India Needs to Regulate Cryptocurrency as Ban Will Lead to Mining, Losing Investors, Jobs

Cryptocurrency is a household word these days, thanks to the advertisements especially during the T20 World Cup this year. I am sure most millennials would have heard about it and most boomers might be confused understanding it. According to one of the recent surveys by Kaspersky, Russia’s multinational cybersecurity company, only one of ten Indians understands cryptocurrency, and only 1 in three investors knows what it is.

Before diving into the economics around crypto it is important to understand what it is. Cryptocurrency is an open source decentralised computer code that generates its value from demand and supply. For example, the price of onions is decided basis how much the demand is and what the supply is going to be, cryptocurrency also works in the same manner. Just like a Rs 10 currency note has the sign of an RBI Governor on it underlining its value, the currency of one cryptocurrency, for example a Bitcoin, is decided by the demand and supply around it.

But why is cryptocurrency so famous? It was invented in 2008 by a person named Satoshi Nakamoto to solve two issues in traditional money system. First, double spending (the concept also solved by banks) and second, decentralising money that will not let banks control and recognise those transactions and take a cut from it, also known as cryptocurrency mining. For example, Bicoin transactions are recognised by its community and those who solve the complex mathematical problems behind it and authorize the transaction or recognise it, and will be rewarded for it.

Now that we know what cryptocurrency is let’s put in some numbers to understand where we stand in India. India has over 20 million crypto account holders, more than the stock market, and a cumulative Rs 6 lakh crore crypto investments. Of these 20 million crypto holders, the average age of investors is around 25 years and most of the investors are between the age group of 25-34 years of age. The rise of cryptocurrency has been phenomenal — the price of one Bitcoin in February 2011 was around $1 and today it is around $56,000. If crypto is such a great investment, then why are people not investing in it? The answer is due to lack of regulations. The crypto market is an unregulated community-driven market that is volatile and has lack of regulatory body to keep a watch on it. For example, to launch a stock in the share market one has to submit the paperwork in the Securities and Exchange Board of India (Sebi), which is a government body, but for cryptocurrency, one will have to write a code on blockchain technology and then the crypto exchange platforms onboard it to buy or sell cryptocurrencies.

ALSO READ: Cryptocurrency is a Bogey that Indian Govt Needs to Ban, Not Regulate

The crypto market is one of the fastest-growing markets in the world and India is not behind the race, this has caught the attention of the government given the growing concern around the lack of regulations. Prime Minister Narendra Modi has recently chaired a meeting on the rising concerns of the crypto market and how the companies are promoting these products, which might take youth in the wrong direction. It is also expected that there will be a bill on cryptocurrency in the winter session of Parliament, which is something much needed and will open the domain for more scope and at the same time regulate the market of crypto. But there is one section in the government that is advising for a ban on cryptocurrency and that is the Reserve Bank of India.

The RBI is concerned when people start investing in assets which are out of its purview, there could be a decline in investments in bank-governed assets such as Provident Funds and government bonds. This, in turn, can affect banks’ lending capability for economic activities.

This leads to another question — can cryptocurrency be banned in India? In 2018, the central bank had issued an order banning cryptocurrency, which was quashed by the Supreme Court because of the absence of any legislative ban on its buy and sell. Before, and more after the Indian market had boomed, cryptocurrency is growing exponentially and is expected to reach up to $241 million by 2030.

Also, with the investments of big and small players and with Bollywood celebrities such as Amitabh Bachchan and Sunny Leone bringing in their NFTs (digital assets traded in cryptocurrency), it is difficult for the government to put a blanket ban on cryptocurrency.

China, for example, has banned the cryptocurrency but it has not been able to kill the crypto market as big firms have invested in it and a complete embargo led to crypto mining from China to the United States. The crypto ban will result in loss to investors along with employment provided due to the blockchain technology. The way the US has become the hub for crypto mining after the ban by China, a blanket ban of cryptocurrency will be a loss for one country and gain for others, and needs to have a more strategic approach to be handled at the international level.

India, which is also the fastest growing startup space in the world, needs to safeguard the interest of innovators and promote innovation, and can very well learn from global markets such as the United Kingdom and Singapore where cryptocurrency is not a legal tender (money which can be offered as a payment to pay the debt) but is considered a property, mandating the crypto-exchanges to comply with the financial regulators.

Cryptocurrency is also banned from derivative trading (contract or product deriving its value from the underlying asset) and the exchanges have to comply with the financial regulators. This helps the government with KYC (know your customer) and the capital gain tax from the trading of cryptocurrencies. This is not just in the UK or Singapore, courts in Ohio, California and South Korea have also handed the decision on considering cryptocurrency a property. The future of cryptocurrency as a legal tender is looking bleak as a big global economy like China is against it but a small country like El Salvador, which is the only country to recognise Bitcoin (one of the cryptocurrencies) as a legal tender, is planning to build an entire city based on it. It will be interesting to see how crypto exchanges comply with global trade rules, which are governed by economies such as the US and China. Till then, India needs a regulator for the crypto exchange platforms and a regulatory body to evaluate investments and advertisements on cryptocurrencies.

(The writer is a Business Development Lead with an impact consulting firm and was previously part of the Delhi government and JP Morgan. The views expressed in this article are those of the author and do not represent the stand of this publication.)

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