Cryptocurrencies represent a new generation of asset class for storage and transaction of value in the modern world. The spurt of varied cryptocurrencies like Bitcoin , Ethereum and Facebook’s Libra, coupled with the recent growth in sales of NFTs have highlighted their nature as a force to be reckoned with in the digital economy. Cryptocurrencies are based on decentralized, open-source protocols and are not issued by any central regulatory authority. This decentralized nature of cryptocurrency is both a source of great potential and great risk for digital finance ecosystems.
Here, it becomes important to differentiate between digital currencies and cryptocurrencies as much confusion exists between the two. While digital currencies are mere digital representations of a centralised legal tender, cryptocurrencies use codes to encrypt transactions and stack them up in blocks creating blockchains that verify the accuracy and fidelity of transactions. At present, an overwhelming majority of countries do not recognize cryptocurrencies as a legal tender. The use of codes is the major differentiating factor that differentiates cryptocurrency from other currencies.
Some arguments for and against the use and acceptance of cryptocurrency are as follows:
Advantages of Cryptocurrencies:
- Being based on opensource code, everybody can have access to cryptocurrencies that often leads to fast, cheap and efficient transactions.
- Being decentralized in nature, the supply is regulated by software and not the government. This ensures minimal governmental interference on the nature, volume and usage of cryptocurrencies.
- With secure transactions, wide usage and acceptability cryptocurrencies have the potential of changing the nature of finance itself.
Disadvantages of Cryptocurrencies
- Cryptocurrencies are not assets backed by tangible entity such as land and other securities. This has led to the charge of cryptocurrency not being based on any real economic activity.
- The mining of cryptocurrency is highly power consuming, as was recently seen in Iran’s power shortages due to large scale mining of cryptocurrencies in the country. The amount of electricity consumed in mining cryptocurrencies in 2018 was equal to the entire power consumption of Switzerland.
- Cryptocurrencies, being a product still at an experimental stage, have a high chance of unforeseen risks that cannot be overlooked entirely.
- Cryptocurrencies could undermine the authority of sovereign currencies as cryptos are digital asset class with solely online identity. They have no border restrictions and could undermine sovereignty and integrity of the nation.
- Being unregulated in nature, cryptocurrencies can be used for illegal activities such as terror finance and money laundering.
- It can lead to significant risks for users and industries as cryptos are are highly speculative with great market volatility. This is seen in the constantly changing values of Bitcoin, which was valued at $20000 in December 2017 and crashed to $3800 in November 2018.
Recent Cryptocurrency Developments in India
Due to the above-mentioned reasons, the RBI had expressed reservations against the use of cryptocurrencies in its April 2019 Circular where it had banned regulated financial institutions from providing services to cryptocurrency businesses. However, the Supreme Court recently gave out a ruling which lifted the RBI ban terming it “disproportionate”.
Considering such debates around cryptocurrencies, the recommendation of Subhash Garg Committee (Inter Ministerial Committee on Virtual Currencies) has become significant. The Garg Committee Recommendations included measures like a ban on all private cryptocurrencies, a fine of 25 crore or 10 years of prison for businesses involved in private crypto transactions and most importantly, the introduction of a national digital currency by the RBI.
Central Bank Digital Currency can function as the official reserve currency for India, for which meetings have been held recently. The RBI Act of 1934 has enabling provisions for the creation of something like a CBDC as a legal tender. However, being centralized currency it will not be the same as cryptocurrencies like Bitcoin , Ethereum and Libra. Nevertheless, it could lead to a shift in the perspective towards viewing cryptocurrencies from an angle of doubt and suspicion to that of encouragement and acceptance.
Even though the Indian government does not recognize cryptocurrency as legal tender, it has still refrained from banning it completely. Neither has the government issued provisions for the regulation of cryptocurrencies as it may provide legitimacy and rise in valuation of what is currently ambiguous and could lead to amateur investors jumping into a investment bubble that could eventually burst.
Cryptocurrencies in India | Way Forward
The northern neighbor China recently became the first country to issue a national digital currency Digital Yuan and other countries, including India, are soon expected to follow suit. Considering this development, coupled with general global acceptance of cryptocurrencies, a complete ban on the same might not be wise and perhaps could amount to the strangling of an emerging industry of the Fourth Industrial Revolution, of which what we have seen so far might just be the tip of the iceberg.