The crypto phenomenon

The government seems to have acknowledged the need to recognise and regulate trade in cryptocurrencies, which enthusiasts say points to a new future, but critics warn that it is a bubble that is bound to burst.

The proposed cryptocurrency Bill is slated for discussion in the winter session of Parliament. The Bill is expected to be tabled by the end of 2021. Here, a view of Parliament House during the current session.

A bulletin that announces issues to be discussed in the winter session of Parliament, which began in early December, had on its list the proposed cryptocurrency Bill. This is significant as the Government of India had earlier been reluctant to endorse private digital currencies. Perhaps it has decided if it cannot beat it then it may as well join it, at least in some capacity. While details of the legislation are yet to be released, information available in the public domain makes experts in the field believe that if India legislates on cryptocurrencies, it will be a historic decision that may change the face of the economy. The Bill is expected to be tabled by the end of 2021.

Investors, financial services professionals and crypto enthusiasts view the move with mixed feelings. On the one hand, it means India is recognising the potential of a revolutionary system. The technology is moving at a breakneck pace that makes it imperative for the economy to get on the bandwagon soon. On the other hand, such intervention does not entirely respect the ideology behind cryptocurrency. Legislation comes from India’s innate need to protect. However, the core idea behind cryptocurrencies is that they are meant to be free of institutional regulation, fair and transparent with a secure method to conduct any form of transaction, not just financial. Cryptocurrencies protect their owners via the technology they use. In fact, says an expert, it goes a step further—it decentralises and democratises. Through the use of blockchain technology, which has been proved to be foolproof, the data remain completely safe and more importantly, traceable.

Following interviews with people knowledgeable on the subject, Frontline found that the collective opinion is that India should not lose out on this opportunity which, a crypto investor says, “is India’s Crypto moment”. According to a Global Crypto Adoption Index released by Chainanalysis, a blockchain firm, in August 2021, India, with approximately 10 crore cryptocurrency owners, tops the 154 countries that have declared cryptocurrency owners. Clearly, there is a draw to the platform, but the way forward has to be charted with vision and maturity and not with the current narrow view, say crypto supporters.

The journey of Bitcoin, the first official cryptocurrency, gives an indication that cryptocurrencies are gaining popularity. In March 2020, Bitcoin was trading at $4,000 per token. In spite of the pandemic, which brought uncertainty and volatility in the market, Bitcoin touched $50,000 per token. This meteoric rise indicates faith in the currency and its potential. It needs to be harnessed well, say its supporters.

The cryptocurrency Bill

According to news reports, the proposed Bill on Cryptocurrency and Regulation of Official Digital Currency is expected to change the definition of cryptocurrency to cryptoassets; private cryptocurrencies and assets will be regulated and not banned. Cryptocurrencies will not be recognised as legal tender currency but will be looked at as an asset class; crypto assets will be dealt with only by the exchanges. The Securities and Exchange Board of India (SEBI) will be the regulatory body for cryptocurrencies and transactions; a penalty of up to Rs.20 crore and imprisonment up to two years could be enforced on violators.

The key takeaway from the information available, say professionals, is that with SEBI becoming the regulatory body, it means India wants to keep control of the trading. For instance, each time a trade takes place, KYC documents and tax details will be required. This ensures the investor is on the government’s radar. For those who are already in the game with investments in cryptocurrencies and exchanges abroad, the Central government is setting a cut-off date for declaring assets. “ Mining” or payments in crypto will not be allowed. If evidence emerges that cryptocurrency is used in nefarious or anti-national activities, the money laundering law will apply to the perpetrators.

