Over the past one month the price of Bitcoin, the most popular among cryptocurriences, has surged around 35 per cent to touch $13,150. Analysts expect it to touch $20,000 by mid-March 2021.
In India, cryptocurrency exchanges scored a victory after the Supreme Court endorsed their stand against curbs put in place by the Reserve Bank of India in April 2018 that effectively banned virtual currencies in India.
The verdict came on petitions by the Internet and Mobile Association of India and others challenging the RBI circular that said the entities regulated by the RBI were prohibited from ‘providing any service in relation to virtual currencies including those of transfer or receipt of money in accounts relating to purchase or sale of virtual currencies.’
While deciding the case, the Supreme Court said: “When the consistent stand of RBI is that they have not banned virtual currencies and when the Government of India is unable to take a call despite several panels coming with several proposals, including two draft Bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.”
Impact on banking system
It is necessary to analyse the judgment for the possible impact it will have on the banking system and currency management of the country. The players in the sector are hoping that the government will consider regulation and not a full-scale ban on trading
A cryptocurrency is a digital asset designed to work as a medium of exchange. It uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
Cryptocurrencies use decentralised control as opposed to centralised digital currency and central banking systems.
No single institution controls the cryptocurrency network. This puts some people at ease, because it means that a large bank can’t control their money. But there’s also a flip side to it.
The RBI, in its wisdom to protect the interests of the country, had virtually banned cryptocurrency trading in India through its circular issued on April 6, 2018. 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.
It is incorrect on the part of critics to say the the RBI’s approach is ham-handed, driven by the fear of the unknown. While conventional currencies have been backed by gold or silver, digital currency is based on mathematics.
Already, the European Banking Authority and other institutions have warned that Bitcoin users are not protected by refund rights or charge backs. The same is applicable for Indian users also.
In a country where many people do not understand how these currencies operate, the government has to be cautious. Any currency must undergo the tests of durability, portability and divisibility and also come with sovereign guarantee for acceptance. There is no sovereign guarantee for cryptocurrency and nobody knows who is accountable for such currency.
When a currency fails the aforesaid tests, it inconveniences the holder of that currency. But when it lacks sovereign guarantee, its value becomes zero whenever there is default. Globally, the value of a currency is based on the sovereign guarantee provided and the economic stability of the country concerned.
Allowing cryptocurrency usage in India may amount to allowing an unknown agency to issue ‘legal’ tender.
This cannot be accepted. In India, only the RBI is authorised to issue currency and that alone is legal tender.
In India, even issue of bearer demand draft or banker’s pay-order by any bank is not permitted, as such instruments are considered equivalent to currency issued by the RBI. Also, issue of any such bearer instruments by banks is a criminal offence .
According to the preamble to the RBI Act 1934, the central bank has been established to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability and to operate the currency and credit system of the country to its advantage.
Permitting cryptocurrency amounts to allowing an unknown agency other than the RBI to issue and manage currency. This should not be allowed at any cost.
The writer is a retired banker