Cryptocurrency
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This article is written by Swathi Vajjhala, pursuing a Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

What would life be like if Government and Corporate Agencies did not control our currency? What if there were no limits on the amount you can transfer to someone without interference by authorities, if these limits exceed, and maybe best of all, no physical money? That all sounds pretty intriguing and futuristic. Thanks to the industrialists, entrepreneurs and the people behind the development of cryptocurrency, the future of money is here. The initial or the first regulated value of Bitcoin (cryptocurrency) was set on October 5, 2009, at $ .0008, charged at $ 1USD, which equals 1309.03 Bitcoin (BTC). The current value of 1 bitcoin as of April 29, 2021, is 48,969. That corresponds to roughly more than 3 million x its initial value.

So now the question which first strikes our mind is what cryptocurrency is? A cryptocurrency is a digital or virtual currency secured by cryptography (which hides information), making counterfeiting or double-spending almost impossible. Many cryptocurrencies are decentralized networks, not controlled by one person or government, based on blockchain technology – a distributed ledger enforced by diverse computer networks. It is a form of virtual payment that can be exchanged for goods and services. One of the famous cryptocurrencies is bitcoin, followed by Litecoin, Ethereum. 

So, the next question which comes to mind is what is blockchain and how does cryptocurrency work? Let us take three friends (Ram, Shyam, and Sita) go for dinner, and Ram pays the bill. Rest two decides to split the bill among three. All the friends know about cryptocurrencies, but none of them tried. So, they decide among themselves and send two bitcoins each to Ram. Firstly, Shyam sends two bitcoins to Ram. The transaction details between them are permanently recorded in the block, and this block also holds the record of bitcoins each of them has. Then, Sita sends her part of the share to Ram. A new block is created for this transaction with all details like how many bitcoins each have. Then these blocks are linked to each other as each of them takes reference from the previous one. This chain of records or blocks is known as a ledger, shared among all the participants, which forms the basis of blockchain. 

Let us suppose that in the same transaction, Shyam has one bitcoin but tries to send two more bitcoins to Ram. The transaction will not go through because all the parties in the transaction have copies of the ledger. From the ledger, his friends can see how many bitcoins he has and can flag the transaction as invalid. 

Let us have a closer look at how these transactions work between Ram and Shyam. So, every user in the bitcoin network has two keys, i.e., the public key and the private key. The public key is the address that everyone on the network knows, like an email address, whereas the private key is a unique address wherein only the user knows, like a password. In this process, firstly, Shyam sends two bitcoins along with his and Ram’s unique wallet address through hashing encryption algorithm, which is protected through Shyam’s private key. That is done by digitally signing the transaction. That will transmit through the outer world using the ram’s public key, and this message can be encrypted only through the ram’s private key. 

From this example, we can see that even a hacker cannot alter the information recorded or inscripted in the blockchain because each user who is a party to the transaction has a copy of the ledger, and the information within the blocks is encrypted with a complex and robust algorithm. All of this can be achieved through blockchain technology. 

Therefore, Blockchain is a collection of records linked with each other with solid resistance to alteration and is protected using cryptography. 

That is why cryptocurrencies run on the blockchain, which helps to make currency immune to counterfeiting and are protected by complex and robust algorithms. 

Brief history

Cryptographer David Chaum, the first person who started virtual coins in 1983, developed a cryptographic system called eCash. Twelve years later, he developed DigiCash, another system that used cryptography to keep commercial transactions confidential. However, the term cryptocurrency was coined in the year 1998.

In 2008, the pseudonymous “Satoshi Nakamoto” published a white paper in which an implementation of a digital currency called Bitcoin uses blockchain technology. That paved the way for the birth of bitcoin. More than ten years later, hundreds of cryptocurrencies and countless other uses of Blockchain technologies are readily available.

Mining

Indeed, with the price of Bitcoin going up, the question that comes to mind: where do cryptocurrencies come from? Currencies are actually ‘mined’ by miners. The simplest way to think about it is to consider gold miners. They are working on mining gold from the earth. When it is mined, it enters the economy. Cryptocurrency is conceptually the same. 

Mining is the process by which new currencies are brought into circulation, but it is also an essential component in the maintenance and development of the blockchain ledger. It is carried out with very advanced computers that solve incredibly complex computational math problems. The miners are paid as mining is meticulous, expensive, sporadically rewarding. 

Current status of cryptocurrencies 

According to CoinMarketCap.com, there are more than 6,700 different types of currencies that are traded publicly at present. These continue to generate through raising initial coin offerings (ICO).  

