Digital currency is a kind of money that exists only in digital or electronic form - currency, money, or any digital exchange medium. It is transacted or stored only via specialized software, mobile, computer applications, or dedicated digital wallets and need to have internet access for the transactions to take place.
Electronic versions of fiat currencies predominate most countries' financial systems. While fiat currencies have a physical form (paper money), digital currencies such as cryptocurrencies, virtual currencies do not have one. All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
Cryptocurrencies such as Bitcoin, Ethereum, and even the meme coin - Dogecoin has been all over the news lately following its wild price fluctuations and boom in cryptocurrencies trading. But what are cryptocurrencies?
Cryptocurrencies are typically not issued by a central authority and as the name suggests, it is secured by cryptography. Many cryptocurrencies work on blockchain technology-decentralized ledger of transactions across a disparate network of computers which makes it difficult to hack or alter.
Bitcoin, the world's first decentralized cryptocurrency, invented by the mysterious Satoshi Nakamoto in 2008, has undergone several changes in its value. Recently, its value rose dramatically in 2020 which eventually peaked at more than $64,000 in April 2021 following the pandemic lockdown and global economic instability, before it dropped at just above $40,000 as of September 2021.
In India, the crypto craze is extremely apparent. According to the Analytics Insight report, over 10 million Indians have invested in cryptocurrencies and poured in a whopping $6.6 billion till May 2021. Over 350 startups are operating in the blockchain and cryptocurrency space.
A surge in crypto investors in India is expected with many digital exchange platforms such as CoinDCX, Unocoin, CoinSwitch Kuber, WazirX, and others coming into play. This is despite the likelihood of cryptocurrencies being banned by the Government of India.
Legal Status Of Cryptocurrencies In India
Cryptocurrencies are not illegal in India. Anybody can buy, sell and trade cryptocurrencies. However, India currently does not have a regulatory framework to govern the functioning of cryptocurrencies as of now.
The government is still exploring the uses of distributed ledger technology especially in financial services and examining the regulation of virtual currencies.
Were Cryptocurrencies Banned In India?
In 2018, the Reserve Bank of India (RBI) had banned all the regulated banks and other financial entities regulated by it from dealing in digital currencies, citing concerns for illegal activities and a threat to financial stability.
The Finance Minister had also released a statement saying that the government does not consider cryptocurrencies as legal tender or coin and that all measures will be taken to eradicate the use of these crypto-assets in financing illegal activities to promote a healthy crypto ecosystem. Furthermore, the government will not consider it as a part of the payment system.
In February 2019, the S.C. Garg Committee had proposed a ban on all private cryptocurrencies, stating that private cryptocurrencies cannot serve the purpose of a currency and had no intrinsic value.
The volatile fluctuations in their values are not consistent with the function of money and cannot replace fiat currencies. The committee also proposed a jail term of up to 10 years and heavy penalties for anyone dealing with cryptocurrencies in India.
However, in March 2020, the Supreme Court (SC) of India overturned the RBI's 2018 circular stating the ban as unconstitutional. In May 2021, RBI announced that banks would be permitted to facilitate cryptocurrency trades. Banks such as HDFC Bank, ICICI Bank, Yes Bank, and the State Bank of India resume their transactions with cryptocurrency exchanges.
Ever since the Supreme Court ruling over the RBI ban on crypto, cryptocurrencies have been thriving in the country. Observing the growing interest in cryptocurrencies, the government introduced the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
The bill proposed to ban all private cryptocurrencies in India with certain exceptions to promote the underlying technology of blockchain, cryptocurrency, and its uses. And to create an official digital currency that will be issued by the RBI.
However, the much-hyped Crypto bill was not tabled during the Monsoon Session of Parliament as the government continued discussions with stakeholders.
What To Expect From The Cryptocurrency Bill?
The delay in introducing the crypto bill indicates that the government is not in a rush to make a decision, said Nischal Shetty, CEO of WazirX, a cryptocurrency exchange in India. The government seems to be taking a cautious approach to the matter as the size of the crypto community continues to grow rapidly in the country.
Though the bill was shelved, in a written reply to a query in the Lok Sabha in the Monsoon Session, the government reiterated its 2018-2019 stance that cryptocurrencies are not considered a legal tender or coin or as part of the payment system. And that measures will be taken to prevent illegal activities stemming from the use of crypto assets.
A good sign is that the government will continue to explore the use of blockchain technology for ushering in the digital economy.
The proposed bill is an important one that includes both finance and technology and it is a positive sign that the government is taking its time to understand the technology before making a hasty decision and also taking in the stakeholders' views to come up with a final solution.
The Finance Minister of India had also stated multiple times that the government is open to offering a window of experimentation to understand the utility of the technology and promote innovation in the fintech sector.
It is likely that the government will not ban cryptocurrencies but may come up with stricter rules and regulations.
The induction of tech-friendly ministers like Ashwini Vaishnav and Rajeev Chandrasekhar in the recently expanded Union Cabinet would bring favorable policies for the Indian crypto community.
India's Digital Currency
The RBI Governor, Shaktikanta Das had announced that RBI is working on its digital currency. RBI aims to leverage the distributed ledger technology in improving financial infrastructure and is open to supporting a central bank digital currency (CBDC).
CBDC is a virtual or digital currency issued by a central bank in the form of a tender. It functions similar to a fiat currency and is exchangeable one-to-one with the fiat currency. Cryptocurrencies like Bitcoin, Ethereum, Solano are however not legal tenders.
Is The Future Of Digital Currency On Hold In India?
By looking at the sheer interest and volume, it is clear that the market sentiments resonate with the assumption that digital currencies are the future. However, the Indian government has not yet released a framework to regulate nor set out a clear mandate.
It is important to note that countries such as the United States, Singapore, and others that have regulated cryptocurrencies went through multiple phases and India is just beginning. It is the wait and watch policy. Initially, it is challenging to adopt cryptocurrencies but eventually, governments and central banks will need to find a way to embrace them as they cannot afford to fall behind the technological advances.
The government of India is keenly observing the crypto space and allowing people to experiment with the blockchain or cryptocurrency. The government has made it clear that they are not shutting all options but are taking precautions to curb its misuse. Perhaps we will see a new framework for cryptocurrencies regulations.
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