Regulation, not ban: on cryptocurrencies

ECONOMY/ GOVERNANCE

• GS-3: Indian Economy & Challenges
• GS-2: Governance

Regulation, not ban: on cryptocurrencies

In News: Government is set to introduce legislation that would, if passed, officially forbid Crypto-currencies. 

• This is being done two years after drafting a Bill to ban cryptocurrencies.
• Eight years ago the RBI had issued its first advisory cautioning holders of virtual currencies about the potential financial and security risks

What were the key factors which has made government to legislate on prohibiting such currencies?

• Its concerns appear to be the risks associated with cryptocurrencies, including their potential use for money-laundering and financing of illegal activities. 
• The risks investors and consumers face in dealing with these so-called currencies, given that they are neither ‘a store of value nor are they a medium of exchange’, and the threat they pose to financial stability are some of the key factors influencing government decision of banning cryptocurrency.
• PM had in a video address to the Sydney Dialogue earlier this month said: “It is important that all democratic nations work together on cryptocurrency and ensure it does not end up in wrong hands.
• No country across the world treats virtual currencies as legal tender

Why the present stance of prohibition a challenging one?

• There has been an exponential jump in investment in virtual currencies, especially after the Supreme Court last year struck down an RBI notification that banned financial entities from facilitating customer transactions related to virtual currencies. 
• Industry estimates now peg cryptocurrency holdings in India at about ₹40,000 crore, held by about 15 million investors, and advertising trends show an upsurge in ads promoting brands associated with investment in virtual currencies.
• Earlier this year El Salvador — admittedly a small and heavily indebted nation — officially declared ‘bitcoin’ as legal tender, much has changed in the adoption of private virtual currencies worldwide.
• The pandemic has fastened the global embrace of all things digital and investment in the technologies enabling cryptocurrencies including blockchain, appear to be no different. 

How is Crypto currency regulation in other parts of world?

• Canada, Japan and Thailand permit the use of virtual currencies as a payment method, with some jurisdictions regulating them as a digital asset, and others as a commodity. 
• Canada and the U.S. closely monitor virtual currency activity to ensure they do not run afoul of laws on financial crimes, with the former also earning tax revenue on transactions.

Way Forward

• All things given, India should avoid the temptation to join China in prohibiting virtual currencies and instead aim to tightly regulate their trading through monitored exchanges and earn revenue. 
• Simultaneously, it should expedite the RBI’s pilot of the Central Bank Digital Currency so as to offer an alternative to cryptocurrencies.

Connecting the dots:

• Central Bank Digital Currency
• China’s Digital Currency