Cryptocurrency – a recent buzzword in the fintech space is surrounded by ambiguities on investing, ever since its encryption technology drew the suspicion of the government. The suspicion of the government over cryptocurrency grew over its characteristic of open-source software where users can produce a private currency and make transactions without the need of any central clearing authority from a bank or any financial institution.Its existence is enabled by blockchain technology – a distributed ledger technology that ensures complete encryption of transactions eliminating the need for a third party for validation. The fact these transactions will not be overseen by any regulating body, made the government wary about illegal activities or money laundering thus, deciding to ban it in India.
Government’s current stand on Cryptocurrency being Legal
Let us revisit the statement made by Finance Ministry in 2018 on cryptocurrency:
‘The Government does not consider Cryptocurrencies “as Legal Tender or Coin” and will take all measures to eliminate the use of these Crypto Assets in Financing “Illegitimate Activities” or a Part of the Payment System the Government will explore the use of Blockchain technology proactively for assuring in Digital Economy.’
The above statement had advised that there will be no involvement of banks or financial institutions to deal in any form of virtual currencies or provide services for facilitating any person or entity in dealing with or settling them. The statement confirms the fact that the government was never against the technology but their intention to ban it was to prevent the illicit use of cryptocurrencies and blockchain. There was no mention to prohibit the buying, selling, or holding of cryptocurrency. Cut to 2020, Supreme Court has turned down RBIs 2018 circular that had forbidden banks to participate in cryptocurrency trading, however, no leniency in processes to carry out customer due diligence in line with regulations governing standards for Know Your Customer, Anti-Money Laundering, Combating of Financing of Terrorism and obligations of regulated entities under the Prevention of Money Laundering Act. Though the Supreme court’s decision to allow banks for crypto trading came in 2020, but the actual clarification from RBI came recently in 2021 that has cleared the confusion and has brought relief to all investors and crypto exchange platforms in India.
Cryptocurrency's encryption technology has put the government in a fix as there is no regulatory body to monitor the process at the same time it does not want to be eluded from blockchain's benefits.
Buying, Selling, and Trading of Cryptocurrencies
According to Chainalysis, the investments in bitcoin, Dogecoin, and Ether grew from $200 million to $40 million since 2020 with Indians holding over 25000 tonnes of gold. What is noteworthy is despite RBI not favouring digital currencies the crypto investments have ballooned. The trading of cryptocurrencies is a no-brainer. A crypto investor can download a crypto exchange app from Google Play Store or App Store. After filling in credentials and completing the KYC process, they can transfer money to the wallet and make the purchase. There are limitations of the amount of buying and what we can buy. The investors can begin with as low as they want to and they also have the option to set a pre-decided limit for selling and buying crypto
Current Bitcoin exchange platforms where Indians are investing
According to data from crypto exchanges, around 1.5 crore Indians have invested Rs 15,000 crore in cryptocurrencies. The most popular crypto exchange platforms have been WazirX and CoinSwitch Kuber. The lucrativeness of this space has given birth to 350 start-ups in blockchain and cryptocurrency. The space is witnessing an influx of retail investors interested to invest in these exchange platforms. Several fintech start-ups are receiving funds to develop the exchange space in cryptocurrency. Crypto exchange start-ups like CoinSwitch Kuber within six months after its launch have witnessed more than 2 million users registering as investors in its platform.
The Apprehensions of Unregulated Cryptocurrency in India
Although the government has given a green signal for buying and selling cryptocurrency and hereby has declared it not to be illegal there still exist apprehensions about its regulation. What is pricking the government is the absence of any central authority regulating it. The government is in a dilemma as it wants to introduce regulations and does not want to be a laggard in the new-age tech revolution to reap the benefits of blockchain technology. It is planning to bring a regulatory framework i.e., Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, that is expected to bring in regulation in this space.
What lies ahead in the Cryptocurrency Space or Exchange platforms?
The government will not settle without establishing regulation in the cryptocurrency space. It is anticipated that the government will introduce a bill to create a sovereign digital currency and simultaneously ban all private cryptocurrencies. The Central Bank Digital Currency (CBDC) will work similarly to the private cryptocurrencies on digital ledger technology except for the latter’s buying limits which are rare to decrease or increase. The supply and demand of CBDC currency will be controlled by central banks which will be in charge of the money supply and can control when to remove or add money to stimulate the economy in times of distress and set interest rates.