An inter-ministerial committee has suggested banning of private cryptocurrencies, like bitcoin, and criminalising any activities related to virtual currencies.

The panel, however, pitched for the introduction of an official digital currency with a status of a legal tender and appropriately regulated by the RBI. The report by the committee was released on July 22.

The report has also highlighted the positive aspect of distributed ledger technology (DLT) and suggested various applications, especially in financial services in India.

What is a virtual currency?

A virtual currency is a digital representation of value that can be digitally traded and functions as a medium of exchange / a unit of account or a store of value.

A virtual currency may be a private medium of exchange, but does not in any way reflect a sovereign guarantee of the value or legal tender status. Virtual currency is therefore distinguished from the fiat currency of a country that is designated as its legal tender.

Cryptocurrencies are a subset of virtual currencies that is decentralised, and protected by cryptography. Bitcoin is an example of a cryptographic virtual currency, and was the first of its kind.

When was the panel formed?

The government had constituted an inter-ministerial committee (IMC) on November 2, 2017, under the chairmanship of the economic affairs secretary, with secretary of the ministry of electronics and information technology, Sebi chairman and an RBI deputy governor as members to study the issues related to virtual currencies, and propose specific action.

The committee has also suggested a draft legislation - The Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019.

This report and the draft Bill will now be examined in consultation with all the departments concerned and regulatory authorities, before a final decision is taken by the government.

Data localisation requirements proposed in the draft Data Protection Bill may need to be applied carefully, including with respect to the storage of critical personal data so as to ensure that there is no adverse impact on Indian firms and Indian consumers who may stand to benefit from DLT-based services.

Advantages of DLT

Distributed ledger technology allows the recording, sharing and transfer of data or value without the need for a central record keeping as in the case of a traditional ledger. Such records are immutable and non-repudiable. Blockchain is a specific kind of DLT which rose to prominence as the underlying technology for the cryptocurrency, bitcoin.

Internationally, the application of DLT is being explored in the areas of trade finance, mortgage loan applications, digital identity management or KYC requirements, cross-border fund transfers and clearing and settlement systems.

The advantages of using DLT are mainly seen in terms of reducing administration and transaction costs, obviating duplication and improving accuracy of data, improving the speed and efficiency of transactions and detecting fraud.

Accordingly, the committee has recommended that the applications of DLT in

relation to the above identified potential use cases be examined by the relevant regulator or the government.

Also, regulators including the RBI, Sebi, IRDA, PFRDA and IBBI should also focus on DLT to explore building of appropriate regulations for development of the technology in their respective areas.

Why is regulation necessary?

Since the launch of bitcoin, numerous alternatives based on the same consensus mechanisms as bitcoin and other consensus mechanisms were launched. These alternative coins are popularly known as altcoins. Studies have shown that more than 1,500 altcoins based on bitcoin were developed by 2014. In context of more formal platforms like exchanges, certain exchanges list more than 900 cryptocurrencies where 440 of them have a market capitalisation of more than $1 million.

However, this market capitalisation is mainly due to the use of a few number of coins.

The committee is concerned over mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these cryptocurrencies. All these cryptocurrencies have been created by non-sovereigns and are in this sense entirely private enterprises.

Cryptocurrencies have certain characteristics that make regulation necessary. Some are…

* They lack intrinsic value and are subject to fluctuations.

* They are decentralised networks with no central authority.

* The transactions in cryptocurrencies are irreversible.

* They provide a degree of pseudonymity, although not complete anonymity, to

participants in a transaction.

What are the benefits of CBDC?

Central bank digital currency (CBDC) is the digital form of fiat money. They can be considered as digital form of central bank liabilities. Some central banks have started considering the possibility of issuing their liabilities in digital form at some stage in the future.

The interest in CBDC across the world has been motivated by…

* interest in technological innovation in the financial sector

* declining use of cash in a few countries

* the emergence of new entrants in the payments landscape

The concept of electronic central bank money is not new and has existed for a very long time, in the form of reserves deposited by commercial banks and certain other financial institutions at the central bank. However, what distinguishes the CBDC from the existing concepts and tools is the greater accessibility of central bank liabilities as well as the better potential for retail transactions.