CRYPTOCURRENCY

Cryptocurrency: With the rise in popularity of cryptocurrencies like Bitcoin among citizens, the Center has been forced to take a position on their legal status.

Back Ground of Cryptocurrencies in India

The Supreme Court has struck down a ban on cryptocurrency trading in India, which was in place after a Reserve Bank of India order in April 2018. Facebook is leaping into the world of cryptocurrency with its own digital money called Libra. It is described as “a new global currency.” The initiative has the potential to allow more than a billion “unbanked” people around the world access to online commerce and financial services. For Libra, Facebook announced a dedicated wallet called Calibra. Calibra will store Libras. It will be available as a standalone app as well as within Messenger and WhatsApp.

WHAT ARE VIRTUAL 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, unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government.
A cryptocurrency is a subset of virtual currencies, that is decentralized and protected by cryptography.

(The RBI has earlier banned speculation and investment in cryptocurrencies. Of late, however, blockchain is seeing a revival, and companies are looking at how to use the tremendous potential of the technology that underpins cryptocurrency.
Recently, in March 2020, the Supreme Court quashed an order by the RBI banning financial services firms from trading in virtual currency or cryptocurrency. On this, RBI is planning to file a review petition in the Supreme Court against the quashing of a central bank circular aimed at curbing cryptocurrencies. The central bank is concerned that the apex court’s decision could pave the way for trading in virtual currencies and put the banking system at risk.)

HOW CRYPTOCURRENCY WORKS?

It is a virtual currency, which users buy and store in any of several available digital wallets and use for transactions on a decentralized network that is not controlled by one bank or a government. Bitcoin is among the best-known cryptocurrencies. Cryptocurrency is powered by a technology called blockchain, which functions like an open ledger that gets updated in real-time. Each transaction on the blockchain network is preserved.

Why did RBI Propose a Ban on Cryptocurrency?

1. Financial stability: The Reserve Bank of India has labelled private cryptocurrencies as a threat to financial stability.
2. Threat to the sovereignty of the Rupee: The emergence of cryptocurrencies is seen as a danger to the rupee’s sovereignty, according to the government.
3. Beyond the reach of regulation: The broad acceptance of cryptocurrencies may jeopardize the RBI’s ability to effectively conduct monetary policy.
4. Digital currency in the works: It’s worth noting that the RBI and other central banks are working on digital versions of their own currencies.
5. Currency competition: Just because the rupee or central bank digital currencies are digital, they may not be able to compete with cryptocurrencies.

WHY PRIVATE CRYPTOCURRENCIES HAVE ATTRACTED A BAN?

While it is true that the technology used in virtual currencies has immense potential, without a central regulating authority, it can have numerous downsides. Non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors. Scaling up such a currency system over a large population would require crippling levels of energy resources. According to a report by the Bank of International Settlements, bitcoin processing already uses as much energy as is used by Switzerland; it called this an environmental disaster.

If private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over monetary policy and financial stability, as it would not be able to keep a tab on the money supply in the economy. The anonymity of private digital currencies makes them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult. There is no grievance redressal mechanism in such a system, as all transactions are irreversible. It is for these broad reasons that the IMC singled out private cryptocurrencies for a ban.

WHY SUPREME COURT HAS LIFTED THE BAN CRYPTOCURRENCIES?

The Supreme Court has struck down a ban on the trading of virtual currencies (VC) in India, which was imposed by a Reserve Bank of India order in April 2018. The court said that the ban proposed on the trading of virtual currencies was not proportionate and that the RBI itself had not found any adverse impact or harm done by the activities of these VC exchanges.

Conclusion on Cryptocurrency

As a result, in order to achieve acceptability and avoid a prohibition, Bitcoin should be classified as an asset rather than a currency.
There is little doubt that the government’s acceptance of cryptocurrencies will be limited.
While cryptocurrencies may be acknowledged as speculative assets, they are unlikely to be recognized as full-fledged currencies capable of competing with the rupee.

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