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CRYPTOCURRENCY IN INDIA- A NEW INVESTMENT OPPORTUNITY ?

Updated: Oct 3, 2020

Introduction

With the massive growth in the field of technology, there has been a rapid development in Information and Communication Technologies. The popularization of internet technologies has activated the virtual world concepts which have led to the creation of a new business phenomenon known as Cryptocurrency. In its most basic form, Cryptocurrency is a virtual or digital currency that acts as a medium of exchange and uses cryptography to control its creation and management. It can be used in various financial transactions, be it a real transaction that involves money, goods and services, or a virtual one that includes online games and social networks. For each Cryptocurrency, a Distributed Ledger Technology (DLT) is used for keeping the database of all the transactions in the form of a record. These records are further managed with the aid of a decentralized technology known as block chain which is spread across many computers. There are various types of Cryptocurrencies such as Ethereum, Litecoin, MintChip, etc. but Bitcoin is one of the Cryptocurrencies that has been accepted as a worldwide payment method. As per the data of February 2015, over one lakh vendors and merchants accepted it as a payment method.

As Cryptocurrency has become a global phenomenon, there has been a significant rise in its awareness and usage which has also reflected in the Indian Markets. It made its subtle entry in India somewhere around 2012 wherein WordPress became the first vendor to accept the payment of Bitcoin. However, it got caught up with issues pertaining to its legality as there was no lawful protection in case of fraud, mainly because of its decentralized nature. Consequently, the use of Cryptocurrencies was banned after the notification issued by RBI in 2018 to prohibit their usage in India. However, the ban was recently lifted by the Supreme Court in March 2020.

In light of the above, this article aims to examine the potential of Cryptocurrency in India taking into consideration the current scenario and challenges. It will attempt to do the same by studying the measure adopted in countries wherein Cryptocurrency is legally recognized.

Rise & Fall in India

In 2008, a paper titled “Bitcoin : A Peer Electronic Cash System” was published regarding the story of Cryptocurrency by a pseudonymous developer, Satoshi Nakamoto and soon the first transaction took place in January 2009. Later, in 2012, Namecoin was created to form a decentralized DNA that could help making internet censorship difficult. By the end of 2012, Cryptocurrency was subtly introduced in many countries and small scale Bitcoin transactions started to take place. And, in 2013 Bitcoins started to gain popularity in India.

However, when demonetization took place in 2016, Indians truly began to realize the potential of Bitcoin as an alternative currency. They started to invest more in Cryptocurrencies and the usage of Bitcoins for online shopping took an upshot. Trading of Bitcoin peaked at over US$ 3.5 million according to statistics, with a steady rise in domestic usage. Though Bitcoin is comparatively more expensive in India than the international market by 5 to 10% because of the lack of mining capacity , Cryptocurrency startups such as Coinsecure, Unocoin and Zebpay have indicated that it is still getting attention from investors.

But, in 2017 their popularity suffered a major setback when the Indian Government issued a warning against the usage of Bitcoins because of its negative impacts such as market manipulation, money laundering etc. There was also the issue of ‘Ponzi Schemes’ which is basically an investment scam where the existing investors are paid the returns from the funds contributed by new investors. Since the investors have no idea where their returns come from, it is easy to fool them and create black market environment for trading in Cryptocurrencies as well.

Consequently, in 2018-19, RBI imposed a ban on the use of Bitcoins and Cryptocurrency by stating that it does not consider it as a legal tender. A draft bill was passed in 2019, ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill’, which prohibited its issue, buy hold, sell, or deal. As a result, people who had bought these Cryptocurrencies as an investment had to sell their crypto assets before they lost their banking facilities. Due to this existential threat, a group of Petitioners including the Trade body of the Internet and Mobile Association of India demanded for the removal of the ban. Since the ban has been lifted, there has been a 450% surge in trading within two months thereby re-opening the pandora’s box of challenges associated with Cryptocurrency.

