Virtual currency is a digitally tradable currency. The currency is used as medium of exchange or performs as a store of a value or unit of account. Till now, it doesn’t hold valid/legal tender status. The central government gives the guarantee of a legal tender and all the parties are lawfully bound to take it as a method of payment.
Cryptocurrency is a particular type of virtual currency which is shielded and decentralized by cryptographic encryption methods. Decentralisation means that there is no central power where history of transactions is maintained. Alternatively, transaction data is stored and shared across various distributor networks via independent personal computers. This technology is named as “Distributed Ledger Technology”.
A high level Inter-Ministerial committee was formed in November 2017 to scrutinize the issues regarding virtual currencies and plan actions to be taken. On February 28, 2019 the committee submitted its report and on, July 2019 the report was declared in public domain.
Important recommendations and observations of the Committee include:
- The Committee stated that there are many issues related to cryptocurrencies and it can’t replace traditional currencies. Issues are:-
- Cryptocurrencies subjected to market fluctuation, for example, the value of Bitecoin cryptocurrency decreased from USD 20,000 in 2017 to USD 3,800 in 2018, in just a year. Cryptocurrency is decentralized which makes them difficult to control.
- Cryptocurrency design has several susceptibilities which left consumers open to risk of cyber-attacks and ponzi scheme scams. Moreover, transactions are not reversible means there is no way to redress wrong transactions.
- cryptocurrencies need large amount of processing power and storage, which may have negative impact on the energy resources of the nation; and
- cryptocurrencies offer greater security making them more exposure to terrorist funding and money laundering activities.
- Regulatory structure around the world:
The Committee stated that various regulatory structures are followed in various countries with respect to cryptocurrencies. Countries such as Switzerland, Thailand and Japan permit use of cryptocurrencies as a mode of payment. In Russia, cryptocurrencies can be used as a medium of exchange or barter exchange (but not for payments), While china has a total restriction on virtual currencies.
- The Committee suggests that all private cryptocurrencies, except cryptocurrency issued by the State, can be restricted in India and any activity regarding cryptocurrencies be forbade through a law. Also, it suggests that the government may setup a Standing Committee to take into account the local and global technological developments in the field and reconsider the issues regarding virtual currencies, as and when needed.
- Official Digital Currency:
The Committee noticed that a formal digital currency may have various pros over the existing payment tools. These involve availability of all history of transactions, safety of distribution and cheaper alternate for cross-border payments. The Committee also observed several issues and risks associated with its execution and implementation as well. Significant infrastructure investment would be needed to issue a crypto or digital currency. Authenticating transactions in a distributed network would require high computation power and high electricity consumption. There could be infrastructural challenges on account of internet connectivity and electricity outages.
According to a committee, it is necessary the open mind to be kept regarding introduction of a digital currency in India. If needed the committee may be established by Ministry of finance with representatives from ministry of Electronics and Information technology and Reserve bank of India, to develop a proper structure of digital currency in India.
The Committee noted that the cryptocurrencies don’t render any benefit as a currency; the underlying technology (DLT) has various potential applications. DLT makes it easier to recognize duplicate transactions, and therefore can be used for processing KYC requirements, claim management for insurance and fraud-detection. Moreover, it can help to remove frauds in land markets, if utilized for maintaining land history.
The Committee observed that the Department of Economic Affairs should know uses of DLT and take steps to facilitate its usage. Just like this, financial sector regulators should scrutinize the utility of the technology in their own fields.
The Inter-Ministerial Committee has suggested a draft Bill which criminalises activities connected with cryptocurrencies in India, restricts cryptocurrencies, and provides for regulation of official digital currency.