The world witnessed a financial revolution in the last decade. The changes had a deep impact on the nature of money and the way it flowed from one person to another. The world was introduced to Bitcoin, a type of cryptocurrency, in 2009. Bitcoin and the other virtual currencies that followed Bitcoin found many takers globally as well as in India. However, life has come full circle for Indian investors as the government is on the verge of prohibiting cryptocurrencies in the country.
What is cryptocurrency?
Cryptocurrency is a broad category of virtual currencies. It is a digital asset designed to function as a medium of exchange. Cryptocurrencies, by nature, are decentralised with records spread across multiple computers. The currency is stored in digital wallets backed by blockchain technology. The wallets function through a system of public and private keys. The public keys are used to transact with other people. Due to the decentralised nature of cryptocurrencies, they are not administered or regulated by any central bank. According to a virtual currency market research firm, there are 6700 different types of virtual currencies traded publicly.
Indian government’s stance
Since its inception, virtual currencies have made successive Indian governments and the central bank uncomfortable. In 2013, the Reserve Bank of India had cautioned investors about the risk of investing in cryptocurrencies. The central bank has rationed that virtual currencies are not backed by any underlying assets and their value is solely based on speculation.
The initial communication was an advisory but the central bank took a firm step in 2018. The RBI prohibited banks from dealing with crypto firms, which essentially was meant to curtail trading in virtual currency. The circular specifically barred banks from “maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs.”
On February 28, 2019, a committee of the Finance Ministry recommended a complete ban on virtual currencies and recommended the creation of a digital rupee. The committee also drafted a bill that made all cryptocurrency-related activities punishable by 10-year imprisonment or a fine of Rs 25 crore or both. However, the bill was not passed by the parliament.
Current Scenario in India
The government has introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 during the budget session of Parliament. While the details of the bills have still not been made public, the finance minister’s statement in the upper house of the parliament shed some light on the government’s stance. The government had formed a high-level Inter-Ministerial Committee (IMC) constituted under the Chairmanship of Secretary (Economic Affairs). The committee’s mandate was to study the various issues related to cryptocurrencies and suggest specific actions. As per its suggestions, all private virtual currencies will be banned in India and only virtual currencies issued by the state will be a legal tender. The central bank, in a separate statement, said it was ascertaining if there is a need for a virtual fiat currency and if the need arises how to operationalise it.
The Global scenario
The existence of a currency that is outside the purview of existing central banks is unnerving for several governments. However, different countries have taken different positions when it comes to virtual currencies. Just like India, many countries are planning to launch their own cryptocurrencies. Some nations like China, Singapore and Venezuela have launched their virtual currencies on a pilot basis. Other countries like Estonia, Japan, Palestine, Russia and Sweden are planning to launch virtual currencies in the near future. Thailand has taken a different path by allowing 13 cryptocurrencies to operate legally in the country. Besides the stance taken by different countries, some large corporates like Tesla are in favour of using cryptocurrencies on a limited scale. The carmaker has invested $1.5 billion in Bitcoin and plans to accept the cryptocurrency in future.
While the complete ban on cryptocurrencies in India may be detrimental for startups operating in the sector, it is unlikely to have any significant impact on the Indian financial markets. As per various estimates, Indian investors have pumped around Rs 10,000 crore in virtual currencies. However, crypto investments have no connection with the mainstream financial markets and hence, the ban may not have an impact on the markets. It is also not advisable to liquidate cryptocurrency holdings immediately as the contours of the bill are still not clear.