Cryptocurrency, that one word has taken the financial world by storm, and it is changing the world. Initially the RBI choose to ban all cryptocurrency transactions in India but soon the Supreme Court reversed that and put into process the necessary legislation required to regulate it. The objective of this paper is twofold, firstly to explore to what cryptocurrency is, and secondly, how should a country like India go about this regulation.
Before we even begin to talk about regulation, we must first understand what cryptocurrency is and the multitude of aspects which accompany it.
Cryptocurrency is defined as a digital currency that is secured by various forms of encryption. Most of these currencies are decentralized networks based off of block chain technology – a ledger spread across all of its users. Some popular examples of cryptocurrency are Bitcoin, Ethereum, and Dogecoin. But none of that would make sense to a common person with a basic understanding of computers, allow me to break it down for everyone’s convenience. Very simply put, Cryptocurrency is a digital peer-to-peer currency. You can’t hold it in your hand or put in your pocket, but you can spend it online. That’s the digital part. Your money is not stored on a large server farm in a billionaire’s underground bunker, instead, everyone’s Bitcoins are actually encrypted into millions of little files saved on the computers of the millions of Bitcoin user in the world, that’s the peer-to-peer part. Blockchain is the virtual ledger of all bitcoin transactions. When you make a transaction, suppose you order place an order for a novel on an e-commerce platform like Amazon and choose to pay via Cryptocurrency, the record of that transaction will be recorded in your account, Amazon’s account and lastly on the blockchain.
Now that we understand what cryptocurrency is, we must begin to wonder why it exists at all. The world has plenty currencies in existence, 180 to be precise. With the technology available today cryptocurrency is promising to solve seemingly impossible to fix problems across the entire financial system. Of all the advantages that it has to offer, they all arise from the same 3 core aspects of its functioning – Decentralization, Confidentiality, and the Internet.
When any system exists in a decentralized fashion, what it means is that there is not one singular governing feature but various equal governing features scattered across. Referring back to when this article talked about how blockchain data is not stored on any single server in the world but on millions of computers, what this essentially means for cryptocurrency is that it is impossible to hack because it is simply impossible to access any useful data on any single computer. Further, since this a peer-to-peer network, all transactions flow directly between senders and receivers thus cutting out traditional middlemen such as banks leading to absolutely no transaction fees and also quick transactions.
Although it is fairly important and easy to maintain a record of all transactions, these transactions are identified by the online wallet of the user and not the actual identity of the user. In a traditional bank in India, if I were to open a bank account, I would have to submit a PAN Card, Aadhar Card, Residence Proof and various other details through which any transactions could be traced back to me. This is not the case in cryptocurrency, transactions can only be traced back to my account, but no document exists to link my personal identity to my account.
In this far from equitable world, many more people have access to the internet than traditional banking systems. By providing a bank that exists freely on the internet, cryptocurrency can provide banking facilities to the ‘unbanked’ population of the world. Moving forward in a world of online transactions, online banking facilities are assuming more importance.
These were the myriad of advantages that digital currencies have to offer, but there exist numerous disadvantages as well.
One of the most easily identifiable disadvantages of cryptocurrency is also one of its advantages. Confidential transactions can be used for any number of purposes. The impacts of anonymized financial transactions are on two ends of a spectrum – on one end you have assured financial privacy as you can never be the victim of a targeted hack on your finances, on the other end you can transfer money to anyone for any purposes without the worry of it being traced back to you. SilkRoad, a popular marketplace on the darknet was able to offer a wide variety of illicit services such as home delivered drugs, weapons and even assassins for hire all while offering Bitcoin as a secure and reliable payment method. On the 11th of August 2020, the United States government finally seized over one billion dollars in Bitcoins which were proceeds from the Silk Road but could not identify the person behind the account.
Price Volatility is another important drawback that needs to be considered. If we were to look at the exchange rates for Bitcoin over the last few years, we see that although it has immense value, now that’s not always been the case. In July 2017, one bitcoin was worth 2700 USD and by January 2018 it was worth 17,098 USD, this shows exponential growth, but soon after its value steadily declined to a low of 3400 USD in December 2018. Today, on the 15th of April 2021, one bitcoin has steadily grown to being worth 62,985 USD.
This growth in value may be steady but at the same time it is also abnormally fast, an abnormal market behaviour leads to market bubbles. Bubbles are economic cycles that start with a fast boom in market value, followed by a quick decrease. Bubbles are not foreign to crypto currencies. In fact, the drop in value of Bitcoin in 2018 mentioned above was a result of bubble pop.
The final drawback that is worth noticing brings us back to the topic at hand, regulation. What cryptocurrency lacks most, is a uniform method of regulation and until it is not regulated by a centralized authority, it will always remain to be a risky investment. This was a viewpoint even confirmed by Warren Buffet in one of his many talks criticizing investments in cryptocurrency. The lack of regulation prevents any systems for protection of the currency, governmental oversight or uniform methods to prevent illicit transactions being made for controlled substances or terrorism.
Although the Crypto Currency Regulation Bill of 2021 has not been made public yet, we can stipulate that these currencies will not be banned in India, however, a great deal of experimentation and exploration with these technologies will be required before the regulation model can evolve into something beneficial. From the previous text of this article, we can understand that Cryptocurrency as a tool has a potential to do both, good and harm, and the essential need of regulatory bodies will be to ensure that the use for harms should be avoided.
If we are to consider the aspect of confidentiality of payments, a successful regulatory model will have to preserve the dimensions of financial privacy for users but also create room for monitoring illicit transactions being made for illicit purposes. A way this can be achieved is by monitoring suspicious accounts but close inspection being allowed only after necessary hearings in a court of law. Further, regulation will need to create a technological mechanism to provide stability to cryptocurrency and this can be done in two ways, firstly, a centralised authority that may control the amount of the currency in circulation and secondly, government ownership over significant cryptocurrency reserves. And lastly regulation would have to create room for future technological developments. Today, blockchain is the leading technology, but if regulation limits itself to only applying on blockchain based currencies, future currencies based on better and fresher technology would go unregulated.
To conclude, new technology makes the world a new place. From the first inception of Skype allowing people across the world to talk face to face and now in a digital pandemic where Zoom has carried education and productivity forward, Technology is this ever-evolving creature that will go on with or without us. It is our choice on how we wish to reap its many benefits or watch while the rest of the world does it and passes us by in an instant.
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This article has been written by Akshaja Singh, B.A.LLB. student at Army Institute of Law, Mohali. It was submitted as an entry to Kanooniyat’s Article Writing Competition.