Home Blockchain Cryptocurrency: a regulatory regime

Cryptocurrency: a regulatory regime

July 4, 2021

1764

cryptos-top-venture-capitalist-is-playing-the-long-game (1) — Image source- https://rb.gy/9tnezw

This article is written by Kartavya Nema who is pursuing a Diploma in Cyber Law, FinTech Regulations, and Technology Contracts from LawSikho.

Table of Contents

Introduction

Cryptocurrency is a decentralized mechanism that involves transactions between two individuals without the interference of centralized authority. It is said to be a virtual form of asset (currency) that is safeguarded by cryptography. The fact that it is secured by cryptography makes it very difficult to be counterfeited. It is an open-source money system.

The transaction should be completed in a peer to peer lending system, recorded in a ledger secured by the blockchain network system. The cryptocurrency is held in separate wallets. There are two types of wallets existing; offline and online respectively.

The capitalization of cryptocurrency has reached more than 2 trillion. Many investment organizations across the world have invested in cryptocurrency. They especially draw the attention of international organizations dealing in finance like the IMF and FATF. The government of India has banned dealing in cryptocurrency but in reality, it’s difficult to enforce this order.

This article provides a framework to discuss the reasons and challenges existing behind the ban on cryptocurrency by several governments and discuss how they can overcome these challenges. The views of international organizations like IMF and FATF have been discussed as well.

The legal step towards cryptocurrency in India

The circular issued by the Reserve bank of India (RBI) directs all banks to stop providing banking services to persons dealing in cryptocurrency. The order was challenged in the supreme court of India in the case of IMAI v/s Reserve bank of India.

The government of India had formed a high-level inter-ministerial committee on cryptocurrency. They were recommended to introduce a new bill in parliament called the cryptocurrency and regulation of the official digital currency bill, 2021 as have been mentioned in the bulletin of Lok Sabha. In this bill, the government wanted to ban all private cryptocurrencies and issue official digital currency.

The bill penalizes a person dealing in cryptocurrency and imposes a fine on a corporation if found to be involved in holding or transacting digital currency. They also want to promote blockchain technology (click here).

The government has acknowledged the advantages and crucial role of cryptocurrency in the emerging digital world and economy, that’s the reason they have provided a green signal without any outright banning cryptocurrency in India.

The government of India has amended the schedule of the Companies Act, enforceable in effect from 1st April 2021. The companies shall be giving information regarding the holding of cryptocurrency in the preceding financial year. The companies trading or investing in cryptocurrency shall disclose the following information:

The profit or loss on transactions related to cryptocurrency.
The disclosed amount of cryptocurrency is held by the company.
Deposit or advance from any person for investing in cryptocurrency or virtual currency.

The RBI had issued a new Circular, for giving direction to banks to provide banking services to the stakeholders of Cryptocurrency. It gives direction to banks to follow due diligence in respect of Know Your Customer (KYC), Anti Money Laundering (AML), Combating of Financial Terrorism (CFT), and compliance with a provision of Foreign Exchange and Management act, 1999.

The banning of cryptocurrency

There are many countries that have imposed a ban on cryptocurrency. There exist various reasons like a conflict with domestic laws, lack of control, and regulated authority, as to why a ban on cryptocurrency has been favoured. To specifically understand from a technological, legally and economically, point of view the reasons as to why several governments have banned the currency, the points hereunder are to be referred to:

The cryptocurrency is a decentralized peer-to-peer lending system, no intermediary shall interfere or control. There is no role of intermediaries, that’s the reason many governments are afraid and have banned cryptocurrency without trusted intermediaries.
The government or its intermediate authority like the central bank has control over the circulation of Fiat currency. This helps the governments to control recession, inflation in the economy and improve the market condition and create more jobs. In cryptocurrency, there is no control or stop to its circulation by a particular authority.

The new cryptocurrency only comes into the market when miners receive rewards in the form of cryptocurrency to perform their duties. The miner has a complete crypto transaction to solve complicated mathematical problems for authentication. The lack of authority or control in circulation is the main reason why governments want to ban cryptocurrency.

The currency is issued by the country in the form of coins, notes for an exchange, and dealing. They have full control over its circulation or production (issuance and circulation of new currency in the market), this would be decided by authority on the basis of economic influence. The tracing of transactions through currency is helping the government detect money laundering activity, tax evasion, or any other illegal activity. The essence of economic running is missing in the function of cryptocurrency.
There is another disadvantage of cryptocurrency which is untraceable financial transactions. These are used in terrorist activity, prostitution, drug trafficking tax evasion.
The price of cryptocurrency fluctuates, that’s the reason many investors suggest “only invest in cryptocurrency when you can afford the loss of that money”. (Refer: here).

