Should The Government Be Worried About Cryptocurrency?
Cryptocurrency is digital and also virtual. In as much as saying that all virtual currencies are digital, digital currencies are not virtual. “Crypto” in cryptocurrencies is a methodology of cryptography which allows creation and processing of digital currencies and their transactions. They are issued by a process called ‘mining’ and are used for payments, transmitting value similar to digital money. What should cryptocurrency be classified as? Is it security or commodity or property or legal tender? The definition would allow great insight to a possible regulatory regime emerging.
Cryptocurrency’s security comes out of cryptography, which makes it nearly impossible to counterfeit or double-spend. Their transactions occur on online networks or on the internet and are issued by private organizations or groups of developers and are mostly unregulated. Whereas the intermediaries are removed from the processes, transactions are speeded up, but will be susceptible to hacks and online scams.
No central authority issues cryptocurrencies. This must mean that they are theoretically immune to government interference or manipulation. Is it also immune to private manipulation is not easy to answer?
There are more than 10,000 cryptocurrencies in the market as on November 19th 2021 as per CoinMarketCap. Apart from Bitcoin being a de facto standard of cryptocurrencies, there are other important ones like Ethereum (ETH), Litecoin (LTC), Cardano (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XLM), Dogecoin (DOGE), Binance Coin (BNB), Tether (USDT) and Monero (XMR). They all use decentralized peer to peer networks supported on blockchain technology. All these exist as digital tokens or “coins” on the Blockchain which is a distributed ledger formed out of disparate network of computers. Out of all these ‘coins’, Bitcoin, the most secure, leads in terms of market capitalization, user base, and popularity. Each bitcoin was worth roughly $60,000 as of November 2021, with a market cap of more than $1 trillion.
Some cryptocurrencies have even ventured into the physical world with credit cards. However, new ‘coins’, such as ‘altcoins’ or ‘shitcoins’ modelled after Bitcoins will keep evolving because of the need to handle more transactions per second or use more efficient consensus algorithms like proof-of-stake.
Sometimes Blockchain tokens are issued as utility tokens as in securities and stocks. If people wish to share files across a decentralized network Storj tokens are issued. Namecoin allows decentralized DNS service for internet addresses. However, they all trade similarly on a crypto exchange.
Should India be really worried about cryptocurrency? Why is the government bent on banning all cryptocurrencies? Not only ban but even issue its own cryptocurrency through RBI? The reason is simple. The technology allows individuals to engage in Peer-to-Peer or person-to-person financial transactions and enter into contracts. Most importantly, there is no need for some trusted third-party intermediary such as a bank, monetary authority, court, or judge to oversee the transaction.
How does one get fiat money then? Simple. Bitcoin transactions are converted to fiat currency like a Rupee or a Dollar. PayPal had announced that in 2021, consumers will be able to use cryptocurrency as a “funding source for purchases.” Meaning it will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency. If Cryptocurrency were not to be treated as legal tender, is this not a backdoor entry to legalising all that happens on the blockchain?
Should crypto investment firms be termed money service businesses (MSBs) or simply Banks? Should they not be covered under SEBI/CBDT regulations?
Currently, huge rallying around Bitcoins and its effect on other stocks is driven by institutional investors. The government then is justifiably worried that such rallying and transactions can potentially disrupt the existing financial order and democratize finance. It can probably lead to unwanted transactions probably institutional gambling as well. Could they fund terrorist activities? Could they be a means to money laundering? The collective market cap of cryptocurrencies is more than $2.5 trillion.
Compared to most investments, bitcoins are risky for they are highly volatile which means that there can be big returns and big losses. They are also risky for another reason. One need not trade only in large Bitcoins. One can also buy as little as $5 of bitcoin or buy fractional shares known as ‘satoshis’ which increases the propensity to gamble even by the small-time traders.
Can Bitcoins be used as a hedge against inflation? Can it survive any economic or infrastructural collapse? Can it be compared to gold? If the answer to these questions is yes, then they can help the government as much as cause worries. Hedge funds in our country do not even need to be registered with SEBI, the market regulator or disclose their net asset value (NAV)s at the end of the day. But then, the supply of bitcoin is limited and is controlled by computer code, which means it is an effective protector of purchasing power.
Blockchain technology though is hard to crack, Bitcoin theft and fraud are possible. There is no technology that cannot be scammed today. Only the level of difficulty would depend on the number of security layers. The government must take heart in the knowledge that each bitcoin transaction is documented on the digital ledger, the blockchain, where a user’s cryptocurrency “wallet” is represented as a unique series of random numbers and letters. Scammers can be traced decoding the encryption, but only after the fraud has been committed. That is the difficult part.
Our country like every other country, will take steps to protect its currency and its ability to tax the people. Should investors pay capital gains tax? Should they pay tax on long-term capital gains? If the people believe this is an area for making money more than they actually deserve, then the government will intervene more.
It is a fact that cryptocurrency is slowly becoming a significant factor in the global investment landscape. India cannot be left behind in that space. In this scenario, the government seeks to bring a Cryptocurrency Bill 2021 in the Parliament this winter session. The bill is expected to make it illegal to issue, hold, mine, and trade in private cryptocurrencies, but will create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India.
The Bill does make exception understandably, on the Blockchain technology used, for it has several other uses which cannot be discounted. It is interesting to note that though Cryptocurrency trades most in US, that country still does not have a regulatory framework or mechanism in place.
Probably, rather than banning private cryptocurrencies, asking the crypto exchanges operating in the country to register with SEBI and comply with adequate Anti money laundering / Combating the financing of terrorism (AML/CFT) provisions may be a progressive step. Certainly, much is at stake in the Crypto world as we see some monumental changes overcoming us.
