Cryptocurrency and Developments

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On May 22^nd 2020, RBI stated in a reply to RTI query that there is no ban on banks in providing services to traders dealing in virtual currencies.

Let’s understand certain terms before we move ahead.

Fiat Money and Virtual Currency

Fiat Money is any currency that is issued by the government of a country. It acts as a legal tender and is regulated by the country’s central bank.

Virtual Currency(VC) refers to all forms of non-fiat money traded online. So, it means that virtual currency is not issued or regulated by the government.

Cryptocurrency

Now that we have understood the above terms, we can easily understand Cryptocurrency.

It is a type of virtual currency that is decentralized and protected by cryptographic encryption (hence the name- ‘cryptocurrency’). Decentralization, here means that there is no central authority that maintains the records of transactions.

These transactions are maintained across distributed computers as on the network as ‘Blocks’ and can be seen by all on the network globally. This technology is called Blockchain Technology.

Bitcoin is an example of cryptocurrency.

How does Cryptocurrency work?

I will try to explain this with a simple example.

As discussed above, cryptocurrency is not a physical currency and its value is not backed by the government. So, for example I use a code to develop a cryptocurrency named AseemCoin and say that its value is Rs. 100.

To make AseemCoin useful, I need to find recognition for the same. People need to accept that AseemCoin has a value of Rs. 100. Also, I need a wallet, to store the cryptocurrency (AseemCoin). Like the currency, its wallet is also digital. Using this wallet and the cryptocurrency’s platform (say, an App or a Website) one can send and receive the cryptocurrency. This entire transaction is encrypted using keys- public and private keys.

Cryptocurrency Mining

In simple language, cryptocurrency mining is the process of solving the cryptocurrency transactions. The process involves tracing the transfer of cryptocurrency from origin to destination and validating the correctness of the same.

It is done using powerful computer systems on a secured network. It is like a data center but these computers are distributed across the network and not at a single place.

The Timeline

Now that we have understood the basic concept of Virtual Currencies, let’s see the developments that led to the RTI query as mentioned in the beginning.

6th April 2018: RBI issues circular banning the banks and other RBI regulated entities in dealing with virtual currencies within three months. It should be noted that the ban was not on virtual currencies, but on using banking channels to trade in the same. So, the cryptocurrencies were never illegal in India. But with this circular, RBI had banned the investors from transferring money to and from the banks for the purpose of cryptocurrency trading. This also meant that the investors could not liquidate their cryptocurrency holdings through banks.

3^rd July 2018: Supreme Court upholds the ban by RBI in a case filed by Indian Mobile Association of India (IMAI), challenging the ban.

6^th July 2018: The ban comes into effect.

4^th March 2020: After multiple litigations, Supreme Court lifts the ban imposed by RBI.

22^nd May 2020: RBI replies to RTI query filed by a cryptocurrency exchange, Unocoin’s co-founder BV Harish. RBI clarifies that there is no ban on banks and other regulated entities on dealing with virtual currencies.

Why RBI placed a ban?

Now, the ban has been lifted but let’s understand, why RBI actually issued such a circular.

In December 2013, RBI issued a Press Release cautioning the users, holders, and traders describing the risks associated with VCs. In the press release, the following risks were highlighted:

a)  Data protection: The VC is maintained in digital form. Hence, it is prone to password and other credential theft and malware attacks leading to loss of VC.

b)  Difficulty in tracking: The transactions of VC takes place on peer to peer basis, i.e. between two people, without any authority from any central agency regulating the payment. This makes it difficult to trace the transaction in case of a dispute.

c)  Volatility: VC is not backed by the government. So, its value is based on speculation. This volatility can expose users to financial loss.

d)  Unclear jurisdiction of exchanges: VCs are generally traded on exchanges setup in jurisdiction with unclear legal status. So, the investors may be exposed to legal issues in such dealings.

e)  Use for illegal activities: It has been reported that VCs are being used for illegal activities. Since the transactions are peer-to-peer and are difficult to track, the users might be subjected to unintentional breach of Anti-Money Laundering and Combating Financial Terrorism (AML & CFT) laws.

f)    Lack of proper regulatory framework: RBI had stated that as on date there was a lack of regulations w.r.t cryptocurrencies in India.

RBI also issued two more Press Releases in February and December 2017, cautioning the users against the aforesaid risks.