International organizations on the regulation of cryptocurrency

The influence of cryptocurrency in this world has been quick, in comparison to any other financial product gaining popularity and adoption by people in large. International organizations should study it because it influences world economic activity. The two organizations International Monetary Fund (IMF), World and Financial Action Task Force (FATF) have taken up a linear approach towards cryptocurrency and its regulation.

They can look at the possibility and the transformation cryptocurrency yields in the financial system but don’t mean to ignore other consequences of it. The IMF’s comment on cryptocurrency is a progressive approach “we welcome innovation in every sector that it also adopts in the financial sector without compromising stability”.

The FATF has issued its report on cryptocurrency and also discusses the important aspects. This is important because it decides the future of cryptocurrency for the whole world. There are mentions regarding cryptocurrency as a low-cost payment, increase in efficiency, and provide an alternative to people who have limited access to banking services.

The threat of cryptocurrency is also raised and gives suggestions in terms of regulation aspects to prevent anti-money laundering through cryptocurrency. They have also released a report on cryptocurrency and talk about the definition of virtual currency, miners, and also mention potential risk. The report of the FATF is Here.

The regulation of cryptocurrency and its advantage

The experts have suggested not to ban cryptocurrency but to regulate and make compulsory compliance for every stakeholder. The threat of banning cryptocurrency by many countries does not affect the valuation and attraction of investors. For example, a survey found out almost 40% of cryptocurrency purchased by new investors.

A prominent example in India, the cryptocurrency market is flourishing on the threat of banning and the uncertain regulatory environment. The new bill is introduced in the parliament that “the cryptocurrency and official digital currency bill, 2020”, that directs all private cryptocurrency is banned by the government and RBI issue new official digital currency but it allows with certain exception to promote the underlying technology of cryptocurrency.

This bill is critical because it affects the main advantage of cryptocurrency and promotes technology. The cryptocurrency aspect means you want to improve the economy but not like money.

The cryptocurrency under the Information Technology Act, 2000, as per section 3 authentication of electronic record, means the person authenticates electronic record through digital signature. Section 3(2) electronic records shall be authentic through the asymmetric cryptosystem and hash function which can be paired and transform one electronic record to another electronic record. They also talk about using public and private keys for each subscriber to verify the electronic transactions.

In cryptocurrency or bitcoin give a private key for each person holding cryptocurrency on receiving of the message and secure system through cryptography. The transaction is completed after minors solve complicated mathematics problems and are paired with each hash. That’s the reason cryptocurrency shall be covered under the IT act, 2000.

The investors and many investment organizations shall attract towards the cryptocurrency. They purchase and invest in the related business of crypto. Crypto investment is like a “high risk and high return” formula basis because the price vitality of crypto is very high, that’s one of the reasons the government banned it.

The Indian perspective, invested by cryptocurrency holders up to 60 lakh to 1 crore people withholding of more than 10000 crore values of cryptocurrency. The government has regulated cryptocurrency through the IT act instead of banning it because of the loss of the many investment opportunities in India.

The Solution of cryptocurrency and its disadvantage

One of the prominent threats of cryptocurrency is price vitality and uncertainty, but proper and carefully the design of regulation and efforts of government authority like continuously provide guidance for example In Japan government declare bitcoin represent currency and in American, CETD declares cryptocurrency is a commodity, helps to mostly overcome or solve this uncertainty. That’s the reason the efficient regulation reduces the uncertain valuation of cryptocurrency.

Most investors shall take cryptocurrency seriously and don’t use it only for preventing scanners of government or any illegal activity purpose. The government regulates cryptocurrency all legible transactions through KYC (Know Your Customer) Guideline and issues compliance to prevent AML (Anti Money Laundering) activity for all stakeholders of cryptocurrency.

A proper regulation or friendly approach towards cryptocurrency will help India or any country to lead in the world of innovative technology and investment.

Conclusion

Cryptocurrency is also innovative technology, which gives options against loopholes in the financial system. One of the main concerns of the government is uncertainty or price vitality affecting the interest of investors, so instead of this, cryptocurrency makes proper regulation and gives clarity as suggested by many experts. The banning of cryptocurrency is not a full-time solution; it increases corrupt practices and illegal transactions.