Importantly, the Bill lays down the groundwork for the creation of the official Central Bank Digital Currency (CBDC) to be issued by the Reserve Bank of India (RBI). An analyst says the law will aim at ensuring the RBI does not lose control of India’s monetary economics while minimising speculative betting around cryptos. He says unregulated cryptocurrencies have the potential to destabilise the macro economy, which at all costs must be protected. In addition, the government is looking to add crypto to tax laws. Details from news reports say Indians who trade or invest in cryptocurrencies on Indian platforms will probably come under the taxman’s lens. The government will be looking at amending current income tax and disclosure norms in the upcoming budget to include terms such as cryptocurrency. The Central government is considering amending Section 26A of the Income Tax Act and the Annual Information Regulation (AIR), better known as the “tax passbook”.

As cryptocurrency trading gains popularity, the RBI and SEBI have been raising concerns over businesses similar to chit fund operations in small towns accepting money to invest in cryptoassets. With the idea of making quick gains, small investors could be placing themselves at substantial risk, say the regulators. According to the RBI, some Indian businesses have already started accepting cryptocurrency payments for exports, thus posing a broader systemic risk. Therefore, before they lose control of a rapidly developing situation that they believe could potentially cause a crisis, it would be prudent to put in place regulations that would ensure Indians benefit and are protected.

What cryptocurrencies are about

In order to understand why cryptocurrency is gripping the world and why people are excited, it is essential to understand the definition and scope of digital currencies. The simplest way to define this reasonably complicated subject is: cryptocurrency is virtual or digital money that has secret codes embedded in it to make it safe and secure and, in some cases, gives the owners an alias so that their true identity is kept secret. Popularly known as digital tokens, cryptocurrencies can be transferred between two parties without the need for a centralised regulator. The transaction is facilitated through the blockchain technology, which maintains the data in a public ledger open for anyone to see.

Simran Mulchandani, a former banker who runs Rangeet, an edutech organisation, says the system evolved around the 2008 financial crisis that caused some of the biggest banks in the world to go bankrupt. Obviously, millions of people lost their life savings. A person, or a group of persons, called Satoshi Nakamoto, disillusioned with the way big banks handled the crisis, launched their own secure and encrypted money, called Bitcoin, to create a fair system that gives everyone control of their own money, shares and other belongings, without the need to completely depend on banks that failed them. “Power to the people!” says Mulchandani.

Following Bitcoin’s launch, other private digital currencies such as Ethereum, Litecoin, Zcash and Dash came into the picture. According to CoinMarketCap.com, a website on cryptocurrencies, there are close to 13,000 cryptocurrencies across the world. Not all are financial. Unlike traditional currencies such as the dollar or the euro, digital currencies are not particular to a country or area but can be used to buy things anywhere in the world. Cryptocurrency can be visualised as virtual coins that are stored online in a digital wallet. They can be used to buy things in the real world or online. For example, many restaurants and stores now accept payment in Bitcoin.

Mulchandani says cryptocurrency is not just about money. In fact, that it is only for financial transactions is a misconception. It will be an enabler for a lot more activities, which will help people. One of the reasons for the popularity of cryptocurrencies is that they are transacted on the blockchain technology, which provides transparency, security and traceability. Another selling aspect is the peer-to-peer transaction method. Many people find the removal of middlemen and their costs to be an attractive feature.

Enter blockchain

“Technological breakthroughs like steam engines, electricity, computers, the Internet and smartphones have altered the trajectory of humankind—blockchain technology is one such seismic event,” says Mulchandani. “Before the Internet and smart phones, would it even be conceivable that we could order a taxi by pressing a small icon on our phones? If we could embrace that technology, we will in time adopt this too.” In fact, blockchain technology has progressed beyond token trading. Several countries, for instance, are moving towards blockchain-based land registries, he says.

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. Because of this blockchain is popularly known as the Trust Machine. It is essentially an Internet notary service that updates transaction ledgers, making them immutable. The ledger records ownership and transfer of any type of asset, claim, or obligation. Its security rests on a method by which transactions are duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.

