New Crypto Bill seeks to ban private players - Daily Current Affair Article

Why in News:

The Union Government will introduce a Bill to regulate crypto currency and ostensibly ban all private crypto currencies, along with 25other pieces of legislation, in the winter session of Parliament that begins on November29.

What is Crypto currency?

Crypto currency is a specific type of virtual currency, which is decentralised and protected by cryptographic encryption techniques. Bitcoin, Ethereum, Ripple are a few notable examples of crypto currencies. Decentralisation implies that there is no central authority where records of transactions are maintained. Instead, anyone can create a transaction. This transaction data is recorded and shared across multiple distributor networks, through independent computers.

Reserve Bank of India's stand on Virtual Currencies

  • Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
  • In view of the associated risks, it was decided that, with effect from April 6, 2018, entities regulated by the Reserve Bank could not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. The RBI did send a circular to banks directing them not to provide services for those trading in cryptocurrencies.
  • Those challenging the RBI Circular in Supreme Court had argued that these were commodities and not currencies. Therefore, RBI did not have the jurisdiction. The circular was set aside by SC, which found it to be “disproportionate”.

Why the Government plans to regulate crypto currency and ostensibly ban all private crypto currencies?

The central government took a decision on the recommendation of committee. A high-level committee suggested that all the private cryptocurrencies except any virtual currencies issued by state, will be prohibited in India.

The Committee noted various regulatory concerns around virtual currencies, and crypto currencies in particular. These include:

  • Fluctuation in prices: Crypto currencies are subjected to market fluctuations and the lack of a centralised authority makes it difficult to regulate them. For instance, in December 2017, the value of Bitcoin crypto currency was around USD 20,000 per coin, which reduced to USD 3,800 per coin by November 2018.
  • Risk to consumers: The Committee also noted that there are several vulnerabilities in the design of crypto currencies which leave consumers open to risk of fraud.
  • Impact on power consumption: The Committee also observed that crypto currencies can have unfavourable consequences on India’s energy demand. The Committee noted a study which estimated that 19 households in USA can be powered for one day by the electricity consumed in a single transaction of bitcoin crypto currency.
  • Potential use for criminal activity: The Financial Action Task Force, an intergovernmental organisation to combat money laundering, in its report (2014) observed that virtual currencies provide greater anonymity than traditional payment methods.

Challenges with banning crypto currency:

  • Difficult to categorising: categorising the cryptocurrencies as public (government-backed) or private (owned by an individual) is inaccurate as the cryptocurrencies are decentralised but not private. Decentralised cryptocurrencies such as bitcoin aren’t or rather, can’t be controlled by any entity, private or public.
  • Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban. Back then, block chain experts moved to countries where crypto was regulated, such as Switzerland, Singapore, Estonia and the US. With a blanket ban, block chain innovation, which has uses in governance, data economy and energy, will come to a halt in India.
  • Deprivation of Transformative Technology: A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world, including by some of the largest enterprises such as Tesla and MasterCard.
  • An Unproductive Effort: Banning as opposed to regulating will only create a parallel economy, encouraging illegitimate use, defeating the very purpose of the ban. A ban is infeasible as any person can purchase crypto currency over the internet.

Is there any country which has permitted use of cryptocurrencies?

Different countries have adopted different regulatory frameworks with respect to cryptocurrencies. Some countries have permitted the use of cryptocurrencies as a payment system while there is a complete ban on cryptocurrencies in some others. El Salvador is the only country which has allowed use of Bitcoin as legal tender.

Way forward:

Smart regulation is preferable, as a ban on something. Even in China, where cryptocurrencies have been banned and the Internet is controlled, trading in cryptocurrencies has been low but not non-existent, the government must resist the idea of a ban and push for smart regulation.

Source: The Hindu

General Studies Paper 3
  • Science and Technology- developments and their applications and effects in everyday life.

Key phrases: decentralised, cryptographic encryption, virtual currencies, price fluctuations, criminal activities, anonymous transactions, transformative technology, smart regulation