Context: crypto currencies and its related issues
- Crypto currency is both digital and virtual currency that is created based on some cryptographic algorithm. No one “mints” this currency; they solve cryptographic algorithms using hardware and electricity to get the representation of one unit of value, typically called a “coin”. Bitcoin, Litecoin, and altcoins are all crypto currencies.
- A virtual currency is a digital representation of value that can be digitally traded and functions as (a) a medium of exchange, and/ or (b) a unit of account, and/ or (c) a store of value, but does not have LEGAL tender STATUS. A virtual currency therefore may be a private medium of exchange, but does not in any way reflect a sovereign guarantee of the value or legal tender status.
- Digital currency can mean a digital representation of either virtual currency (non-fiat) or e-money (fiat) and thus is often used interchangeably with the term “virtual currency”.
Crypto currencies around the World and its status:
- Russia and Canada: Countries like Russia and Canada allow virtual currencies to be traded for other goods or services (Barter Transactions). These transactions are similar to using virtual currency as a mode of payment.
- Switzerland and Thailand: Some countries like Switzerland and Thailand allow for virtual currencies to be modes of payment. However, since they are not classified as legal tender, parties are not legally obliged to accept them.
- No country: No country across the world treats virtual currencies as legal tender.
- China: Countries like China have completely banned virtual currencies. It does not allow any sort of legal transactions in virtual currencies.
Concerns with crypto currencies:
- Sovereign backing: Unlike fiat currencies, these crypto currencies do not have sovereign backing, nor do they have a formal, verified backing of bullion.
- Trust and consensus based: Since these crypto currencies are backed by trust and consensus-based algorithms, processing transactions is time-consuming due to validation procedures and network latency.
- The large gap in transaction processing speed between crypto currencies (especially Bitcoin), and other electronic payment methods, hinders their ability to be used as medium of exchange.
- Shocks or fluctuations: the crypto currencies might have functional benefits; however, the market potential of these functionalities is subject to technological and behavioral changes, as well as the scope of financial investment that the crypto currencies can raise. All these factors, make the intrinsic value of crypto currencies negligible, and subject to severe shocks or fluctuations.
- Frauds: Non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers. For example, a recently unveiled RS 2,000crore scam involving GainBitcoin was uncovered in India, where people were promised returns on their investment in GainBitcoin in the form of Bitcoin.
- Booms and Busts: In December 2017 Bitcoin was valued at around USD 20,000 per coin. However by November end bitcoin’s value toppled to approximately 80 percent of its peak value and bitcoin was trading at a price of USD 3800. There were numerous investors who suffered losses due to the fall in the valuation of crypto currency.
- Resource intensive: The mining of non-official virtual currencies is very resource intensive. And to a national level retail payments system, a virtual currency would re- quire crippling levels of storage and processing power. Adding more users also makes virtual currencies more cumbersome to use. Already, Bitcoin mining has used as much electricity as all of Switzerland, with the report terming it an environmental disaster.
- Criminal activity: according to the report of Financial Action Task Force (FATF) it identifies that virtual currencies can provide greater anonymity than mainstream non-cash payment methods, making them vulnerable to money laundering and use in terrorist financing activities.
- For example, in 2014 the illegal website Silk Road was found to have been using Bitcoin to finance hacking, drug trafficking, and illegal weapon sales.
Regulation of crypto currencies: Crypto currencies have certain characteristics that make regulation necessary. Some of these characteristics are:
- They lack intrinsic value and are subject to fluctuations.
- They are decentralized networks with no central authority.
- The transactions in crypto currencies are irreversible.
- They provide a degree of pseudonymity, although not complete anonymity, to participants in a transaction.
Inter-ministerial committee recommendations with respect to crypto currencies:
- There is no underlying intrinsic value of these private crypto currencies. Therefore, the Committee is of clear view that the private crypto currencies should not be allowed. These crypto currencies cannot serve the purpose of a currency.
- The private crypto currencies are inconsistent with the essential functions of money/currency; hence private crypto currencies cannot replace fiat currencies.
- A review of global best practices also shows that private crypto currencies have not been recognized as a LEGAL tenderin any jurisdiction.
- The Committee recommends that all private crypto currencies, except any crypto currency issued by the State, be banned in India.
- Accordingly, the Committee has recommended a law banning the crypto currencies in India and criminalizing carrying on of any activities connected with crypto currencies in India.
Way forward: Governments and economic regulators across the world are wary of private crypto currencies. As they need neither a central issuing authority nor a central validating agency for transactions, these currencies can exist and thrive outside the realm of authority and regulation. They are even deemed a threat to the official currency and monetary system. So government of India should bring a law to control and regulate the private crypto currencies in the country.