Cryptocurrencies, also known as cryptos, exist in a digital or virtual form and utilize cryptography to secure transactions. Unlike traditional currencies, they don’t have a central issuing or regulating authority. Instead, they rely on a decentralized system for recording transactions and issuing new units. This system is supported by a decentralized peer-to-peer network called the blockchain.
In India, the matter of cryptocurrencies remains complicated. There is currently no legislature that covers cryptocurrencies specifically. While the act of owning cryptocurrencies is not illegal, the Reserve Bank of India (RBI) has expressed concerns over their use. The RBI has recommended a ban on cryptocurrencies, citing potential ‘destabilising effects’ on the country’s monetary and fiscal health. In 2020, the Supreme Court struck down an RBI-imposed ban on cryptocurrency trading, but the Central bank continues to caution Indians against the use of virtual currencies.
RBI’s Stance and Concerns Regarding Cryptocurrencies
The RBI holds certain reservations regarding cryptocurrencies. For one, it states that cryptocurrencies do not qualify as fiat money as they aren’t issued by the central bank or Government. The bank also deems them speculative and potentially destabilizing due to the fact their value rests solely on speculation and expectations of high returns. Consequently, they can pose a threat to the monetary and fiscal stability of a country.
Perceived Benefits of Using Cryptocurrencies
Despite the issues surrounding them, cryptocurrencies bring certain benefits to the table. They are generally faster and cheaper for executing international transactions as they bypass several intermediaries. Also, due to their limited supply, they are often compared to gold and seen as a favorable investment destination. Furthermore, their prices have largely maintained an upward trajectory, so people tend to hold more cryptocurrency than spending it. This creates a deflationary effect on the currency.
Concerns Associated with Cryptocurrencies
There are a range of concerns with cryptocurrencies. For example, the crypto market is often marketed as a pathway to quick profits, leading to a bombardment of potentially misleading advertisements. Unregulated crypto markets can also become hotspots for money laundering and terror financing. Furthermore, cryptocurrencies bear an inherent risk due to their extreme volatility. This not only poses risks to individual investors, but also to macroeconomic and financial stability. The Securities and Exchange Board of India (SEBI) has expressed concerns over its inability to control the clearing and settlement of cryptocurrencies.
The Need for Regulation
Given these concerns, there’s an urgent need for a robust regulatory framework for cryptocurrencies in India. Proposals have been tabled, including the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which would establish the groundwork for launching an “official digital currency”. Adequate regulation could help prevent misuse, protect investors from excessive market volatility and potential scams. However, any national legislation would be most effective in tandem with international collaboration, which acknowledges the borderless nature of cryptocurrencies and seeks to prevent regulatory arbitrage.
