New cryptocurrency bill seeks to ban private players

Context:

The Union Government will introduce a Bill to regulate cryptocurrency and ostensibly ban all private cryptocurrencies, along with 25 other pieces of legislation, in the winter session of Parliament that begins on November 2021.

Relevance:

GS-II: Governance (Government Policies and Interventions, Issues arising out of the design and implementation of policies), GS-III: Indian Economy (Banking, Money, Monetary Policy), GS-III: Science and Technology (Developments in Science and Technology, Application of Technology in Daily life, Blockchain technology)

Dimensions of the Article:

1. What are cryptocurrencies?
2. How are they different from actual currency?
3. How do cryptocurrencies derive their value?
4. Highlights of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021
5. Other developments regarding ban on cryptocurrencies

What are cryptocurrencies?

• Cryptocurrencies are e-currencies that are based on decentralized technology and operate on a distributed public ledger called the blockchain.
• Blockchain records all transactions updated and held by currency holders.
• The technology allows people to make payments and store money digitally without having to use their names or a financial intermediary such as banks.
• Cryptocurrency units such as Bitcoin are created through a ‘mining’ process which involves using a computer to solve numerical problems that generate coins.
• Bitcoin was one of the first cryptocurrencies to be launched and was created in 2009.

How are they different from actual currency?

• The Main difference is that unlike actual currencies cryptocurrencies are not issued by Governments.
• Actual money is created or printed by the government which has a monopoly in terms of issuing currency. Central banks across the world issue paper notes and therefore create money and assign paper notes their value.
• Money created through this process derives its value via government fiat, which is why the paper currency is also called fiat currency.
• In the case of cryptocurrencies, the process of creating the currency is not monopolized as anyone can create it through the mining process.

How do cryptocurrencies derive their value?

• Any currency has its value if it can be exchanged for goods or services and if it is a store of value (it can maintain purchasing power over time).
• Cryptocurrencies, in contrast to fiat currencies, derive their value from exchanges.
• The extent of involvement of the community in terms of demand and supply of cryptocurrencies helps determine their value.

Highlights of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

• The stated intent of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India.
• The bill will also seek to prohibit all the private cryptocurrencies in India. However, the Crypto bill or Cryptocurrency Bill, 2021 will allow certain exceptions for facilitating the underlying technology of cryptocurrency and its uses.
• The bill could also allow for the use of technologies known as blockchain and distributed ledgers, which underpin the cryptocurrency mechanism but have been used also to create secure records and identity management.

Highlights of the meeting: Reasons for banning Cryptocurrency

• The meeting which was chaired by PM Modi on the way forward for Cryptocurrency and its uses strongly felt that the attempts of misleading the youth regarding Cryptocurrency must be immediately stopped.
• The discussion was also held on the unregulated markets of Cryptocurrency that cannot be allowed to become the path for terror financing and money laundering.
• The meeting on Cryptocurrency was an outcome of a consultative process. Previously, the Finance Ministry of India, Reserve Bank of India, and Home Affairs Ministry had already done an elaborate exercise on it, including the consulted experts from across India and the world.

Other developments regarding ban on cryptocurrencies

• In October 2021, a note by Fitch Ratings, the exposure of American corporate and financial institutions to cryptocurrencies is predicted to grow – several companies, such as Tesla, have accepted Bitcoin for payments, and plan to resume doing so if concerns over their environmental impacts are addressed.
• On September 2021, China banned cryptocurrencies and rolled out its own digital currency, known as the e-CNY.
• A Fitch report on CBDCs from May 2021 said such digital currencies have the potential to boost cashless payments and wider digitalisation of economies. “For central banks in some emerging markets, a key driver for researching CBDCs is the opportunity to bring underbanked communities into the financial system, and improve the cost, speed and resilience of payments.”
• While cryptocurrencies such as Bitcoin offer anonymity of the nature of cash bills and draw their value from its demand and supply, they do not carry any sovereign guarantees making collapses in value immitigable. On the other hand, CBDCs do not carry such risks but they do not offer the anonymity of cash.
• Additionally, experts have raised concerns over the impact on banking institutions that currently act as intermediaries in the financial system.

-Source: The Hindu