An Inter-Ministerial Committee (IMC) formed by the government recommended that a Draft Bill ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019’. This bill recommended hefty fine and jail term for anyone dealing in cryptocurrency.

However, this bill was in consultation till September 2019. MoS- Finance, stated in Rajya Sabha that there is no prohibition on cryptocurrencies in India.

Now, that curbs have been lifted, so we can safely say, this Bill never materialized.

The Recent Supreme Court Judgement

Following are some of the important points of the judgment dated 4^th March 2020in the case IMAI vs RBI, based on which the April 2018 circular of RBI regarding VCs was quashed:

a)  Doesn’t pass ‘test of proportionality’: It is a legal term meaning, the punishment should be in proportion to the damage done. RBI has not been able to prove damage from cryptocurrency trade, to any of its regulated entities.

b)  Doesn’t match the stand: RBI maintains the stand that VCs are not banned in the country.

c)  Approach of other countries: Other countries have not imposed a blanket ban, rather they exercise caution in dealing with VCs. The entire ban is pushing the crypto ecosystem underground. 

RBI has powers to regulate the currencies in the the system, so instead of banning, a regulatory framework should be put in place.

What does lifting off the ban mean?

It means that now the users can legally trade cryptocurrencies on cryptocurrency exchanges in India using banking channels again. They can pay for the purchase of cryptocurrencies through their bank accounts and even transfer the sale proceeds into their accounts on selling their holdings.

However, Cryptocurrencies are still not a legal tender in India. That means one still cannot purchase goods and services using cryptocurrency in India.

Bitcoin

Bitcoin is the first and one of the most famous cryptocurrencies. A discussion about cryptocurrencies is incomplete without talking about Bitcoin. It has become so popular that now it is synonymous to cryptocurrency.

The concept of Bitcoin was developed by Santoshi Nakamoto in 2008 and it was released as an open-source network in 2009. He left the project in 2010. Not much is known about him. No specific person owns Bitcoin. It is owned by the Bitcoin users themselves.

The The value of Bitcoin was not always so high. On 22^nd May 2010, the first real-world transaction took place using Bitcoin. At that time the value of 1 Bitcoin (BTC) was less than $0.01. But as of today 5^th June 2020, 1 BTC = USD 9700 (approximately). This value has been achieved because BTC is recognized as equivalent to money.

The value of Bitcoin has been extremely volatile. It has witnessed both Boom and Bust in over a year between August 2017 and December 2018. It started rising in October 2017 from around USD 5600 to USD 19700 all-time-high on 17^th  December 2017.

But a few days later, in one month from January to February 2018, it fell by 65% from its peak value.

It is interesting to note that as per the official website of Bitcoin, only 21 million Bitcoins can ever be created. But only a fraction has been released online on exchanges.

Developments around the world

Libra Cryptocurrency

Libra is an upcoming cryptocurrency, announced by Facebook Inc in 2019. It is still in the experimental stage and is proposed to be launched this year.

Libra will be overseen by Libra Association, a non-profit organization founded in Geneva, Switzerland.

 Libra network initially had many companies of different categories as its members, like payments services companies, venture capital companies and others.

It was said that Libra will have greater acceptance as it will be accepted by many brands. Though some companies have left Libra network over the period but new ones are joining in too.

For example, an e-commerce company, Shopify in February 2020 and payment process company Checkout.com in May 2020 has joined the network.

Unlike other cryptocurrencies, there will be no mining in Libra. It will be only processed by Libra Association members.

As per Libra’s official website, Libra will be backed by Libra Reserve, a reserve of cash and cash equivalents equal to the value of each Libra Coin in circulation.

Libra payment system will have Libra single currency stablecoins or multicurrency coins, i.e. they will be  pegged to single fiat currency (US Dollar, Euro, and Pound) and a composite of these currencies respectively.

Like any other cryptocurrency, Libra will also have a wallet. Initially, it was called Calibra but now it has been renamed to Novi on 26^th May 2020.

We still have to see how Libra actually rolls-out in the future.

Introduction of Digital Currency by China

In April 2020, China’s central bank launched a digital currency called e-RMB in four cities as a pilot project. It will be regulated by China’s central bank- People’s Bank Of China.

This concept is called Central Bank Digital Currency (CBDC). It is the digital form of fiat currency of a nation and is entirely different from cryptocurrency as it is backed by the government in the country.

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