From UPSC perspective, the following things are important :
Prelims level : Cryptocurrencies
Mains level : Need for Cryptocurrencies regulation
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was listed for introduction in Parliament’s Winter Session.
About the Bill
- The bill aims to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”.
- It seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.
How are cryptocurrencies regulated in countries around the world?
The stance of countries and regulators has ranged from:
- A total ban on these financial assets Ex. China
- Allowing them to operate with some regulations
- Allowing virtual currency trading in the absence of any guidelines Ex. El Salvador
- Governments and regulators remain divided on how to categorize it as a currency or asset — and how to control it from an operational point of view.
- The evolution of the policy and regulatory response has been uncharacteristically discordant, with no apparent coordination in the responses of countries.
Among the countries that haven’t issued detailed regulations, there are those that have recognized and defined these currencies.
- It defines virtual currency under its Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, as:
(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or
(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a).
- The Canada Revenue Authority (CRA) generally treats cryptocurrency as a commodity for purposes of the country’s Income Tax Act.
- Israel in its Supervision of Financial Services Law includes virtual currencies in the definition of financial assets.
- The Israeli securities regulator has ruled that cryptocurrency is a security subject, while the Israel Tax Authority defines cryptocurrency as an asset and demands 25% on capital gains.
- In Germany, the Financial Supervisory Authority qualifies virtual currencies as “units of account” and therefore, “financial instruments”.
- It considers Bitcoin to be a crypto token given that it does not fulfill typical functions of a currency.
- However, citizens and legal entities can buy or trade crypto assets as long as they do it through exchanges and custodians licensed with the German Federal Financial Supervisory Authority.
[D] UNITED KINGDOM
- In the UK, Her Majesty’s Revenue & Customs, do not consider crypto assets to be currency or money.
- It further notes that cryptocurrencies have a unique identity and cannot, therefore, be directly compared to any other form of investment activity or payment mechanism.
[E] UNITED STATES
- In US different states have different definitions and regulations for cryptocurrencies.
- While the federal government does not recognize cryptocurrencies as legal tender, definitions issued by the states recognize the decentralized nature of virtual currencies.
- In Thailand, digital asset businesses are required to apply for a license, monitor for unfair trading practices, and are considered “financial institutions” for anti-money laundering purposes.
- While most of these countries do not recognize cryptocurrencies as legal tender, they do recognize the value these digital units represent.
- Almost all countries consider their functions as either a medium of exchange, unit of account, or a store of value (any asset that would normally retain purchasing power into the future).
- Like India, several other countries have moved to launch a digital currency backed by their central bank.