Author Image

REEDLAW

Editor

Share this Article:

Mail%20Icon_edited.png
Twitter.png
WhatsApp Green.png
Copy%2520Icon_edited_edited.png

Cryptocurrency: An Investment - Unstable, but Rewarding?

Cryptocurrency: An Investment - Unstable, but Rewarding?

With the industrialization and increased use of technology, digital currencies are gaining an upper hand in comparison to the others. An important aspect here is cryptocurrencies. A cryptocurrency is a form of payment made electronically in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. It does not require any physical coin or bill unless the service itself accepts to cash in cryptocurrency for a physical token. Generally, the exchange of cryptocurrency takes place with someone online through a phone or computer without the help of any intermediary. There are very many cryptocurrencies but bitcoin and ether are the most well-known ones.  The main purpose of using cryptocurrency by the people is for quick payments, to avoid transaction fees and a lot of them hold it as an investment with an expectation that the value would increase. Many times, companies have issued their currencies which are termed as tokens, and these can be traded specifically for the good or service that the company provides. They use the concept of blockchain, a well-known decentralized technology that spread across many computers to manage and record transactions. The supremacy of this technology is its security and with the cryptocurrencies, they find it very protective for the following reasons:


Firstly, it is self-governed and managed as the cryptocurrency transactions are stored by developers or miners on their hardware, and they get the transaction fee as a reward for doing so. Since the miners are getting paid for it, they keep transaction records accurate and up-to-date, keeping the integrity of the cryptocurrency and the records decentralized as mentioned earlier. 


Secondly, since it all is based on technology, privacy and security have always been a major concern for cryptocurrencies. To resolve that issue, it's known that the blockchain ledger is based on different mathematical puzzles, which are hard to decode which makes a cryptocurrency more secure than ordinary electronic transactions. Hence, cryptocurrencies for better security and privacy, use pseudonyms that are unconnected to any user, account, or stored data that could be linked to a profile.


The next advantage of cryptocurrencies is the quick and cost-effective mode of transaction. With the help of cryptocurrency, the transaction fees paid by a user are reduced to a negligible or zero amount, and the transactions could take place anywhere in the world. It eliminates the need for third parties, like VISA or PayPal, to verify a transaction and removes the need to pay any extra transaction fees and to add on the currency exchange could be done easily as well. 


There is a lot of demand for Bitcoin like it is the currency in the near future and people are racing to buy them now on the pros that it removes central banks from managing the money supply and with its decentralized processing and recording system it can be more secure than traditional payment systems. 


On seeing the immense usage of these cryptocurrencies, it is of foremost importance to examine the concerns on consumer protection, money laundering, increased risks faced by the banks regarding global financial stability to the banking system in the non-appearance of strict rules in these virtual currencies. The Basel Committee on Banking Supervision (BCBS), have observed that banks that have a bigger exposure to cryptocurrencies should be placed under stricter capital norms that reflect on the higher risks and the committee has also called for "minimum capital standards" for banks in cases of assets such as tokens, while cryptos like Bitcoin could be placed under a conservative prudential regime.


Although cryptocurrencies are known for its feature of being decentralized, the flow and number of currencies in the market are still controlled by their creators and organizations. These holders could very well manipulate the coin for large swings in its price. Even hugely traded coins like bitcoins are susceptible to these manipulations. The objective is aimed at curbing illegal activities and circulation of black money via cryptos and while rules are implemented that are stricter it would improve corporate governance with more transparent disclosures. It’s not those cryptocurrencies are illegal and anyone can start trading in them also. The concern however is that India does not have a regulatory framework to govern cryptocurrencies as of now. There were initiatives taken in the year 2017 by the government by setting up an Inter-Ministerial Committee (IMC) to study virtual currencies. It put forth various applications in the field of financial services that would include banks and other financial firms but the Centre had flagged reservations around its misuse and wanted to put a complete ban in India. Later, the Reserve Bank of India, through a Circular Dated 6 April 2018, had advised all the entities regulated by it not to deal in virtual currencies or provide services for facilitating any person or entity in dealing with the same. A statement was issued by the finance ministry as well to not consider the cryptocurrencies as legal tender or coin and had notified that all measures would be taken to eliminate the use of these currencies in financing and termed it as illicit and the government would look into this system and the use of blockchain technology proactively for assuring in the digital economy. The government had then suggested banning all private cryptocurrencies, with a jail term of up to 10 years as well as heavy penalties for anyone dealing in digital currencies. However, the Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India, REED 2020 SC 03001 overturned RBI's circular, permitting banks to handle cryptocurrency transactions from traders and exchanges, and the use of cryptocurrency per se was never banned. The Supreme Court observed that cryptocurrency is capable of being accepted as valid payment for the purchase of goods and services, and payment systems can be regulated by the RBI


The Reserve Bank of India (RBI) has noted through media reports that even after the Supreme Court’s verdict certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI Circular. Such references to the above circular by banks/ regulated entities are not in order as this circular was set aside by the Hon’ble Supreme Court on 4 March 2020. As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgment, and therefore cannot be cited or quoted from.


The RBI directed through new Circular dated 31 May 2021 to the banks as well as other entities, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.


Therefore, the use of cryptocurrencies has long been a source of debate, with the legality of it remaining a mystery because lack a formal government or bank-backed framework to control their use, they have been accused of becoming a conduit for dark money or funding terrorism anonymously. In light of such a situation, it is unlikely that financial institutions and the banking sector would be inclined towards investing in virtual currencies as the use of cryptocurrency is itself questionable. Despite the odds, cryptocurrencies have grown in popularity worldwide and the cryptocurrency market in India has also been slowly gathering momentum and, like mentioned earlier there is still a need to regulate the cryptocurrencies and the Centre would set up a panel for the same. This decision was taken after a lot of compulsion and urge to not ban and instead regulate the virtual coins. 


RECENT ARTICLES

Role of Banking Ombudsman in India - An Analysis

REEDLAW

Sep 3, 2021

Section 7 Application of IBC cannot be allowed if Petition filed collusively

K. Bavana

Sep 3, 2021

"Preferential Transaction" and "Relevant Time" under Section 43 of IBC

R. Haritha

Sep 1, 2021