Blockchain Technology: Prospects and Challenges

Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency, Blockchain technology

Mains level : Digital Currency

With the likely scenario of India’s government banning private cryptocurrencies, the Reserve Bank of India (RBI) is planning to introduce an official digital currency for the country.

What is the news?

  • An earlier government bill on cryptocurrency in 2019 reportedly sought to ban cryptocurrency and criminalise its possession in India. However, it was not introduced in Parliament.
  • The detailed text of the bill has not been released in the public domain so far.
  • The bill also says that there will be a regulation to help RBI create its own CBDC (central bank digital currency).

What are Cryptocurrencies?

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Hues over the Bill

  • The past year has seen a surge in the number of cryptocurrency investors in India and in trading volumes.
  • Cryptocurrency exchanges such as CoinDCX and Coinswitch Kuber have also raised early-stage funding for their operations.
  • The bill may spark an end to the nascent cryptocurrency industry in the country.

What were the provisions of 2019 Bill?

Definition of cryptocurrencies:

  • The 2019 Bill defined cryptocurrency as any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.

Ban:

  • The 2019 Bill bans the use of cryptocurrency as legal tender or currency.
  • It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency.
  • Mining is an activity aimed at creating a cryptocurrency and/or validating cryptocurrency transactions between a buyer and a seller.

In particular, the use of cryptocurrency was prohibited for:

  1. use as a medium of exchange, store of value or unit of account,
  2. use as a payment system,
  3. providing services such as registering, trading, selling or clearing of cryptocurrency to individuals,
  4. trading it with other currencies,
  5. issuing financial products related to it,
  6. using it as a basis of credit,
  7. issuing it as a means of raising funds, and
  8. issuing it as a means for investment.

Why the govt wants to ban cryptocurrencies?

Sovereign guarantee

  • Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.

Market volatility

  • Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.

Risk in security

  • A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).

Malware threats

  • In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.

Money laundering

  • Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.

Regulatory bypass

  • A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.

Power consumption

  • Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

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