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Should Crypto be legalized in India

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A panel led by finance secretary Subhash Chandra Garg drafted a bill titled, “Banning of Cryptocurrencies and Regulation of Official Digital Currencies Bill 2019.” While the Reserve Bank of India has distanced itself from this draft bill, people on both sides of the economic aisle ask for this Bill to be scrapped. Cryptocurrency is not supposed to be banned without discussing its values and downfalls. Banning will also mean that the money we invested is at stake, India’s national security and monetary policy are at stake, and most notably, India’s participation in the future of technology is at stake.

A cryptocurrency is an alternative form of payment to cash, credit cards, and checks. The technology behind it allows you to send it directly to others without going through a 3rd party like a bank In other words, cryptocurrencies are like virtual accounting systems. They keep a record of all transactions. The transactions are bundled into blocks, which are cryptographically signed (hence “crypto” currency)

Problem? Crypto exchanges got a second wind after the supreme court on March 4th struck down the virtual ban on trading announced by India’s reserve bank in April 2018. The RBI had prohibited banks and financial institutions from providing services supporting digital currencies like bitcoin after a string of frauds were unearthed post-2016 demonetization. Large banks have not supported crypto trading entirely.

However, in a blow to estimated 1.7 million Indian digital traders, the government is planning to bring in a law to ban trading in cryptocurrencies. The Indian traders were already hurting due to the lack of regulations in the sector as they waited for clarity from the government and the  RBI. However, for a change, the industry was flourishing during the lockdown. India is on the verge of banning a trillion-dollar industry instead of using it to strengthen our finances

The point is that this Cryptocurrency is legit, and it is enormous and is nothing compared to the future that awaits us if we embrace it but needs to be regulated to avoid mishaps.

In  February 2018, late Arun Jaitley and the then finance minister of India said that the government might take measures to eliminate the use of cryptocurrency. Again in April 2018, RBI also banned banks and other associated financial entities from encouraging the use of cryptocurrencies as a medium of exchange. Later, in March 2020 the ban was lifted by the Supreme Court as it was deemed unconstitutional. Now in 2021, the government is planning to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill which will set the tone for India’s own digital currency. Now the issue is that such varied statements are sending mixed signals to Indian citizens. This might lead to some resistance and mixed feelings towards cryptocurrency when legalized.

Fig 1: Value of Bitcoin (in $)

Fig 2: Value of SENSEX (in points)

As evident from the graphs, the returns on cryptocurrency, in general, have been much more than BSE or NSE stocks.

The cryptocurrency was initially deemed as a bubble that will burst, but recent years have taught us that it is in fact an asset that is here to stay. Different forms of cryptocurrencies are expected to stabilize at some fair value in the future depending on multiple macroeconomics factors

What/Who gives cryptocurrency its’ value and what all parties are involved who will play a key role in deciding in which way will the camel sit.

So first, talking about its value, any cryptocurrency, gets its value from three aspects, which are, rules, history, and value(monetary). Rules refer to the rules that concern the structure and the code written by the people who developed it, and these are the rules that would be looked upon in case there is a fork between two parties regarding authenticity. History refers to the transactions, which help keep track of the currency and effectively let us know who possesses how many bitcoins. And value, as we know cryptocurrency requires large-scale computations to be mined, and thus therefore the whole process is very capital intensive and demands large investments.

First party involved are the developers of various cryptocurrencies, the ones who write the rules of a given currency. The next party and a very important one consists of miners, these are the various developers and coders who spend their time and intelligence in understanding the blockchain technology. Another important stakeholders is the investor, who funds the process of mining which by the way is a very capital intensive one, some theories suggest that the capital required behind building a bitcoin may soon be equivalent to printing currency worth the same value. Another big and probably the most important segment of stakeholders is the merchants and the customers, they are the ones who generate the primary demand for any cryptocurrency and hence drive the long term price, in fact, all the real power that the investors hold derives from customers and merchants only, and investors are simply placing a bet on which currency will they move to in the long run. Payment services also come in and will play a decisive role in the legalization of cryptocurrency as once the currency and the users are there, there needs to be a platform that allows for transactions to occur.

