GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
GS-3: Science and Technology- developments and their applications and effects in everyday life.
Cryptocurrency and RBI
Context: Days after some leading banks cautioned people against dealing in cryptocurrencies, the Reserve Bank of India (RBI) said banks cannot cite its April 2018 order on virtual currencies – that had banned them – as it has been set aside by the Supreme Court of India in 2020.
How do Cryptocurrencies work?
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions.
So, instead of relying on traditional financial institutions like RBI who verify and guarantee your transactions, cryptocurrency transactions are verified by the user’s computers logged into the currency’s network.
Cryptocurrency mining is the process in which transactions between users are verified and added to the blockchain public ledger.
The process of mining is also responsible for introducing new coins into the existing circulating supply and is one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a third party central authority.
Concerns with Cryptocurrencies
Extreme volatility
It isn’t backed up by a sovereign state and a public institution like a central bank
Regulatory authorities have expressed concerns of these being used as instruments for illicit activities, including money laundering and terror funding.
Anxiety among investors about the regulatory uncertainties plaguing India’s position on cryptocurrency. Indian investors are said to hold some Rs 10,000 crore in digital currency already.
Implication of RBI’s clarification: Relief to investors of cryptocurrencies
As many Indians have invested in cryptocurrencies like Bitcoin and Ethereum, the RBI move will be a big respite for them and their money – estimated to be around Rs 10,000 crore — won’t be blocked.
Also, banks can’t take action against investors in virtual currencies following the court and RBI directives.
What’s the RBI’s position?
The RBI’s 2018 position was more restrictive. The RBI had said regulated entities which already provide such services should exit the relationship within three months from the date of the circular.
However, the RBI which is against other virtual cryptocurrencies has warned people against such currencies several times in the past.
RBI has indicated it’s very much in the game, and getting ready to launch its own digital currency.
RBI Governor said recently that “Central bank digital currency is a work in progress. The RBI team is working on it, technology side and procedural side… how it will be launched and rolled out,”
