India has had a cryptographic stance towards the regulation of cryptocurrency.
Almost half a decade ago in 2013, the Reserve Bank of India had released a precautionary press release warning investors about the volatility and legalities of this virtual currency trend. Cryptocurrency’s anonymity for its users unnerved the purveyor of all things money in our country, ie, our central bank. RBI has been cautioning users about the pitfalls of cryptocurrencies since 2013 till date.
In 2018, when the speculations around cryptocurrencies started to surface, the central bank issued the first formal circular strictly restricting banks and other financial institutions to offer facilities to participants engaged or involved in cryptocurrency transactions. The startups and companies offering services such as those of exchange platforms, etc, were forced to wind up, as a result.
Though RBI did not impose an outright ban on cryptocurrency trading, it meant cryptocurrency traders had to use the only peer to peer networks for transactions.
However, the Supreme Court has taken an opposing stance. In the judgement of Internet and Mobile Association of India vs Reserve Bank of India (2020 SCC Online SC 275), the Supreme Court struck down a blanket ban on cryptocurrencies, highlighting that even though the RBI is empowered to regulate the financial sector, its act of banning virtual currencies is not proportional but rather mischievous.
Following this judgement, RBI asked the banks to add another layer of hygiene check-in their KYC and other due diligence processes to deal in any facilities related to crypto transactions.
What do SEBI and other regulators say on crypto?
The Security and Exchange Board of India(SEBI) has expressed its distress with the companies dealing with and owning any form of cryptocurrency.
More recently the aggressive marketing and advertising campaigns for different cryptocurrency assets during the festive season and sporting events have highlighted the regulatory gap for cryptos.
With high visibility, noise-making Bollywood celebrities, FOMO building crypto promoting ad campaigns with small fine print renewed the cry from regulatory bodies like SEBI, RBI and Advertising Standards Council of India (ASCI) and other stakeholders to protect the interests of consumers.
The Centre’s stand is not clear yet
This sudden influx of crypto advertising with overpromising returns and safety allegedly also triggered a meeting chaired by the prime minister himself. But the government’s perception toward cryptocurrencies is also not clear.
The government changed its plan to introduce “The Cryptocurrency and Regulation of Official digital currency Bill, 2021” at the last minute. This Bill contained provisions to make any transactions in cryptocurrency illicit.
As of now, no clarity has been given on when and how an updated version of the Bill will be introduced in Parliament.
What’s next on cryptocurrencies?
The government to keep up with the worldwide trend has started to discuss and debate ways to regulate cryptocurrencies. The RBI is also working on releasing India’s own Central Bank Digital Currency (CBDC) using blockchain technology by sometime this year.
RBI’s worries are not unfounded despite the network of cryptocurrencies being super-secure. Exchanges and wallets or user accounts are not always as secure as blockchain ledgers. That is why the theft of cryptocurrency already generated is not unheard of.
But at the same time, the security and secrecy characterising the cryptocurrencies make it difficult to detect fraud, money laundering, and tax evasion.
Not stored on a central server but held across a wide, anonymous network, physical damage to any of the computers’ storage could erase valuable units if there is no backup of the private keys of these computers’ memories.
It is said the design of a number of cryptocurrencies results in scarcity of their availability (liquidity). The complex technology is not easy to delegate and it takes firepower to mine them. Hence, there are situations where supply is short of demand. The rate of exchange of a cryptocurrency against a fiat currency gets determined by this and there have been wild fluctuations with even the most popular Bitcoin.
High-risk instrument to park your money
Cryptos are not a type of investment, they are a digital currency with no means of generating future cash flows. Without official backing for the currency, cryptos are just highly volatile digital currencies whose value is not supported by any financial system or organisation.
The values are determined by the community and the price could go up or go to zero in the coming years. Having said that, cryptos are a very high-risk instrument to park your money in.
Cryptos like Bitcoin, Ether or Dogecoin, etc, are high-risk and they still have to establish themselves.
Besides, the digital currencies have no intrinsic value and have nothing underlying also to derive their value. They are highly speculative and retail investors must consider staying away from these cryptocurrencies unless they’re regulated in India. The rally in various cryptocurrencies has been surreal and the future is uncertain in terms of their value.
The author is an analysit at Tavaga Research