Future of Cryptocurrencies in India


SynopsisThe Government is planning to ban all private cryptocurrencies in India while supporting an RBI-backed cryptocurrency.

Background:
  • The proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 bans all private cryptocurrencies. 
    • It lays down the regulatory framework for the launch of an “official digital currency”. 
    • Further holders of private cryptocurrencies will have a 3-6 month exit period before banning the trading, mining, and issuing of cryptos.
  • The Reserve Bank of India is also working on a Central Bank digital currency (CBDC) using DLT (Distributed Ledger Technology).
    • DLT is a digital system for recording the transaction of assets. It records the transactions and their details in multiple places at the same time. 
    • Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
Rationale behind such proposals:
  • Check on Volatility: Private Cryptocurrencies are too volatile and pose a threat to India’s financial stability. A fiat currency shouldn’t portray such volatility. For instance, Bitcoin’s price has risen more than 10-fold over the last year due to:
    • Increased institutional exposure to Bitcoin
    • Global progress in fostering a friendlier legislative environment for cryptocurrencies
    • Supply reduction coupled with increasing demand.
  • Curb Illegal Activities: In April 2018, RBI banned banks and other regulated entities from supporting crypto transactions after digital currencies were used for frauds. In March 2020, the Supreme Court clarified that crypto transactions were not illegal in India.
  • Ascertaining the Magnitude of Undisclosed Holdings: Once private currencies are banned, then all investors would have to declare their true digital holdings in order to exit within the permissible window.
    • As per an unofficial estimate, Indian investors hold around $1.5 billion (Rs 10,000 crore) in digital currencies.
Way Forward:
  • The government needs to clear the uncertainty regarding the legal status of cryptocurrencies in the minds of Indian investors.
  • Further, it also needs to ascertain the economic and social impact of closing startups that function on private cryptocurrencies like Unocoin, Zebpay, etc. 

Source: indianexpress


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