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On cryptocurrencies and regulation

  • IASbaba
  • February 12, 2021
  • 0
UPSC Articles
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ECONOMY/ GOVERNANCE

Topic:

  • GS-3: Science and Technology- developments and their applications and effects in everyday life
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

On cryptocurrencies and regulation

Context: Government has proposed bringing in a law on cryptocurrencies so as to put an end to the existing ambiguity over the legality of these currencies in India. 

What is cryptocurrency?

  • A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. 
  • Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers

Regulation of Cryptocurrencies

  • The government has, from time to time, suggested that it does not consider cryptocurrencies to be legal tender. 
  • The disapproval of cryptocurrencies by government is due to fact that such currencies are highly volatile, used for illicit Internet transactions, and wholly outside the ambit of the state.
  • In 2018, the RBI did send a circular to banks directing them not to provide services for those trading in cryptocurrencies. 
  • Those challenging the RBI Circular in Supreme Court had argued that these were commodities and not currencies. Therefore, RBI did not have the jurisdiction.
  • The circular was set aside by SC, which found it to be “disproportionate”.
  • Regulatory bodies like RBI and Sebi etc also don’t have a legal framework to directly regulate cryptocurrencies as they are neither currencies nor assets or securities or commodities issued by an identifiable user

Challenges

  • This legal ambivalence has not, however, been able to prevent cryptocurrencies from having a growing user base in India. 
  • Their attraction may only grow now, given that the most well-known of them as also the most valuable, Bitcoin, has hit new peaks in price and is gaining influential followers such as Tesla founder Elon Musk. 
  • Cryptocurrency exchanges, which have sprung up, are reportedly lobbying with the government to make sure these currencies are regulated rather than banned outright.

Way Forward

  • Smart regulation is preferable, as a ban on something that is based on a technology of distributed ledger cannot be implemented for all practical purposes.
  • Even in China, where cryptocurrencies have been banned and the Internet is controlled, trading in cryptocurrencies has been low but not non-existent,.
  • The government must resist the idea of a ban and push for smart regulation.

Connecting the dots:

  • Blockchain and Voting: Click Here

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