The government will soon introduce a Bill in Parliament that will explicitly ban private cryptocurrencies such as bitcoin, as it concurs with the central bank that enabling private parties to toy with currencies can potentially threaten the stability of the financial sector.
But the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, will facilitate the launch of any official digital currency and bolster an ecosystem around it. The Reserve Bank of India (RBI) is close to rolling out such a currency.
While senior government officials and RBI have always made their opposition to private cryptocurrencies clear, the Bill will be brought in to provide a solid legal backing to the ban and is expected to remove any ambiguities around it, a source told FE.
“Introduction of currencies is a sovereign function, and it must remain that way,” the source added. Plus, with technology changing the way people undertake transactions, it’s important to have a framework for various modes of payments, he added.
The price of bitcoin surged last month after electric car manufacturer Tesla announced its purchases of the cryptocurrency worth $1.5 billion. However, it fell about 10% a few days later after Elon Musk observed the bitcoin price seems high. Bitcoins have seen a spike in value since October 2020, from about $10,000 a piece to close to $50,000 now, beating returns witnessed in most asset classes.
The Supreme Court last year set aside a 2018 RBI circular that had barred financial sector entities from offering services to any individual or business dealing in virtual currencies. This reflects the concern that extant laws are inadequate to deal with the proliferation of private cryptocurrencies. A solid legal backing, therefore, could go a long way in removing any ambivalence over the issue.
Cryptocurrencies typically operate independently of a central bank. These are essentially digital currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds.
In 2019, an inter-ministerial committee under then economic affairs secretary Subhash Garg had suggested that private cryptocurrencies like bitcoin be banned, and any activities related to virtual currencies be criminalised.
Even the central bank had through public notices in December 2013, February and December 2017, warned holders and traders of virtual currencies about risks associated in dealing with such currencies.
The authorities’ discomfit with bitcoin stem from the fact that it doesn’t derive its value from any underlying assets or earnings. Since its value depends purely on what an investor is willing to pay for it, it can be easily swayed with speculative bids. Moreover, such currencies typically keep the owners’ identity anonymous, making it difficult to track its flow. This can cause security risks and the currencies can be used to funnel black money.