• The Supreme Court has questioned the Centre’s prolonged inaction on regulating cryptocurrencies. 

• A bench of Justices Surya Kant and N. Kotiswar Singh asked why the Centre couldn’t formulate a clear cut policy on regulating cryptocurrency while underlining its impact on economy.

• The Supreme Court was hearing a bail plea of an accused held in a case of illegal Bitcoin trade in Gujarat and said it could not ascertain whether he was a victim or victimiser. 

• On May 5, the apex court said trading in Bitcoin in India was like dealing with a refined way of Hawala business as it lamented the Centre’s inability to come up with a clear regime on regulating virtual currency so far.

• Cryptocurrencies are by definition borderless and require international collaboration to prevent regulatory arbitrage.

• Therefore, any legislation for regulation or for banning such currencies can be effective only after significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.

What is cryptocurrency?

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

What is Bitcoin?

• Bitcoin is based largely on complex math, data-scrambling cryptography, thus the term cryptocurrency, and a distributed global ledger called the blockchain, which records all transactions. 

• No central bank or other institution has any say in its value, which is set entirely by people trading Bitcoins.

• The concept of Bitcoin, and its underlying blockchain technology, was laid out in a white paper published in October 2008 by Satoshi Nakamoto, whose true identity is not known. 

• In the white paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, he envisioned the use of Bitcoin as a peer-to-peer network to allow online payments to be sent from one party to another without relying on a financial institution. 

• The first-ever Bitcoin transaction took place on January 9, 2009, between Nakamoto and software developer Hal Finney.

• In June 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender.

What is blockchain technology?

• Bitcoin attracted attention to its underlying technology — the blockchain — which may be used to revolutionise the way companies handle payments or transfer information. 

• A blockchain is a database that is shared across a network of computers. Once a record has been added to the chain, it is very difficult to change. 

• To ensure all the copies of the database are the same, the network makes constant checks. Blockchains have been used to underpin cryptocurrencies like Bitcoin, but many other possible uses are emerging. Advocates of the technology say this makes Bitcoin transactions secure and safer than current systems.

Why RBI seeks ban on cryptocurrency in India?

• The Reserve Bank of India (RBI) has been cautioning users, holders and traders of virtual currencies since 2013 at regular intervals that dealing in virtual currencies is associated with potential economic, financial, operational, legal, customer protection and security related risks.

• It had also issued a circular on April 6, 2018 prohibiting its regulated entities to deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies. The circular was set aside by the Supreme Court on March 4, 2020.

• Further, the RBI on May 31, 2021 also advised its regulated entities to continue to carry out customer due diligence processes for transactions in virtual currencies, in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT), obligations under Prevention of Money Laundering Act, etc, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.

• The RBI is of the view that cryptocurrencies should be prohibited. The RBI had registered its concern over the adverse effect of cryptocurrencies on the Indian economy.

• It mentioned that cryptocurrencies are not a currency because every modern currency needs to be issued by the central bank or the government. Further, the value of fiat currencies is anchored by monetary policy and their status as legal tender, however the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a destabilising effect on the monetary and fiscal stability of a country.

Additional read:

The concerns on cryptocurrencies and the scope for CBDCs

As cryptocurrencies have evolved, these financial instruments have seen their share of controversy causing severe distrust between governments and people alike. Global government responses range from a complete ban of cryptocurrencies in favour of a state-mandated digital currency like in China to more liberal regimes in Japan which permit cryptocurrency operations governed by its Payments Services Act.

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