Relevance:

• GS 3 || Economy || Banking & Financial Sector || Money Market

All about Cryptocurrency

The global response to Cryptocurrencies:

• China: In September 2021, China outlawed all cryptocurrency transactions.
• Japan and the United Kingdom: for example, have set aside land for their operations.
• Canada was one of the first countries to embrace cryptocurrency. For the purposes of the country’s Income Tax Act, the Canada Revenue Agency (CRA) regards cryptocurrencies as a commodity.
• Virtual currencies are included under Israel’s definition of financial assets. Virtual currencies are classified as financial instruments in Germany.
• Federal government: While the federal government does not accept cryptocurrencies as legal money, state definitions acknowledge the decentralised character of virtual currencies.
• Less recognized: Although the majority of these countries do not recognise cryptocurrencies as legal money, they do recognise the value they represent as a means of trade, unit of account, or store of value.

Various concerns against Cryptocurrencies:

• Concerns about money laundering and terrorism financing have been raised several times. Other issues have been expressed on a regular basis, including:
  • Central banks’ apprehensions: Cryptocurrencies have the potential to render monetary policy ineffective and trigger significant macroeconomic upheaval.
  • Unsuitable for use as a currency: Because of their volatility, they are ineffective as a medium of trade. It also makes them an unreliable store of value and an inconsistent unit of account.
  • No fundamental value: They are a type of asset that has no intrinsic value or is not a source of dividends. The only return is the willingness of others to hold them, which increases their value. This has the potential to plummet as quickly as it rises.

General opinion on regulating vs banning cryptocurrencies:

• Against cryptocurrency regulation:
  • Shaktikanta Das, Governor of the Reserve Bank of India He has warned against cryptocurrencies on numerous occasions, claiming that they pose major threats to macroeconomic and financial stability. As a result, the Reserve Bank has continuously emphasised the necessity to prohibit private digital currency.
  • SC Garg panel: In 2019, the government created an inter-ministerial panel led by then-economic affairs secretary Subhash Chandra Garg, which recommended that private cryptocurrencies be banned.
• Regulation is favoured:
  • A previous meeting convened by the Prime Minister advocated for “progressive and forward-looking” initiatives in the cryptocurrency area.
  • Members of the standing committee on finance, chaired by Jayant Sinha, are apparently more in favour of regulating cryptocurrencies rather than outright banning them.
  • According to D. Subbarao (former Governor of the Reserve Bank of India), one strategy could be to emulate countries like the United Kingdom, Singapore, and Japan, which have enabled cryptos to function under the radar while not recognising them as legal cash. India should take the middle road.

• Gain domestic dominance: For online use, an RBI-issued digital rupee may be positioned as the genuine thing. It would have a distinct advantage if the government backed it. It could take advantage of the market’s demand for a common standard to gain domestic dominance if it’s well-crafted. This would aid the RBI’s ability to maintain monetary policy control.
• Digitisation is the way of the future, and it comes with a slew of benefits, including lower transaction costs and the ability to conduct cross-border transactions. As a result, Central Bank Digital Currencies (CBDCs) must provide these features in order to prevent customers from shifting to payment services provided by huge global players such as Facebook.
• Regulated as an asset: Another option for India is to prohibit cryptocurrency from being used as a medium of exchange but allowing it to be regulated as an asset. On the India stack, which makes KYC relatively simple, tech-based regulation can be built. It can safeguard investors while also taxing capital gains and transactions. Volatility could be reduced via macroprudential regulation.
• Governance, transparency, and auditing standards must all be met by exchanges. Responsible advertising must emphasise the hazards, provide investor education, and raise awareness.
• Cross-border transactions: According to the capital control framework in effect, cross-border transactions can be recorded and capped.
• Drive innovation: Cryptocurrency’s continued existence as a possible competitor to the local currency will drive innovation and increase the latter’s stability.

Mains oriented question:

To realise the full potential of crypto assets, India need adequate regulation. Discuss. (200 words)