Economy

Explainer: Government of India, Cryptocurrencies and you

Lokeshwarri SK | Updated on: Nov 12, 2021

FILE PHOTO: A representation of virtual currency Bitcoin is seen in front of a stock graph in this illustration taken January 8, 2021. REUTERS/Dado Ruvic//File Photo | Photo Credit: Dado Ruvic

No country in the world, including India has a comprehensive regulation for cryptocurrency trading

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Is crypto currency trading regulated by the Government of India now?

No. The exchange platforms enabling trading of cryptocurrencies (bitcoins, etherium, litecoin, dogecoin etc) such as Wazirx, CoinDCX, Coinswitch Kuber are not operating under the supervision of any regulatory body under the Government of India. Neither RBI nor SEBI regulates them. The exchanges have formed rules including KYC requirements that investors need to fulfill. But these are not water-tight and there have been many cases of money-laundering and other malpractices through the exchanges.

How has the government approached cryptocurrency regulation in the past?

No country in the world, including India has a comprehensive regulation for cryptocurrency trading. While China banned crypto trading and mining recently, other countries have not issued a complete ban on these activities yet. Some countries allow trading in futures and options or ETFs based on crytptocurrencies, thus regulating them indirectly. In 2018, RBI had brought trading in cryptocurrencies to a virtual halt by asking banks and financial institutions to stop supporting flow of cash to crypto trading platforms or digital wallets. But the Supreme Court revoked this ban last year, after which crypto trading has again picked up in India.

Why is there a re-think on regulating crypto currencies?

As the number of traders on the crypto trading platforms increase and other financial products relating to cryptos such as fixed deposits, loans and so on get launched, the government of India is facing increasing pressure to regulate these exchanges in order to protect investors from financial loss. Since these exchange platforms are unregulated, investors have no recourse if any of these exchanges decide to shut down. Many such platforms have shut down overnight in the last decade, Mt. Gox of Japan being a prime example.

Is a law on crypto trading in India on the cards?

A bill to regulate cryptocurrencies was introduced in the parliament early this year. But the Bill proposed a complete ban on crypto trading. The Centre is now reportedly considering a revised Bill in the Winter Session of the Parliament. It is looking at a middle path in its approach - no complete ban and also no total acceptance. It is also exploring ways to tax transactions involving cryptocurrencies. There are reports that it could bring crypto trading under the GIFT City regulator IFSCA and shift the trading to GIFT City. With SEBI unwilling to regulate the crypto trading platforms, the Centre is clearly running out of options.

Will cryptos get a currency status?

Private crypto currencies cannot be a fiat currency because – they do not have any underlying assets backing them and the price is discovered through demand and supply dynamics alone. Secondly, there is no sovereign guarantee. Finally, the prices are too volatile to be considered as legal tender.

What is RBI's stand?

RBI is very worried about money laundering risks through these private cryptocurrencies and has expressed the concerns to the Centre. The Centre has to now pass a law to regulate them. RBI is also working on an official digital currency which will be official legal tender.

Published on November 10, 2021
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