In simple words, cryptocurrencies are nothing but digital or virtual currencies that can be used to pay for goods and services. Neither are they recognized by the Government as legal tender nor are they regulated by the Central Bank of a country and therefore, they are decentralized and are not controlled by any country. They have been created using computer encryption techniques that limit the number of monetary units (or coins) created and then verify any transfer of the funds after their creation. These currencies are secured by cryptography and hence, the name is cryptocurrency. This creation technique of cryptocurrencies is known as “mining” due to its theoretical similarity to mining gold or other precious metals. To mine cryptocurrency, one needs to solve complex algorithms or puzzles. The technology which is used for cryptocurrencies is Blockchain or Distributed Ledger Technology and it was the first time used for Bitcoins, one of the most famous cryptocurrencies. El Salvador has become the first country, which has approved Bitcoin (cryptocurrency) as a legal tender. There, in El Salvador, Bitcoins have been loaded into digital wallets and the same can be accessed through a mobile app. The wallet is known as “Chivo”, which means “cool” in the local language.
Internet and Mobile Association of India v. Reserve Bank of India
In April 2018, the RBI issued a circular that prohibited the banks and other organizations from trading in Virtual Currencies. The circular barred the banks from providing any sort of services either to any organization or individual dealing or settling virtual currencies. This circular issued with a view that virtual currency trading is prone to hacking and this could lead to terrorist attacks, money laundering, etc. Also, Circular further directed the banks not to deal with certain services such as clearing, giving loans against virtual currencies, maintaining the accounts, registering, trading, settling, accepting the virtual currency, opening accounts of exchanges, and trading in such virtual currencies. Against such circular, a petition was filed by the Internet and Mobile Association of India before the Supreme Court. The Court set aside the circular issued by the RBI but did not declare digital currencies as legal or illegal.
TYPES OF CRYPTOCURRENCIES
Cryptocurrencies can be classified into two types (i) Bitcoin and (ii) Altcoins. After the arrival of Bitcoin in the year 2009, several other cryptocurrencies were created and collectively all such cryptocurrencies are known as Altcoins. Litecoin, Ethereum, Monero, Tron, Dash, etc. are examples of Altcoins.
THE CONCEPT OF LOYALTY POINTS
The concept of the Loyalty points program is much older than cryptocurrencies. They have been created for providing rewards or incentives to the customers in a bid to retain them with the company or get them to shop again at the company associated with the program. Loyalty points, as the name suggests, are points that have given to customers ‘loyalty’. Being a loyal or regular customer of a company earns an individual a certain loyalty point with each purchase that can be later converted into a discount or a freebie. It is generally created for centralized authorities like companies but cryptocurrencies are decentralized and unregulated. Therefore, many risks are associated with the use of cryptocurrencies.
THE CABINET NOTE ON CRYPTOCURRENCY
- The Cabinet note suggests that Cryptocurrency has not been recognized as legal currency in India. The proposed Bill also describes Cryptocurrency as a Crypto asset, according to the Cabinet note.
- Crypto assets shall be dealt with the existing crypto exchange platforms which shall be regulated by the Securities and Exchange Board of India (SEBI). To declare and bring those having crypto assets under the crypto exchange platforms, a cut-off date shall also be prescribed for them.
- The proposed digital currency of the Reserve Bank of India, shall not be clubbed with the new crypto Bill. However, the central bank shall regulate issues related to cryptocurrency.
- Anyone who is found to violate the exchange provisions shall be penalized with criminal imprisonment of up to one and a half years. In addition to this, the regulator may also impose penalties in the range of Rs 5 crore to Rs 20 crore.
Anyone who uses the crypto assets for terror-related activities shall be punished under the provisions of the Prevention of Money Laundering Act (PMLA).
THE PROPOSED CRYPTOCURRENCY BILL
An inter-ministerial committee was constituted by the Ministry of Finance in the year 2017. The purpose of this committee was to study different issues related to virtual currencies and propose actions to be taken. It pointed out the various risks associated with technology-based risks such as phishing and Ponzi schemes, illegal and criminal activities such funding to terror activities and money laundering, decentralized virtual currencies, including value fluctuation risks, etc.
The Committee report had recommended the introduction of CBDC (Central Bank Digital Currency or digital rupee) as a digital form of fiat money, which is intended to be issued by the RBI and approved by the Central Government in India. It is also recommended for banning proposed cryptocurrencies. Currently, in the coming days of the ongoing winter session of Parliament, the Central Government is planning to table the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, As per the news reports, the proposed bill seeks to ban all private cryptocurrencies except a few to promote the underlying technology of cryptocurrencies and their uses in India.
The most important thing that one needs to be aware of while one is investing in cryptocurrencies is that his or her investment can go down to zero as cryptocurrencies are very high risk, unregulated investment and tomorrow they could lose their demand temporarily in the market and one can lose his or her all investment instantly. Secondly, one should not trade in future and options unless they are aware of them. Just buy the cryptocurrencies and hold them rather than speculate over them by using available tools. These cannot be a good option for a person due to the volatility given to cryptocurrencies. So, it is strictly advisable to one that if he or she is completely new in the markets, they should not try them.
On the other hand, the introduction of CBDC has also the ability to provide significant benefits, such as reduced settlement risk, higher seigniorage due to lower transaction costs, reduced dependency on cash, etc. In the coming future, CBDC could play a lead role as a more trusted, regulated, efficient robust, and legal tender-based payments option. With this, we can conclude that no doubt that there are many risks associated with CBDC, but they need to be carefully evaluated against the potential benefits.
Author(s) Priyanka Gupta (Adamas University, Kolkata)
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