Trade in Cryptocurrencies
The Supreme Court in March set aside a circular of the Reserve Bank of India (RBI) (issued in 2018) prohibiting banks and entities regulated by it from providing services in relation to virtual currencies (VCs).
● The Reserve Bank of India had virtually banned cryptocurrency trading in India through a circular where it directed that all entities regulated by it shall not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling those.
● Regulated entities that were already providing such services were told to exit the relationship within three months. The RBI had earlier issued circulars cautioning users, holders and traders of virtual currencies, including bitcoins, regarding various risks associated in dealing with such virtual currencies. The April 2018 circular was later challenged in the top court.
● The RBI argued in the Supreme Court that it had always been consistent in its opposition to allowing any other payments systems and undermining the integrity of the banking system.
● It also argued that though there was no formal ban on cryptocurrencies under any law in existence in India, it had consistently been warning all those dealing with virtual currencies of the risks inherent in them.
● The RBI order had banned trading of all virtual currencies in India. The Internet and Mobile Association of India (IAMAI) was the petitioner in this case on behalf of all the virtual currency trading companies.
● From a permissive draft bill, the Inter-Ministerial Committee went on to recommend a “total ban” on private cryptocurrencies through a proposed legislation called ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Act’ in February 2019. This proposed law contemplated the creation of a digital rupee as official currency and a legal tender by the central government in consultation with RBI.
→ The court held that the ban did not pass the “proportionality” test. The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1)(g), which states that all citizens of the country will have the right to practice any profession, or carry on any occupation or trade and business.
→ It also pointed out the contradiction in the RBI’s stand where it insisted that virtual currencies are not banned in India, but the circular had then gone on to ban all trading around them.
→ In the 2018 circular, the RBI had banned banks from dealing with virtual currency exchanges and individual holders on the grounds that these currencies had no underlying fiat and that it was necessary in the larger public interest to stop banks from providing any services related to these.
What are virtual currencies? Are they different from cryptocurrencies?
⮚ There is no globally accepted definition of what exactly is virtual currency. Some agencies have called it a method of exchange of value; others have labelled it a goods item, product or commodity.
⮚ Virtual currency is the larger umbrella term for all forms of non-fiat currency being traded online. Virtual currencies are mostly created, distributed and accepted in local virtual networks.
⮚ Cryptocurrencies, on the other hand, have an extra layer of security, in the form of encryption algorithms. Cryptographic methods are used to make the currency as well as the network on which they are being traded, secure. Most cryptocurrencies now operate on the blockchain or distributed ledger technology, which allows everyone on the network to keep track of the transactions occurring globally.
Are cryptocurrencies dangerous?
⮚ Organizations across the globe have called for caution while dealing with virtual currencies, while also warning that a blanket ban of any sort could push the entire system underground, which in turn would mean no regulation.
⮚ In 2013, the RBI had for the first time warned users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security-related risks that they were exposing themselves to.
⮚ The following year, the Financial Action Task Force came out with a report that highlighted both legitimate uses and potential risks associated with virtual currencies. In a different report, it again said use of such virtual currencies was growing among terror financing groups.
Why did the RBI ban virtual currencies?
Owing to the lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules, the RBI initially flagged its concerns on trade and use of the currency. Risks and concerns about data security and consumer protection on the one hand, and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand, also had the RBI worried about virtual currencies.
The Supreme Court’s judgment could lead to the RBI rethinking its policies surrounding virtual currencies. RBI might reconsider its approach to cryptocurrency and come up with a new, calibrated framework or regulation that deals with the reality of these technological advancements.
Types of Currencies
Hard Currency: Itis the international currency in which the highest faith is shown and is needed by every economy. It is basically the strongest currency of the world, which has the highest level of liquidity. Some of the best Hard currencies of the world today are the: US Dollar, The Euro, Japanese Yen, and the UK Pound Sterling.
Soft currency: It is just the opposite of Hard currency. It is the currency that is easily available in any economy in its Forex market. For example, Indian Rupee is the Soft currency in the Indian Forex market.
Hot Currency: If any Hard currency is exiting any economy at a fast pace for the time, the Hard currency is said to be Hot currency. For example, in the case of SE Asian crisis, the US Dollar become hot.
Heated Currency: This term is used to denote the domestic currency which is under pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the economy. Also known as currency under heat or under hammering.
or virtual money, is a type of digital currency (mostly unregulated), which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community.
Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time. Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
Inter-Ministerial Committee on Virtual Currencies
ª The committee headed by finance secretary Subhash Chandra Garg has proposed a draft bill “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019"
ª The Committee highlighted the positive aspect of distributed-ledger technology (DLT) and suggested various applications, especially in financial services, for use of DLT in India.
ª The DLT-based systems can be used by banks and other financial firms for processes such as loan-issuance tracking, collateral management, fraud detection and claims management in insurance, and reconciliation systems in the securities market.
ª As for private cryptocurrencies, given the risks associated with them and volatility in their prices, the Group has recommended banning of the cryptocurrencies in India and imposing fines and penalties for carrying on of any activities connected with cryptocurrencies in India.
ª The Group has also proposed that the Government keeps an open mind on official digital currency.
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FATF, Bitcoin, Index of regulation of cryptocurrency, Differences between digital, virtual and crypto currencies