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Cryptocurrency ban in India coming soon? Will Modi Government launch its own fiat Digital Currency?

Cryptocurrency ban in India coming soon? Will Modi Government launch its own fiat Digital Currency?


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

Why in news?

Government to ban all private cryptocurrencies.

Present context:

  • The government is set to table the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the winter session of Parliament.
  • The bill seeks to ban all private cryptocurrencies with ‘few exceptions’, the official document shared by the government says so.
  • The initial document doesn’t provide any clarity on these exceptions.
  • It states that the decision has been taken to promote the official digital currency which will be issued by the Reserve Bank of India.
  • The RBI shown the intent of bringing its own crypto but is yet to announce one.

All about Cryptocurrency


  • Cryptocurrency is a digitised asset that is dispersed across several computers in a shared network. Because of its decentralised character, this network is immune to government regulatory oversight.
  • The word “cryptocurrency” comes from the encryption techniques that are employed to keep the network safe.
  • Any system that falls within the category of cryptocurrency, according to computer specialists, must meet the following requirements:
    • There is no centralised authority, and everything is run through distributed networks.
    • The system keeps track of who owns which bitcoin units.
    • The system determines if new units can be formed and, if so, what their origin and ownership terms will be.
    • Cryptography is the only way to prove ownership of bitcoin units.
    • The system enables transactions involving the transfer of ownership of cryptographic units.

Cryptocurrency Types:

  • Bitcoin was the first sort of crypto currency, and it remains the most widely used, lucrative, and popular to this day.
  • Other cryptocurrencies, in addition to Bitcoin, have been developed with differing degrees of functionality and requirements. Some are forked versions of bitcoin, while others were built from the ground up.
  • Bitcoin was created in 2009 by a person or group known only as “Satoshi Nakamoto.” There were about 18.6 million bitcoins in circulation as of March 2021, with a total market valuation of around $927 billion.
  • Altcoins are the alternative cryptocurrencies that emerged as a result of Bitcoin’s success. The following are some well-known altcoins:
    • Litecoin
    • Peercoin
    • Namecoin
    • Ethereum
    • Cardano
  • The entire value of all cryptocurrencies in existence is currently over $1.5 trillion, with Bitcoin accounting for more than 60% of that amount.

Advantages of cryptocurrency:

  • Simple to transfer: It will be simple to transfer funds between two parties without the use of a third party such as credit/debit cards or banks.
  • Online transactions: It is a less expensive option than other online transactions.
  • Payments are safe and secure, and they provide an unrivalled level of privacy.
  • Minimum processing fees: Only a public key and a pirate key can access a user’s “wallet” or account address in modern cryptocurrency systems. The wallet’s owner is the only one who knows the private key. Fund transfers are processed with minimum processing fees.

Disadvantages of cryptocurrencies:

  • Criminal activities: Because of their almost impenetrable nature, cryptocurrency transactions are ripe for criminal activities such as money laundering, tax evasion, and maybe even terror financing.
  • Can’t be reversed: Payments aren’t made in a way that they can’t be reversed.
  • Widely accepted: Cryptocurrencies are not widely accepted and have limited value in other places.
  • There is fear that cryptocurrencies such as Bitcoin are not backed by any tangible assets. According to certain study, the cost of generating a Bitcoin, which consumes a growing quantity of energy, is directly tied to its market price.

Is a cryptocurrency ban a rational policy approach?

  • Best course of action: Even while there are legitimate worries about Cryptocurrencies, an outright ban would not be the best course of action.
  • Harsh financial controls: A ban would not only be impossible to police, but it may also lead to harsh financial controls.
  • Furthermore, cryptocurrencies created outside of India’s jurisdiction cannot be destroyed, and prohibiting them will likely affect connected crypto businesses.
  • Illegal operations: A prohibition may drive cryptos to the dark web, boosting their use in illegal operations.

Is a blanket ban on Cryptocurrencies possible to implement?

  • Technologically unfeasible: A blanket ban would require cryptocurrency exchanges to cease operations in India, but such a restriction may be technologically unfeasible.
  • Practically impossible: While the government can prohibit the use of local currency to purchase crypto, crypto wallets, which exist online and are not regulated by banks or governments, are practically impossible to prohibit.
  • Difficult to monitor: Peer-to-peer networks are particularly difficult to monitor since people can easily move money between one other via bank accounts and crypto between each other via wallets.

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.

Future Aspect:

  • 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)