Given policymakers’ pronouncements and the industry’s expansion, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’s inclusion in the winter session of Parliament was not surprising. Policymakers have examined a variety of approaches, ranging from outright bans on private cryptocurrencies to their registration as a financial asset subject to regulatory oversight.
The bill is expected to ban all private cryptocurrencies, but not the underlying technology, which can be leveraged to improve the financial system’s efficiency and inclusiveness. Soon after the Supreme Court invalidated the Reserve Bank of India’s (RBI) prohibition on cryptocurrencies, India was swept up in the crypto tsunami. Following that, several cryptocurrency exchanges sprouted up in a short period.
Virtual currencies have been classified by courts in various jurisdictions across the world as belonging to numerous categories, including property, commodity, non-traditional currency, payment instrument, and money. The Indian Supreme Court ruled that the use of cryptocurrencies is an activity over which the RBI has authority and that any activity that poses a threat to or has an impact on India’s financial system can be regulated or prohibited by the RBI, even if it is not part of the credit or payment systems. However, the court judged the prohibition to be ineffective under the principle of ‘proportionality.’
Even though the RBI’s ban on cryptocurrencies was overturned by the court, the regulator has remained cautious. The main argument used by policymakers to oppose virtual currencies is that their large price swings expose investors to dangers without any protection, indicating that the financial system is in peril. There should be no need to deceive regular people into thinking that virtual currencies are backed by a government.
Furthermore, the central bank’s legitimate worries remain the use of the dark web to encourage unlawful operations and the use of digital identities to make payments. The RBI has consistently and explicitly warned investors about the numerous dangers of unregulated cryptocurrency trading without the participation of a reputable regulator. RBI governor Shaktikanta Das expressed his concern earlier this month, saying that cryptocurrencies pose a major macroeconomic and financial stability danger.
The fact that cryptocurrency is not classified as legal money poses the most significant regulatory challenge. The RBI must have monetary value to regulate cryptocurrencies. The Reserve Bank of India (RBI), as India’s banking regulator, will be wary of any alternative currency that threatens the Indian Rupee’s strength.
In its consideration of the nature of virtual currencies, the Supreme Court stated that the RBI has adequate authority to provide directives to its regulated businesses in the interest of depositors, banking policy, the banking company, or the public interest. Nonetheless, the industry believes the activity is unregulated, and precautions have been made to ensure compliance. This is likewise seen as a valid use of technology for the formation of an asset class by the industry.
The inter-ministerial body, which was established on November 2, 2017, to research virtual currencies, has issued a report that has a negative opinion of bitcoin while emphasizing the benefits of distributed ledger technology. A framework for issuing CBDCs (central bank digital currency) is likely to be formed as a result of this recognition of the underlying technology.
The RBI appreciates the CBDCs’ importance in promoting financial inclusion and financial literacy and is cognizant that blockchain technology can be used to develop these types of innovations. This stance is consistent with authorities around the world, who are investigating the viability of adopting blockchain technology to make faster and cheaper cross-border payments while preserving regulatory supervision.
Whatever the future holds for cryptocurrencies, one thing is certain: blockchain is here to stay. Governments, regulators, and legislatures will have to keep up with technological advancements to analyze their impact on the broader regulatory, governance, and supervisory mechanism, ensuring that the government’s economic controls are respected and maintained. Within these confines, it will be interesting to watch how technology contributes to the creation of a new asset class whose fundamental worth does not disrupt or have an impact on financial markets that are otherwise regulated and supervised.
While a restriction may prevent disruption in money and financial markets, one must hope that the use of technology to improve efficiencies and the creation of new asset classes, as well as improving financial inclusion, would be promoted.
Bill’s introduction is merely the first stage. The law will catch up to technology as it develops. The law’s features are also envisaged to foster innovation and the use of technology to develop financial markets. Otherwise, such technology could end up in other sectors of the global financial markets that have decided to regulate cryptocurrencies.
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