By companies

Many companies have their own cryptocurrencies called tokens, which people can use to trade in the company’s goods and services. Companies that have launched their currencies are:

  1. Air Asia, an airline based in Malaysia, famous for its low cost, expands into the cryptocurrency world. Customers of Air Asia can turn their Frequent Flyer Points into a cryptocurrency and ‘BigCoin’. The prices of a ticket will also have a BigCoin value. Using BigCoin, customers can pay for products and services such as in-flight meals and seat upgrades. AirAsia has also launched a blockchain-based air cargo network named ‘Freightchain’ to simplify cargo space booking with its airlines. It tries to eliminate the tedious manual process previously required, which will eventually be convenient for both customers and the airline.
  2. Libra is a cryptocurrency that Facebook and the association of libra found. Facebook will not be responsible for it, but it will provide an opportunity to use the currency on its platform. 
  3. JP Morgan Chase, which specializes in investment, is reportedly to launch its cryptocurrency named ‘JPMCoin’. Its goal is to replace the dollar with its new coin. 
  4. Walmart has launched its cryptocurrency named ‘walmartcoin’, intended to equalize its coin’s value to that of the dollar. The currency will speed up the transaction and help customers to pay for the goods.
  5. Japan’s largest bank and the world’s fourth-largest bank, Mitsubishi UFJ Financial Group (MUFG), launched its much-awaited cryptocurrency named MUFG Coin in collaboration with HR Firm recruit Holdings. Apart from currency, it is also launching a high-speed blockchain payment network with a US-based tech firm named Akamai in 2021. 
  6. US-based airlines Surf Air also launched its cryptocurrency and partially allows its customers to pay a monthly fee or cancel the flight. 

These are some companies which are followed by big companies like amazon and google. They both have their virtual currencies. 

By countries

  1. Dubai is the first country to launch its own cryptocurrency back in 2017 named ‘Emcash’. It is operated based on its own blockchain and used by various government and non-govt activities such as utility bills, coffee cafes, and purchases for everyday use. Dubai has banned virtual currencies like bitcoin but has launched its own crypto.
  2. Venezuela is said to be the second country that launched its currency in 2018 called ‘Petro’. It launched its virtual currency to access international financing, which it cannot due to sanctions on it by the US.
  3. The Government of Tunisia decided to integrate blockchain technology with eDinar and launched a national payment system called Monetas. It is used to pay bills and manage official documentation. 
  4. Taking inspiration from Tunisia, Senegal also launched its currency called eCFA. It is designed to be compatible with other African digital currencies. 

Likewise, other countries that are planning to launch their own cryptocurrencies are Japan, Russia, Israel, Sweden. 

So far, we have looked at the countries that are planning to adopt their own cryptocurrencies and the countries that have already adopted them. However, does this have any impact on Bitcoin and Ethereum? Well, it totally depends on the treatment these two cryptocurrencies are receiving. If every country that has its own cryptocurrency tries to ban Bitcoin entirely, it could pose a severe threat. Not much can be said about that. If all countries have their own cryptocurrencies, there may be a chance that Bitcoin and Ethereum will no longer exist. After all, since this is not an imminent threat, Bitcoin and Ethereum are pretty safe.

A matter of rights

According to Jaideep Reddy, Partner, Nishith Desai Associates, there are several constitutional rights associated with cryptocurrencies which includes – 

  • The right to trading in cryptos under Article 19 of the Constitution recognized in the IAMAI case, 
  • The right to Property, especially as the Apex court previously recognized crypto-assets as ‘intangible property,
  • The Freedom of expression, citing the First Amendment, must protect US courts which previously said that the encryption software was in the source code form, and 
  • The right to equality under Article 14 of the Constitution states that no government decision can be arbitrary. 

Even if these rights exist subject to ‘reasonable restrictions in the Constitution, he says, they must not be disproportionate to order them to qualify for the legal test.

Regulatory framework

This has been divided into three sections: 

  • Countries which have framework

  • United Kingdom: All companies that conduct crypto-asset-related activities in the UK must register with the UK Financial Conduct Authority. Crypto companies can apply for the ‘Authorized Payment Institutions’ license. BCB Payments Limited was the first crypto asset company to receive this license in the UK. All regulated crypto-asset companies must comply with Anti-Money Laundering (AML) / Counter-Terrorism Financing (CFT) measures under UK law. The UK High Court recently recognized crypto assets such as Bitcoin as British common law property.
  • Singapore: Cryptocurrency trading is legal and regulated by the Monetary Authority of Singapore under the Singapore Payment Services Act of 2020. Cryptocurrency companies must obtain a license to operate a currency swapping. The Securities and Futures Act of 2001 regulates public offerings of virtual currencies. In the past few years, several Indian cryptocurrencies and blockchain start-ups have relocated to Singapore. CoinDCX has migrated its holding company to Singapore, and since then, it has raised over INR 100 million from global investors. Unocoin followed the steps of CoinDCX and moved to Singapore.
  • Indonesia: This is the first country that initially banned cryptocurrency and then legalized it later. This country banned all the payment systems and financial technology operators from trading in cryptocurrencies in 2018. However, the government introduced new regulations in 2019 and regulated trading in currencies as commodities under the supervision of the trading regulator. Any company that trades in crypto assets as commodity futures must comply with AML / CFT standards. Companies are also required to report to the Indonesian Financial Transaction Reporting and Analysis Center.
  • Canada: In 2018, the Canadian Securities Administrators (CSA) issued a notice clarifying that the requirements of the Securities Act apply to crypto companies offering coins or tokens. In January 2020, further communication clarified how securities law would apply to platforms that facilitate trading in crypto assets. As of June 1, 2020, Canadian Money Laundering Act requires all companies that trade virtual currencies to register with Canada’s Financial Transaction and Reporting Analysis Center (“FINTRAC”) and implement applicable AML / CFT measures.

