Managing Cryptocurrencies

News: Since March 2020, when the Supreme Court ruled it was legal to trade Cryptocurrencies, over Rs 50 crore in Crypto-assets is traded every day by resident Indians. On the other hand, RBI has often expressed its serious concerns regarding the dangers these instruments pose to macroeconomic and financial stability of the country.

Hence, governments needs to create a regulatory framework for these virtual assets on a priority basis

It is to be noted that central bank’s panel, which is tasked with studying Crypto-assets, is expected to submit its report in December 2021.

Must Read: Cryptocurrencies and Indian regulations – Explained, pointwise
Why are Cryptocurrencies are so popular in India?

There are various reason behind their popularity:

– Efficient transfer of remittances: The ease of remittance is one big reason why cryptocurrencies have become popular.Cryptocurrencies are extensively used to manage the efficient transfer of remittances. They are quicker and their transfer charges are less too. 

For example: El Salvador’s stated reason for adopting bitcoin as an official currency is precisely its dependence on remittances.  Facebook is also trying to bring together a cryptocurrency alliance to enter the remittance market.

Due to the possibility of higher returns, many investors see these as a hedge against inflation, and against shocks like demonetisation

Must Read: The Crypto conundrum
What are the risks/concerns associated with Cryptocurrencies?

These are volatile, high-risk instruments.

These are also used by fraudsters, to cheat people of their money.

And these assets can be used to enable cybercrimes, including ransomware.

Must Read: What are Cryptocurrencies and what are the associated risks?
What is the way forward?

Ban is not recommended: Despite all the associated risks, cryptocurrencies have survived various global financial crises over the years. This signifies that they are here to stay, hence banning them won’t be an optimum solution.

Moreover, it would be impossible to enforce a ban without imposing draconian currency controls.  It’s legally okay for a resident Indian to open an overseas broking account (which offers cryptocurrency trading) and to remit the equivalent of $250,000 abroad every fiscal. Shutting down that route would make life impossible for importers, exporters, Indians studying abroad, and so on.

Comprehensive regulatory framework: Policymakers should bring out a comprehensive plan for such instruments. This will not only enable the central bank to manage financial stability risks and protect investor interests, but also give clarity in terms of taxation.

Mass awareness campaign: The government should run mass awareness campaigns to inform investors about the risks associated with such instruments.

Source: This post is based on the article “Managing Cryptocurrencies” published in Business Standard on 11th Nov 2021.

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