It’s time to regulate the crypto market
Even though the digital payment method is becoming the preferred mode in financial transactions, it is the use of virtual currencies, commonly known as cryptocurrencies, that is causing a stir in the Indian monetary system. Here, it should be mentioned that the penetration of cryptocurrencies into the monetary system is not induced by a virus, but these virtual currencies had violated financial and monetary regulatory limits long before the coronavirus outbreak.
The continued resistance shown by the Reserve Bank of India (RBI) with government backing against the increasing use of cryptocurrencies outside the traditionally well-regulated financial system has been an attempt to mark these virtual currencies as “illegal” and keep the domestic investors (Indian) market away from this investment. But, over time, resistance from the regulator has only attracted more and more investors into cryptocurrencies and millions of Indians have invested in this asset class.
Remarkably, we haven’t seen any sort of volatility in the crypto market like we frequently see in the stock markets. Of course, we have seen a drop in the prices of some virtual currencies, but that hasn’t stopped investors from continuing to invest. In fact, the crypto market has always been a bull market and we rarely come across investors who lose money on this platform. Some examples of this virtual currency are Biticon, Ethereal and Ripple. Bitcoin is the largest and oldest cryptocurrency, which trades at a huge premium on various global exchanges, including India.
Frankly speaking, about five years ago these virtual currencies were beyond the comprehension of the majority of common investors and even it was a new topic of debate for financial experts / consultants. This was after the demonetization in November 2016, which shook people’s confidence in fiat currency; the general public began to flock to other payment and investment options. It is here that virtual currency started to emerge as one of the solid and profitable alternatives in the digital currency segment.
Specifically, today cryptocurrencies are not considered to be legal tender like fiat money issued by governments. Despite regulatory constraints, the crypto market has hit the $ 2 trillion mark and investors have positioned them as one of the trusted digital assets. Interestingly, these virtual currencies have unofficially been an essential part of the global payment system as a fast and comfortable means of payment across the world.
Despite wider acceptance and a growing user base, the country’s laws and regulations regarding cryptocurrencies remain unclear and fear among crypto investors still exists. However, crypto-fear is not limited to its investors, monetary regulators have been afraid since June 2013 when virtual currencies were featured in the Reserve Bank of India’s (RBI) financial sector report and in December 2013, the regulator has issued a warning warning users of virtual currencies against the risks. This was the time when India already had few cryptocurrency exchanges and services running. This impacted operations and trading in virtual currencies has been called a violation of the rules of the Foreign Exchange Management Act (FEMA).
However, in December 2014, then RBI Governor Raghuram Rajan breathed new blood among investors when he said: Currencies like this (Bitcoin) will be at work. I think these virtual currencies will definitely become much better, much more secure and over time they will become the form of transaction for sure. “
Rajan as governor of the RBI supporting cryptocurrencies has not allayed the fear within the governance system. The government has locked itself in an opinion on these virtual currencies as money laundering tools. In April 2018, the Government of India (GoI) asked banks not to allow any type of transaction involving investments in cryptocurrencies. This gave the crypto market a big shake-up and this move resulted in the bankruptcy of many crypto exchanges in India.
Interestingly, despite the regulator’s refusal to provide regulatory support for virtual currency, the portfolio of investing in these digital assets has grown (and continues to grow) exponentially. In fact, time has killed the fear factor among its investors and we have seen new investors come onto the platform.
However, it was a blow in the arm of crypto investors when in June of this year the RBI clarified that banks and other entities cannot cite its 2018 virtual currencies ordinance because it was overturned. by the Supreme Court of India in 2020. The Central Bank said: “Banks, as well as other entities, may however continue to implement customer due diligence processes in accordance with regulations. governing Know Your Customer (KYC), Anti-Money Laundering (AML), Anti-Terrorist Financing (CFT) standards and the obligations of regulated entities under the Law on Prevention of Money Laundering (PMLA), 2002, in addition to ensuring compliance with the relevant provisions of the Foreign Exchange Management Act (FEMA) for remittances abroad.
The clarification from the central bank came as a sign of relief for all investors and crypto exchanges in India who have invested in virtual currencies. This
Meanwhile, RBI Governor Shaktikanta Das has said the umbrella bank may come up with a pilot for its fiat digital currency by the end of this year. Earlier, during the last monetary policy review on August 6, RBI Deputy Governor T Rabi Sankar said the central bank should launch a fiat digital currency by December.
The launch of fiat digital currency does not replace cryptocurrency. They are two entirely different things. Indian investors holding cryptocurrencies in their investment portfolio cannot be ditched for a digital rupee. It would be in the nation’s best interest if cryptocurrencies were allowed to become part of our monetary system and play a role in this fastest growing virtual currency industry. There are expert opinions who believe that cryptocurrencies can be used as a tool to strengthen national security, economy, currency, technology, and even foreign policy.
So to conclude, a blanket cryptocurrency ban is not the way to go. It should be understood that this is a common investment for millions of investors (apparently 60 to 70 lakhs) in the country. It must be valued in the huge potential associated with cryptocurrency. An expert in the crypto market said: “It is the need of the hour to regulate cryptocurrencies with consistent and well-structured regulation rather than banning them altogether especially since the market has seen a huge boom at a time when the country is fighting the Covid-19 pandemic as well as an economic fall. It would also help the government tax crypto trading, which in turn would help generate more revenue. So can’t India strike a chord in being a world leader in shaping the regulation of the crypto market?
(The opinions are those of the author and not of the institution for which he works)