Challenges and Issues:

Legal & Economic Concerns

As Cryptocurrencies are becoming mainstream, the authorities and regulators are continuously battling to understand their legal nature. A lot of concerns have been raised regarding their decentralized nature as they are mainly a peer-to-peer system that is neither issued by the public bank/central authority nor attached to any fiat currency.

Money Laundering is one of the primary concerns involved with virtual currency. Because of it not being authenticated, financial transactions is not completely safe and monitored. Thus, due to the decentralized nature and lack of control exerted by central authorities over Cryptocurrencies, there would be no recourse in the event where payment is hacked or there is a technical glitch in the transaction.

The other issue which can be faced is the collapse of the economy. Cryptocurrencies are of a volatile nature. If unlimited virtual currency is issued, without any supervision and control, then, it would lead to economic problems such as inflation because this virtual currency does not function on the concept of demand and supply.

Security threats-

Security threat is one of the biggest problems in Cryptocurrencies because of lack in security measures to keep the information safe. Since, there is anonymity of account holders, the user can create more than one account and it may be difficult to identify the original account holder in case of any fraudulent or illegal practices, done in the course of transactions. Moreover, as the addresses or keys are available in a public ledger, there are chances that a person may hack and access the account information. Simply by changing the account balances, hackers and malicious users can create fake virtual currency and can also steal the virtual currency. Coin Desk reported that around $2.7 million assets are stolen every day from exchanges.

The possibilities of a scam are also present because whenever a new technology emerges in the market, first time investors are likely to fall in trap of its dupe due to the lack of experience. Bitconnect is an example of one such scam. With the increasing use of virtual money, the demand and use of real money would also depreciate.

The legality of Cryptocurrency has always been questioned. Many countries like Vietnam, Bolivia, Bangladesh and Ecuador have prohibited the use of Cryptocurrencies. However, others have adopted a different approach in dealing with it instead of an outright ban. For instance, Japan has legalized the cryptocurrencies; Australia has made new regulations for crypto exchanges that includes registration; US, crypto exchanges have been licensed; Israel taxes it as an asset; the United Kingdom taxes it as Corporate Tax while individuals pay capital gain tax; South Korea made more stringent laws on Cryptocurrencies. Needless to say, these countries are actually growing in the Crypto and Blockchain space as any new technology requires trials, tests and a specific approach to deal with. Every country has its reason to opt a method of accepting or discouraging Cryptocurrencies.

Way forward

Evolution is the necessity of a growing economy. The main reason behind the invention of virtual currencies was to bypass the traditional banking system and welcome the alternative instruments of transaction. However, the journey of Cryptocurrency has not been so gratifying due to the very fact that it can be used for anti-social activities, money laundering, and even terrorism. But is banning altogether really a solution? The instances from various countries highlight that there are many ways to regulate this business phenomenon which could be a success instead of out rightly banning it. India has a tremendous opportunity and scope to regularize virtual currencies and channelize them in a proper way. It may regulate these currencies by amending certain laws like taxation after which the profit derived from the sale of digital currency can be considered income or taxed, or Foreign Exchange Management Act [FEMA] 1999 which controls all the incoming and outgoing forex associated transactions. Furthermore, it may also appoint authorities like RBI or SEBI so that the currency is regulated in an adequate manner. These regulations may pertain to crypto exchanges through licensing or initiating a registration process, similar to what the other countries have been following. It is argued that Cryptocurrencies would create obstacles for the current financial institution, but what is being denied and ignored is that it would lead us to an e-control economy which can be assessed by making specific laws for its functioning.

Virtual Currencies are an excellent example of technological evolution and India needs to keep up with the ever-changing markets. Thus the need of the hour is to bring out a reasonable policy that balances both technological innovations and economic interests along with the protection of its users.

Title Image Source: British Broadcasting Company


This article has been written by Nitisha Agrawal and Mukti Heliwal. Nitisha is a third year law student at Hidayatullah National Law University, Raipur and Mukti is a third year law student at New Law College, Bharati Vidhyapeeth, Pune.