An Inter-Ministerial Committee set up recently in India to assess the viability of virtual currencies has recommended a ban on all private cryptocurrencies like Bitcoin and has even drafted a law called the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019”.
This proposal hardly comes as a surprise, since it follows the unequivocal statement, “the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities, or as a part of the payment system,” made by Finance Minister Arun Jaitley in 2018.
However, the Modi government does seem enthused by the Blockchain and Distributed Ledger Technology (the two major technological innovations behind cryptocurrency) and thus, ardently supports the use of these technologies in various spheres. The panel has supported the use of distributed ledger technology (DLT) and Blockchain in areas like trade finance, loan applications, KYC requirements (digital identity management) and cross-border fund transfers. It has accepted and noted the wide-ranging fields where DLT can be applied and has put the Department of Economic Affairs in charge to facilitate their implementation. The IMC has recommended that regulators – RBI, SEBI, IRDA and IBBI – explore regulations needed for the development of DLT in their respective areas of operation.
The Inter-Ministerial Committee (IMC) draft also explores the possibility of a central bank digital currency (CBDC), or simply, the digital rupee.
Every online payment made today passes through a bank or a credit card company which takes a cut in the transaction. These financial intermediaries vouch for individuals and record all digital transactions in their central ledgers to ensure that the same digital currency token owned by an individual is not duplicated and spent again, hence avoiding the biggest risk of digital currency – double-spending. Arising out of a need for a more inclusive, boundaryless, intermediary-free financial system, cryptocurrencies were introduced in 2009. Based on the Distributed Ledger Technology (DLT) and Blockchain technology, cryptocurrency is a decentralized digital global currency that replaces a central ledger of transactions, kept by each such financial intermediary around the globe, with a system where all the users record all the transactions at the same time. Once the transaction is verified by all, each such transaction is stacked in a particular sequence, one after another. In this way, on comparing the sequence of transactions recorded with each user, one can validate that a particular transaction has taken place and a unit of digital money has been spent. In case there is a duplication of the money spent, the transaction will show an error as it will attempt to change the sequence of transactions recorded with the other users. The result is an intermediary free and error less system to spend money easily, even across borders.
WHY DID CRYPTOCURRENCY ATTRACT A BAN
Stating the risks associated with cryptocurrencies (which are private and not backed by the government), the draft not only recommends a ban on the use of this medium of exchange but also criminalizes indulging in the “mining, generating, holding, selling, dealing in, transferring, disposing of, or issuing cryptocurrencies,” with a maximum jail term of up to 10 years. One of the main reasons cited for its crackdown was to protect investors and banks from frauds. The absence of underlying intrinsic value of a bitcoin, immense volatility in prices, lack of a status of a legal tender and the pseudonymity that the system provides, makes it much easier to dupe gullible investors in this financial system. These very characteristics of cryptocurrency also allow criminal activities to boom. Notorious examples like the Silk Road case where cryptocurrencies were used for illegal transactions like smuggling and human trafficking throw light on how this system of money exchange can circumvent the law and hide from its scrutiny. In fact, a survey in New Zealand showed a spike in the amount of ransom asked when the trade was done in Bitcoin.
Private Cryptocurrency also carries risks for the financial system, compromising the ability of the RBI to regulate the money supply in an economy. Reiterating that issuance of currency is a sovereign function, RBI Governor Shaktikanta Das said, “you cannot have private entities issuing currency instruments because that will completely undermine and destroy macroeconomic and financial stability.” With non-government companies coming up with their own currencies, the power of the central bank to exert their influence on the creation and transfer of money in the economy, through monetary policies, is diluted. Additionally, with no restrictions on the cross-border transactions, the limits of inflow and outflow too can be disregarded. Hence this would dampen the initiatives of the government to regulate the money supply in the economy.
Another glaring disadvantage is that trading and mining of Bitcoin requires mammoth amounts of storage and processing power. “According to a study, an estimate of 19 households in the United States can be powered for one day by the electricity consumed in a single Bitcoin transaction,” stated the draft. Since it follows a decentralization system of recording transactions, each user of the virtual currency has to validate each trade and this makes it a cumbersome and energy-hungry system.
ADVOCATING CENTRAL BANK DIGITAL CURRENCY
Over the years, private cryptocurrencies have gained popularity owing to their decentralized and regulation-free nature. So much so, that it has started to threaten the very existence of traditional banks that operate under the purview and control of a country’s central bank. Recognizing the need to combine the best of both worlds i.e., the convenience and security offered by digital currency and the regulated, reserve-backed currency issued under the conventional banking system, many central banks globally have either introduced or are contemplating on introducing their own cryptocurrency. They aim to launch regulated cryptocurrencies, called central bank digital currencies (CBDCs), that operate under the respective monetary authorities and are backed by the necessary amount of reserves like gold or foreign exchange.
The IMC’s draft also recommends the introduction of India’s own CBDC, or simply the digital rupee. Under this system, each unit of CBDC will be equivalent to the legal tender and will act as a secure instrument for digital payments.
As of today, there exist 2,116 cryptocurrencies with a market capitalization of about 120 billion dollars. Currently, there is a wide variance in the treatment of private cryptocurrencies around the globe. Many countries like Canada, Thailand, Russia and Japan are moving on the path towards strengthening regulation, which implies that these countries recognize Bitcoin as a means of payment. These countries have either made amendments or are in the process of making amendments in their laws that pertain to money laundering and terrorist activities, in order to include Bitcoin transactions under their purview. China, on the other hand, has imposed a complete ban. As of now, no country treats virtual currencies as legal tender.
On the other hand, government cryptocurrency is a more widely accepted concept. The Bank of England was the very first to initiate such a proposal. Following its footsteps, the People’s Bank of China (PBoC), Bank of Canada, and central banks of Uruguay, Thailand, Venezuela, Sweden and Singapore (and now India too) are exploring the possibility and validity of CBDCs.
CRYPTOCURRENCY – THE UNIFORM INTERNATIONAL PAYMENT UNIT
John Maynard Keynes, on behalf of the British government, first proposed the creation of a uniform unit of account, called Bancor, for settling international payments when negotiations to create the International Monetary Fund were still in progress. The Americans dismissed the idea by assuring that the dollar would do quite well as the world’s currency for settling international payments. At that time, war-torn Britain had no option but to drop the idea and give in to the pressure imposed by the US, the then major financier of the war expenses of the Allies.
Fast forward to the 21st century, the US is now the only country who enjoys the power to borrow as much as it wants and can simply print more dollar bills to repay the loans. It has also had huge profits arising out of global seigniorage. Further, the US dollar is now being used as a weapon. In the recent trade sanctions imposed on Iran, the US denied access to the dollar payment network to any entity trading with Iran. Since no bank in the world would want to be cut off from access to the dollar, the US can exploit its global currency status to drive their enemies to the ground.
Cryptocurrency has the potential to be the new-age digital Bancor. Ensuring a common unit of exchange for all and hence, an absence of one nation acquiring a stranglehold over the global financial system, cryptocurrency can pave the way for India (and the world) to reduce its dependence on the dollar and safeguard the world from any unscrupulous practices of the US.
In conclusion, cryptocurrency and the technologies that make it possible (DLT and Blockchain) truly have the potential to transform the financial system of the world, and maybe in the distant future, even make traditional banks redundant. However, at this stage, the negatives and risks outweigh the positives and hence, the panel was prudent enough to recommend a ban on private cryptocurrency, while also being progressive enough to suggest that the government must delve deeper into the applications of DTL and explore the possibility of a digital rupee.
By Deepti Mahajan
2nd year undergraduate student, Shri Ram College of Commerce, Delhi Univeristy