A report by Mulchandani titled “Blockchain will help society” published in BusinessWorld says: “Assets are referred to as digital coins accessible through a wallet on a smartphone. Users can buy, sell and transfer tokens in real time without involving middlemen. The transaction is recorded on a blockchain and is universally visible. A core feature of blockchain is the concurrent swap of digital coins. The exchange of coins happens efficiently as though the parties are standing face-to-face, only better because transactions are executable across the globe. In their wallets, users will have coins of fiat currencies. But of greater importance is that wallets will also include other types of coins from property to commodities, company shares, bonds, insurance, loyalty points, solar energy, tree tokens that accrue carbon credit rights.

“A huge diversity of coins will emerge, changing the landscape of monetisation of assets and exchange of value. Imagine a buyer using tree tokens in their wallet and exchanging them for Starbucks settlement coins, using them to receive a coffee! Everyone can choose what is best for their circumstances, democratising the landscape. This system will be more efficient, because digital coins are exchanged in a second without the heavy lifting of physical goods. There are no minimum transaction sizes, small transactions are not penalised with large fees. A global marketplace for all asset classes and instruments will exist, levelling the playing field.”

Not yet ready for it

The naysayers include legendary investors such as Warren Buffet. They have trashed the new currencies going so far as to calling them “rat poison”. A stockbroker in Mumbai says cryptocurrencies have no intrinsic value, they are non-productive assets that are traded because there is a demand for them. He says: “It appears to be what we call casino culture: trade freely and merrily for quick gains. With stock, we analyse companies and products before buying script. Here, there is nothing. It sounds bizarre. It is all very grey still. That is why for us in the financial sector it is reassuring to know the government, SEBI and the RBI are viewing the issue seriously.” Raghuram Rajan, former RBI Governor, recently said in a television interview: “A lot of cryptos have value only because there is a greater fool out there willing to buy.”

The reality is cryptocurrencies are a draw particularly for younger investors. It could be compared to fiat currency trading. People have faith in the dollar, and that is why it is considered a strong currency. Cryptocurrencies are beginning to see a similar trend of faith. This explains their high prices. The government will have to implement a plan soon as a lot of money is being channelled into this asset. “All bubbles eventually burst. This one will, too, and we need to be able to have a safety net in place so that people do not squander away their savings,” said the stockbroker.

Analysts say the need to regulate stems from serious concerns that are associated with money fraud and market manipulation. The lack of authorised information on cryptocurrencies and the fact that they are traded on the simple premise of demand and supply make them highly volatile. Therefore, the government believes investors need to be protected. As thousands of cryptocurrencies exist, a regulatory authority needs to endorse reliable ones so that investors can make informed choices. It is common knowledge that an unregulated system, especially when it has to do with money, will attract fraud. Systems need to be in place to prevent duping and laundering.

The financial analyst Mihir Desai says no central bank or government will relinquish control over money. They play a crucial role in economic intervention, particularly in times of crisis, such as the COVID-19 pandemic. Yet private cryptocurrencies will not allow a centralised bank to fulfil its traditional function of setting interest rates and controlling and manipulating money supply effectively. It is highly unlikely governments will endorse private crypto for this reason.

Replying to questions on the cryptocurrency Bill and digital currency issues during the ongoing Parliament session, Finance Minister Nirmala Sitharaman said the government had no plans to boost the cryptocurrency sector in India. Additionally, she said the proposed CBDC will not have the volatility that is associated with priva te virtual currencies. The government is willing to consider the introduction of CBDC because it has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage owing to lower transaction costs, and reduced settlement risk.

A study conducted by BrokerChooser, a comparison platform, said India ranked seventh in a list of 50 nations on the level of interest in and awareness of cryptos. Interestingly, a World Economic Forum study revealed that Nigeria was the highest user of cryptos. Vietnam is second and the Philippines third. Latin America is another region where cryptocurrency is gaining momentum. Significantly, the study says European and English-speaking nations had low levels of adoption. El Salvador is currently, the only country to consider Bitcoin legal tender. As per the Global Crypto Adoption Index, 42 per cent of the crypto transactions in India are hefty and institutional-sized, amounting to over $10 million (roughly Rs.74 crore). India appears to have sensed the future, say crypto enthusiasts.