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Cryptocurrencies are digital assets spread across multiple computers in a shared network. This network’s decentralized nature shields them from control by government regulatory bodies. The term “cryptocurrency” itself comes from the encryption techniques used to secure the network.

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Why is it in demand?

  • Facilitates direct funds transfer between parties, eliminating the reliance on intermediaries like credit/debit cards or banks.
  • Offers a cost-effective alternative to traditional online transaction methods.
  • Ensures the safety and security of payments, providing an unparalleled level of anonymity.
  • Utilizes modern cryptocurrency systems, featuring user “wallets” or account addresses accessible only by public and private keys.
  • Maintains the privacy of transactions, as the private key is solely known to the wallet owner.
  • Minimizes processing fees associated with fund transfers.

Significance of Cryptocurrencies

  • Utilizing a peer-to-peer network, blockchain technology facilitates the tracking of fund flows and transactions, effectively mitigating corruption risks.
  • Cryptocurrencies offer significant time savings for both senders and recipients by conducting transactions entirely over the Internet. With minimal transaction fees and near-instantaneous processing, this mechanism streamlines financial transactions.
  • Traditional intermediaries like banks, credit card companies, and payment gateways impose fees that amount to approximately 3% of the global economic output, exceeding $100 trillion. Integrating blockchain technology into these sectors could lead to hundreds of billions of dollars in savings.

Concerns over Cryptocurrencies

  • Lack of Sovereign Guarantee: Cryptocurrencies lack sovereign backing, making them ineligible as legal tender and exposing consumers to risks.
  • Market Volatility: Bitcoin’s value plummeted from USD 20,000 to USD 3,800 within a year, showcasing the extreme volatility inherent in cryptocurrencies.
  • Security Risks: Unlike traditional banking, losing one’s private key in cryptocurrency means permanent loss of access, with no option for password reset.
  • Malware Threats: Private keys stored by service providers are vulnerable to malware or hacking, posing security risks to cryptocurrency users.
  • Money Laundering: Cryptocurrencies enable anonymity, making them prone to criminal activities like money laundering since transactions aren’t directly linked to individuals.
  • Regulatory Challenges: The decentralized nature of cryptocurrencies bypasses central bank regulation, potentially destabilizing the economy if their usage becomes widespread.
  • Energy Consumption: The energy-intensive process of validating transactions, particularly in bitcoin mining, poses risks to a country’s energy security, with consumption rivaling mid-sized economies like Switzerland.

Cryptocurrencies in India

In 2018, the Reserve Bank of India (RBI) issued a circular barring banks from engaging in cryptocurrency transactions. However, the Supreme Court declared this circular unconstitutional in May 2020. Recently, the government has announced plans to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. This bill aims to establish a sovereign digital currency while simultaneously prohibiting all private cryptocurrencies. Indian blockchain startups have only garnered a mere 0.2% of global investment in the sector, hindered by restrictive cryptocurrency regulations that impede their economic growth.

Issues Associated with Banning Decentralised Cryptocurrencies

  • The proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, aims to outlaw all privately-owned cryptocurrencies in India.
  • If the government bans cryptocurrencies, we’ll probably witness a notable exodus of talent and businesses from India, akin to what happened after the Reserve Bank of India’s ban in 2018. Back then, blockchain experts moved to countries with friendlier crypto regulations such as Switzerland, Singapore, Estonia, and the US. Such a broad ban would hamper innovation in blockchain, which has practical applications in governance, data management, and energy sectors in India.
  • Banning cryptocurrencies would rob India, its entrepreneurs, and its citizens of a groundbreaking technology that is rapidly gaining acceptance worldwide, even among major corporations like Tesla and MasterCard.
  • Rather than effectively addressing concerns, a ban would likely backfire, driving cryptocurrency transactions underground and fueling an illicit economy.
  • Banning cryptocurrencies is at odds with the Ministry of Electronics and Information Technology’s Draft National Strategy on Blockchain, 2021, which lauds blockchain as a transparent, secure, and efficient technology that enhances trust on the internet. Such contradictory policies only serve to confuse and hinder progress in the digital economy.

Way Forward

Regulation is crucial for managing cryptocurrency risks while promoting innovation and investment. Clear rules are needed to define cryptocurrencies and establish oversight. Strong KYC norms, reporting, and tax rules can reduce risks without banning them outright. Transparency measures like record-keeping and audits protect consumers and market integrity. Supporting the growth of the sector can boost entrepreneurship and create jobs in India’s startup scene.

Read also: Ukraine Legalises Bitcoin

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