Likewise, countries that have regulated it instead of banning virtual currency, like the Netherlands, Switzerland, Germany, Australia, Thailand, South Korea, and Philippines. 

  • Countries which are proposing framework

  • United States of America: Some states in the United States have regulated cryptocurrencies while others consider laws to regulate them. New York, to make virtual currency start-ups easier to operate, has proposed a conditional licensing structure. Wyoming has already passed a law that allows a bank to be set up, enabling companies to keep digital assets safe and legal. Oklahoma has passed a bill authorizing the use, sale, and exchange of cryptocurrencies within government agencies. The US Treasury Department’s Financial Crimes Enforcement Network has issued a bill requiring operators of virtual currencies to keep records and verify the identity of customers in transactions involving virtual currencies or digital assets. 
  • Pakistan: In 2018, the Pakistani State Bank issued an official circular advising the public that virtual currencies are not recognized as legal tender and also advised banks and payment system operators not to allow transactions in virtual currencies. However, the Pakistani state bank reportedly stated in a court case that its circular was not banning cryptocurrency but merely warning citizens of its unregulated use. In November 2020, the Pakistani Securities and Exchange Commission published a position paper on the regulation of cryptocurrency, proposing measures to regulate it.
  • Countries which banned virtual currency

  • China: According to various Chinese government agencies, fundraising and trading platforms such as crypto exchanges are banned in China. All initial coin offerings in China are also illegal and prohibited. However, no law or regulation is prohibiting Chinese people from holding or doing business in cryptocurrencies. Therefore, the ban proposed by the Indian government is likely to be larger than that imposed by China.
  • Bangladesh: In 2017, the Central Bank of Bangladesh issued a notice stating that cryptocurrencies are illegal in Bangladesh. Transactions with cryptocurrencies violate existing regulations on foreign exchange, money laundering, and terrorist financing.

India’s stand

In all the above three scenarios, India is somewhere between the second and third, i.e., proposing and banning virtual currencies. India is a sweet spot to spur growth and innovation by launching a solid digital currency bill this year. Despite the various rumours of a potential ban on crypto in India, policymakers could consider the true potential of crypto use and its impact on our economy. 

Given that our country’s success for the past three decades has been based on ITeS-based solutions, we cannot ignore the $ 1.7 trillion cryptocurrency market when India aims for a $5 trillion economy. A policy on the regularisation of crypto can have a far-fetching impact on improving our overall: 

  • financial infrastructure, 
  • maintaining national security, 
  • preventing financial fraud, 
  • strengthening our monetary policy, 
  • attracting international capital, 
  • creating more employment opportunities, and
  • retaining our technical talent to accelerate technological development.

All these can drive the nation to become a global powerhouse.

We must prepare for the future and take reasonable precautions to secure our global financial positioning. We also need to become “Atmanirbhar” and reduce our dependence in situations like the 2008 financial crisis or the 2020 COVID-19 crash. Cyber Warfare also poses a significant threat in our rapidly digitizing country. A decentralized financial platform could help India solve such problems and have an additional advantage as a single state or country that does not block these platform networks in times of national emergency or conflict.

We are all aware of the devastating effects of COVID-19 on the Indian economy and the global market. Even so, Crypto has created jobs in a wide variety of functions in India and abroad. To date, over 300 start-ups have created tens of thousands of jobs and hundreds of millions of dollars in revenue and taxes. The constant development will inevitably lead to technical talents getting involved in India. Indian youth are looking for challenging opportunities to work on internationally competitive projects and help improve our technical infrastructure.

Conclusion

Cryptocurrency is an exciting technological accomplishment, but it remains a financial investigation. Even if cryptocurrencies survive, they may not displace fiat currencies entirely because of a straightforward reason currency needs stability to determine its fair value. The crypto has failed to be stable in its entire history. 

World-wide, many institutional investors, including hedge funds in the US, along with giants like Square and PayPal, are entering the crypto industry and buying. That also drove the adoption of Bitcoin.

India can take a similar approach as other countries that have introduced laws regulating cryptocurrency trading by making companies follow internal laws related to finance and money laundering. In this way, India can achieve its $ 5 trillion economy. 

The world is progressing in blockchain technology, and India’s progress in the blockchain is just around the corner if it completely legalizes crypto. 

References

  1. Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto
  2. A Short Introduction to the World of Cryptocurrencies (https://www.researchgate.net/publication/322456542_A_Short_Introduction_to_the_World_of_Cryptocurrencies)
  3. Understanding Cryptocurrencies (https://ies.keio.ac.jp/upload/20191125econo_Wolfbang_wp.pdf)
  4. The economics of cryptocurrencies- Bitcoin and beyond (https://www.bis.org/events/eopix_1810/chiu_paper.pdf)

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