Legalizing cryptocurrency is a big task and its advantages and disadvantages must be kept in mind while doing so.

Advantages:

Legalizing cryptocurrency in India will open new business avenues for crypto miners and traders. When they have backing from the judiciary of the country, they won’t have to fear anything and they could grow startups and create jobs for thousands of people in India. It would also help in growing the GDP of the country by a significant margin.

Crypto would  curtail the transaction fees. When an individual sends money through a credit card, the bank takes its fees from the user for its services. But when the same amount of money is sent through cryptocurrency, the transaction fees are very less. It is because the crypto transaction fees are based on the amount of data sent and that is very less. According to Investopedia, the crypto transaction fees are ~25% lesser compared to normal credit card/banking fees.Using cryptocurrency also gives more power to people concerning their hard-earned money. It is because crypto is not owned by any organization and hence there would be a lack of interference from the banking industry regarding crypto transactions. Legalizing cryptocurrency will help in escalating international businesses. It is because it has universal recognition and it is legal in many developed countries. There would be no need to convert one currency to another as it is universally accepted and recognized.

On 5th April 2021, the market capitalization of the global crypto market crossed the $2 trillion mark. The two largest cryptocurrencies by value are Bitcoin and Ethereum. Bitcoin holds more than $1 trillion and Ethereum holds about $245 billion in market capitalization. To put the number in perspective, the market cap of gold as an asset is around $11 trillion. This shows the market capitalization of cryptocurrency is high enough to gain our attention and it can no longer be ignored. USD is a very important foreign currency, not only for Indian but for the world. Countries have tried to reduce their dependence on USD and cryptocurrency has the ability to allow them to do so. In this way, it can surely influence the world economy and India might be left out if they don’t board the early train by legalizing the cryptocurrency.

So one can easily say that legalizing cryptocurrency will help India in enhancing its global outreach and it would be beneficial for its citizens as well.

Disadvantages:

As cryptocurrency is online and encrypted, hence it is highly vulnerable and sensitive to be used in illegal activities. Such activities may include crypto funding and transactions for smuggling, drug trafficking, terrorism, kidnapping, dark web activities, and so on. This fact is backed by a Forbes article dated January 2021, and the crypto fundings account for 5% of such activities, and they are growing. Another aspect that one must take note of is hacking and malware activities. Cryptocurrency is 100% online and hence there is always a possibility for hacking because it is entirely operated in the digital domain. In 2019 alone, 313000 cases of cybersecurity were reported in India by the Indian Computer Emergency Response Team (ICERT). So there is always a digital hacking risk.

Fig 3: World map showing the advancement of CBDC in different countries

To cope up with these disadvantages, some countries are looking at Central Bank Digital Currencies (CBDC). CBDC is a form of digital currency issued by the central bank or the regulatory monetary body of the country

Therefore it is high time we legalize crypto in India. But before that there are certain things to be thought extensively.

Due to the illegal status of the crypto various potential tax revenues, FDI inflow, and Talent which went unnoticed need to be recovered. The banning caused reduced global investment in more than 350 startup generations’ revenue worth 70000 million USD daily. With the increased malware attacks there is the need to invest in startups and public agencies, like Kaspersky to prevent crypto trojans from attacking the digital system of transactions. Even if crypto is legalized in India there is a need to set up password authentication & recovery agencies to make crypto secure & refundable. There is a need to implement laws and regulations not nationally but internationally as well to identify problems and take capacity-building measures instead of fearing the uncertainty. CRODC 2021 may be a game-changer but better regulation will be required for the issues that will arise with increased usage of the crypto in large amounts

If India sets up its own crypto regulated by the government, and there exists a possibility of things going south, then it is the responsibility of the regulatory authority (tentatively RBI) to maintain decorum. The crypto, as well as fiat money, are quite similar in this sense since none of them is backed by anything. So the things would go in a similar fashion for both except the fact that crashing crypto is not as easy as fiat money laundering.

(By: Yash Kabra, Anoop Gopal Singh, Amartya Bhargava, Abhay Kulshrestha, Raghav Goel)

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