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Cryptocurrencies and their Regulation

Context: Indian Finance Minister has said that issues related to crypto assets need immediate attention and the response of the G20 countries, for protecting economies from harm while reaping the potential benefits.

What are Cryptocurrencies?

  • Cryptocurrencies are defined as virtual currency that are secured through cryptography and is based on a network that is spread across multiple computers.
  • Cryptocurrency is based on blockchain technology, which is a distributed ledger enforced by a dissimilar network of computers.
working of Cryptocurrency
working of Cryptocurrency
  • Features of Cryptocurrency
    • Decentralized: Cryptocurrencies are not issued by any central authority, making them immune to government interference or manipulation.
    • End-to-end transactions: Cryptocurrencies enable secure online monetary transactions without the use of third-party intermediaries.
    • Owning cryptocurrency: Cryptocurrencies can be mined, purchased from various cryptocurrency exchanges, or can be obtained as a rewarded for work done on a blockchain.
    • Semi-legal status: Cryptocurrencies are not backed by any public or private entities nor do they have any underlying physical asset. They are termed financial assets but not banned.

Advantages and Disadvantages

Advantages Disadvantages
Transaction of funds is fast and secure due to end-to-end connection.

It reduces chances of single point of failure as they are not routed through third party entities such as banks.

Cryptocurrencies offer protection against depreciation of domestic currency.

They are cost-effective as it does not involve third parties and their transaction fees.

Cryptos are highly secured and cannot be easily hacked as in case of traditional banking system.

Since it is anonymous, it can be used for criminal purposes like money laundering.

Prices of cryptocurrencies are high volatile, leading to significant losses for investors.

Mining cryptocurrency requires considerable energy, which can lead to energy shortages across countries.

Since they are unregulated, there are no authorities to address grievances of a user.

Crypto technology is highly advanced and users must have high knowledge to carry out transactions unlike traditional banking.

Current Regulations in India

  • Regulation: Cryptocurrencies as a payment medium are not regulated or endorsed by the RBI. There are no clear guidelines dealing with cryptocurrency or its trade.
  • Even though crypto currencies have not been banned, their transactions in the country are very low. Majority of them buy cryptos as an investment.

Cryptocurrencies and their Regulation_5.1

  • Taxation: During the Union Budget 2022-23, the Finance Minister announced a 30 per cent tax on gains from crypto assets and an additional 1 per cent TDS on the transfer of the said assets.
    • This marked Indian government’s official regulation of cryptocurrency in the country.
  • Money laundering law: The government has brought crypto currencies and such other digital assets, trading, safe keeping and related financial services under the ambit of Prevention of Money Laundering Act (PMLA).
    • It means that entities dealing with crypto assets must follow similar reporting standards and KYC norms as the other regulated entities like banks, securities intermediaries, payment system operators, etc.

Need for Regulations

  • Prevent misuse: Regulations will prevent misuse of crypto so that it will not just safeguard interest of investors but also of the country. This will allow for their integration into the broader financial system in a way that is beneficial to all stakeholders.
  • Stabilises operations: Regulations of cryptocurrency transactions will ultimately lead to a more stable and trustworthy environment for the industry to thrive in the long run.  Regulations will help reduce volatility and promote greater confidence in their use as a means of exchange.
  • Consumer interest protection: Cryptocurrency regulations are necessary to protect consumers from fraud and other financial crimes. Standards and regulations will protect consumers from financial harm.

Way Forward

  • International collaboration: For any specific legislation to be fully effective, significant international collaboration will be required. In this regard, G-20 member countries need to develop a standard operating protocol for regulating crypto assets.
  • Central Bank Digital Currency: The government is planning to introduce a new bill that aims to outlaw private cryptocurrencies in the country with a few exceptions, promote cryptocurrency trade and its underlying technology while introducing an official digital currency that will be issued by the RBI.
  • Financial awareness: There is a need to provide clear and concise information to consumers to make them aware of the risks associated with cryptocurrency transactions, as well as the potential benefits.

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