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Regulating cryptocurrencies: Treating them as speculative assets

What has been the recent events surrounding the status of cryptocurrencies in India? Why is the Union Government opting for regulation rather than outright banning?

The story so far: The Union Government is said to be considering a proposal to tax cryptocurrency transactions in the country. The move would bring cryptocurrency trading, which has till date happened outside the ambit of the law, into the formal economy. The proposal has given hopes to crypto-enthusiasts that the Government may decide to regulate rather than impose an outright ban on cryptocurrencies.

What is the background to this proposal?

THE GIST

  • With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Centre has been compelled to take a stance on the legal status of these private currencies.
  • The Centre might not be so keen on banning private cryptocurrencies outright, but may instead want to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.
  • However, the RBI has stuck to its guns and continues to characterise private cryptocurrencies as a threat to financial stability.

With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Government has been compelled to take a stance on the legal status of these private currencies. The Reserve Bank of India in 2018 had banned financial institutions such as banks from facilitating transactions involving cryptocurrencies. The RBI’s order was overturned by the Supreme Court last year, and this led to a tremendous surge in cryptocurrency transactions through exchanges. Last week, Prime Minister Narendra Modi chaired a meet to discuss the risks of cryptocurrencies and their future in India while on Thursday he urged that cryptocurrencies should “not end up in wrong hands.” This week, a Parliamentary Standing Committee recommended that cryptocurrencies be regulated rather than banned. The Government is also expected to table a bill that clarifies its position on cryptocurrencies in Parliament next year. In this context, the said proposal to classify cryptocurrency exchanges as e-commerce platforms and tax them under the goods and services tax framework comes as a relief to many. The move is seen as a sign that the Union Government might not be so keen on banning private cryptocurrencies outright, but may instead want to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.

Why has the Union Government chosen to regulate rather than ban cryptocurrencies?

Unlike the RBI, which has been vehemently opposed to the idea of legalising cryptocurrencies, the Union Government has taken a more measured approach towards dealing with cryptocurrencies. This is in contrast to the heavy-handed way in which Chinese government has dealt with cryptocurrencies by banning them. The RBI, however, has stuck to its guns and continues to characterise private cryptocurrencies as a threat to financial stability. RBI Governor Shaktikanta Das on Tuesday said that when the central bank which is entrusted to maintain financial stability cautions against cryptocurrencies, then its concerns need to be taken seriously. He also noted that he is yet to witness any well-informed discussions on cryptocurrencies and their risks. The growing popularity of cryptocurrencies among citizens, however, may have played a role in the Government opting for regulation over an outright ban. Even though usage figures released by cryptocurrency exchanges may be inflated, it is hard to deny that these private currencies are witnessing a rapid rise in their popularity. Secondly, the Union Government may also not want to kill the nascent cryptocurrency industry which many believe can be a hub for financial innovation. For instance, blockchain technology has multiple uses beyond just facilitating cryptocurrency transactions.

What lies ahead?

It is highly unlikely that the Government will allow cryptocurrencies to rise as a threat to the sovereignty of the rupee. The former RBI Governor Duvvuri Subbarao has stated that the widespread acceptance of cryptocurrencies could interfere with the ability of the RBI to conduct monetary policy effectively. So, the acceptance of cryptocurrencies by the Government is likely to be limited. While cryptocurrencies may be accepted as speculative assets, it is highly unlikely that they will be accepted as full-fledged currencies competing against the rupee. The cryptocurrency bill set to be tabled in Parliament next year may offer more clarity in this regard.

It should be noted that RBI and other central banks are also looking to come up with digital versions of their own currencies. This could be to dent some of the appeal that private cryptocurrencies possess over traditional fiat currencies. But central bank digital currencies may not be able to outcompete cryptocurrencies just because they are digital. This is because cryptocurrencies derive a large part of their value from their limited supply.

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