investors have suffered a total loss amounting to more than $500 million in cryptocurrency scams from the year 2017-2019. This is the background in which the Central government is concerned about the risks that are there in this sector.
In April 2018, the Reserve Bank of India evaluated the risks of the use of cryptocurrency and issued a circular that banned all cryptocurrencies in India. It prohibited all commercial banks and regulating institutions from dealing with transactions involving cryptocurrencies. This made cryptocurrency trade in India come to a standstill. This circular was criticized by many regulators and the government. The circular was challenged by a non-profit organization in the case of the Internet & Mobile Association of India (IAMAI) V. Reserve Bank of India, 2020. They contended that the ban on cryptocurrency was an infringement on the fundamental rights of people under article 19(1)(g) of the Indian Constitution. The Supreme court of India, in a three-judge bench, overturned it in March 2020, on the grounds that it didn’t take any measure to incorporate a less invasive way of controlling cryptocurrencies and a complete blanket ban seemed to be unreasonable. It also stated that the RBI had failed to show any harm caused by cryptocurrencies to the banks.
Again in the year 2019, the government drafted the bill “Banning of cryptocurrency and regulation of official digital currency bill, 2019” which prohibited mining, holding, selling, trade, issuance, disposal, or use of cryptocurrency in India. It made dealing with cryptocurrencies a criminal offense and stated that anyone performing the mentioned activities could face imprisonment for ten years, or a fine, or both. The bill also asked the government to introduce an official government cryptocurrency. In the end, Parliament decided not to introduce this bill.
CRYPTOCURRENCY AND REGULATION OF OFFICIAL DIGITAL CURRENCY BILL, 2021
Cryptocurrencies are not considered legal tender. The transactions take place directly between individuals in cryptocurrency markets all over the world without the involvement of any government or regulatory body. This makes cryptocurrencies riskier to invest in. The existing laws have been proved to be inadequate to deal with cryptocurrencies as they cannot be classified under currencies, assets, securities, or commodities issued by identifiable users.
The Parliament has recently stated that it is planning on passing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The bill is currently under review in the 17th Lok Sabha Budget Session of the Parliament. The bill aims to ban mining, holding, or transacting of all private cryptocurrencies in India and formulate a central bank digital currency (CBDC) that will be issued by the Reserve Bank of India. The CBDC will have all the characteristics a physical currency has and will fulfill all the traditional criteria as a result being at par with denominated cash currency. Introducing this form of digital money will help in decreasing money laundering, hacking, tax evasions, terror funding, etc. It will also make the money easy to track and transfer of money in real-time will become easier which will lead to an increased overall efficiency and transactional fluidity.
The inter-ministerial committee has decided to give those who have invested in private digital money a period of 3 to 6 months to exit a trade in cryptocurrencies. The bill also mentioned that some exceptions may be made to promote the underlying technology of cryptocurrency and its uses.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 only talks about a ban on private cryptocurrency. It has no mention of public blockchains like Bitcoin and Ethereum. Public blockchains are open for everyone and anyone can participate in them without obtaining permission. On the other hand, private blockchains, are restricted and one needs permission to enter them. Here, the transactions are done through a third party, who is in control of that blockchain. The future of public blockchains in India is uncertain.
HOW WILL THIS BILL AFFECT US?
The need for regulating cryptocurrencies arise because it can be used for money laundering, funding terrorist bodies, creation of investment bubbles etc. Cryptocurrencies can be used to fund terrorist groups without the government knowing about them. They can be easily converted from black money to white money by sending them to countries where they accept cryptocurrencies. Cryptocurrencies gain their value due to speculation and not due to any underlying asset. Higher speculation leads to the higher value of the cryptocurrency. This creates an investment bubble which increases the risks on the part of the investor.
Due to the stringent systems in the formal banking sector, cryptocurrencies become more likely to be used for illegal activities. Therefore, new laws and provisions need to be formulated to include cryptocurrencies under the ambit of the Reserve Bank of India and SEBI.
If the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is passed, it would affect both the cryptocurrency market as well as its investors. The government formulating its own cryptocurrency will create more awareness about the same in the market. Once it receives legal recognition, different platforms will start accepting it, creating an increase in its demand in the market. An increase in demand will also require to increase in its supply. The lack of legal recognition didn’t allow its investors to get any restitution in case of any grievance or scam. Bringing cryptocurrency within the purview of the law is going to solve this problem as well. The government has been promoting the idea of ‘Digital India’ for quite some time now. Cryptocurrency is a huge step towards achieving this agenda. Bringing cryptocurrencies under the ambit of the government means that the government can control the amount of cryptocurrency that is available to the public and it will also be able to detect any suspicious financing activity.
There is still a lot of speculation about the Cryptocurrency and Regulation of the Official Digital Currency Bill, 2021. Private cryptocurrency investors are still not sure if they should liquidate their investments or not.
Around the world, governments are still trying to comprehend the implications of virtual currencies and to ascertain the worldwide regulations surrounding them. Some countries have given legal recognition to cryptocurrencies, while some have outright banned them. The issue of cryptocurrencies has been around for quite some time in India itself. The government has always been skeptical of trading in cryptocurrencies due to the increase in scams and has previously also tried to bring cryptocurrencies under the legal framework but it hasn’t happened yet. Cryptocurrency has huge potential in the near future. Imposing an absolute ban on cryptocurrency will be a massive loss of opportunity for the Indian economy. With the current state of the GDP of India being what it is, the country cannot afford to lose a brilliant opportunity like cryptocurrency. Passing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will mean formally embracing digital money. This will push India toward technological advancement and towards a digital economy. Along with this, the government will also be able to impose strict control over potentially illegal activities like money laundering and terror funding.