Need for Balanced Cryptocurrency Regulation
Why in News?
While the US has embraced crypto assets, firmly embedding them in the global financial system, countries such as Vietnam are pushing for clear regulations, and the EU is setting global standards with the MiCA framework. Meanwhile, India is still awaiting a discussion paper on the issue.
What is Cryptocurrency?
- A cryptocurrency is a type of digital or virtual currency secured by cryptography. Unlike traditional currencies, it operates on a decentralized network, independent of any central government or financial institution.
- Transactions involving cryptocurrencies are recorded on a public digital ledger called the blockchain, which is maintained by a global network of computers. Each new transaction is verified and added to the blockchain by these computers.
- This decentralized nature and the use of cryptography make it difficult to manipulate the currency or its transactions.
- Some of the popular cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
Difference Between Cryptocurrency, e-Money, and Physical Currency
| Category | Cryptocurrency | e-Money | Physical Currency (Rs) |
|---|---|---|---|
| Accessibility | Requires internet connection | Requires access to e-devices and agent networks | Physical access to cash, ATMs, and banks |
| Value | Determined by supply, demand, and trust in the system | Equal to the amount of fiat currency exchanged | Backed by government, influenced by policy |
| Customer ID | Anonymous | Requires identification | Not required for transactions, but for bank accounts |
| Production/Issuer | "Mined" mathematically by a community of developers | Issued digitally against equal value of fiat currency | Issued by the central bank (RBI) |
| Regulator | Mostly unregulated | Central Bank/Board | Central Bank (RBI) |
Global Regulations
- Global: Most cryptocurrencies operate outside national government regulations, offering an alternative to state-backed currencies.
- Switzerland has embraced cryptocurrency with a clear regulatory framework that ensures investor protection while fostering blockchain innovation.
- In September 2021, El Salvador became the first country to adopt Bitcoin as legal tender.
- India: Cryptocurrency in India remains unregulated, although it is not explicitly banned.
Why Does India Need a Policy for Cryptocurrency?
- Preventing Talent Exodus: A blanket ban on cryptocurrencies could drive blockchain experts and capital to crypto-friendly countries, as was seen after the RBI's 2018 ban, stalling innovation within India.
- Integrating into the Global Financial Ecosystem: By adopting cryptocurrency regulations, India can position itself as a global financial hub, attracting investment and nurturing the growth of crypto startups through initiatives like 'crypto export zones.'
- Leveraging New Technology and Services: The increasing demand for blockchain technology presents an opportunity for India to build expertise, thus fostering technological advancements.
- Encouraging Financial Innovation: The flexible nature of blockchain allows for innovative business models and applications that could revolutionize various industries, necessitating a balanced regulatory approach.
- Enhancing Investor Protections: Implementing strong regulations will help protect investors, curb fraudulent schemes, and regulate crypto assets as commodities, which will also increase tax revenues.
- Preventing Misuse: Stricter oversight is needed to prevent the use of cryptocurrencies in illicit activities such as money laundering, ransomware attacks, and investment scams.
Challenges Posed by Cryptocurrency
- Market Volatility: The speculative nature of cryptocurrencies leads to significant price fluctuations, posing risks of large financial losses for investors.
- Risk of Misuse: Cryptocurrencies' ease of cross-border transfer without accountability increases the risk of money laundering and terror financing.
- Scalability Issues: The growing size of blockchain data limits its capacity for large-scale transactions, which could be problematic during national emergencies.
- Economic Imbalance: The rise of the cryptocurrency market can disrupt India's traditional money flow, diverging significantly from the cash creation process in the economy.
- Lack of Regulatory Oversight: The absence of a dedicated forum or grievance redressal mechanism for crypto assets leaves consumers vulnerable to risks related to transactions and misinformation.
Way Forward
- Regulatory Clarity: India needs a comprehensive crypto regulation bill that differentiates between different types of crypto assets based on their use cases.
- Investor Protection: Mechanisms for dispute resolution, fraud prevention, and risk disclosures should be established to protect retail investors from bad actors.
- Stablecoin and CBDC Integration: India’s Digital Rupee (CBDC) initiative could coexist with cryptocurrencies, with clear regulations and interoperability guidelines. A stage-based approach can allow for phased integration based on risk assessments, regulatory readiness, and technological advancements.
- Taxation Reform: The current high tax regime in the crypto sector is pushing businesses abroad. A more balanced tax structure could foster innovation while ensuring government revenue.
- Public-Private Collaboration: Engaging with industry leaders, blockchain startups, and international regulatory bodies will help India create policies that promote innovation while managing risks effectively.
Drishti Mains Question:
Discuss the current regulatory framework for cryptocurrencies in India. Evaluate the challenges and suggest measures to ensure a balanced approach that fosters innovation while protecting investors.
UPSC Civil Services Examination, Previous Year Question (PYQ)
Prelims:
Q. With reference to “Blockchain Technology”, consider the following statements: (2020)
- It is a public ledger that everyone can inspect, but no single user controls it.
- The structure and design of blockchain are such that all data in it is related only to cryptocurrency.
- Applications that depend on the basic features of blockchain can be developed without anyone’s permission.
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 2 only
(d) 1 and 3 only
Ans: (d)
Q. Consider the following pairs: (2018)
Terms sometimes seen in news | Context/Topic
- Belle II experiment — Artificial Intelligence
- Blockchain technology — Digital/Cryptocurrency
- CRISPR – Cas9 — Particle Physics
Which of the pairs given above is/are correctly matched?
(a) 1 and 3 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2, and 3
Ans: (b)
Mains:
Q. Discuss how emerging technologies and globalization contribute to money laundering. Elaborate measures to tackle the problem of money laundering at both national and international levels. (2020)
Q. What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society as well? (2019)
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