Cryptocurrency is currently a booming market despite the fact that several economies are facing the brunt of the pandemic. India itself has close to 2 million users joining their hands in this digital virtual currency.
Statistics from analysis firm Venture Intelligence say that in 2020, investments worth $24 million went into crypto firms. This was a major boost from the little $5 million invested in the previous year. This can be credited to the existence of a more formalized sector over the past few years and the upsurge of multiple crypto exchanges.
However on 29 January 2021, the Indian government proposed a new bill in circular number 2,022, in the ‘E’ new bills section under Legislative business. This government has decided to call this bill The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
What does this bill aim to do?
The government after passing this bill aims to establish a facilitative framework for the creation of the official digital currency. The sole authority of issuing these currencies will be the Reserve Bank of India. The second function of this bill is to outlaw all the private cryptocurrencies in India but also provide some provisions to sustain and utilize the underlying cryptocurrency technologies.
“The bill is yet to be finalized. The form and manner of declaration and how existing holders of the cryptocurrency should dispose of it will be prescribed either in the law or through the rules to be notified later," a finance ministry official said on condition of anonymity.
The official also stated earlier that this law draws its origins from the regulatory policies of China which have completely banned the trading and usage of cryptocurrencies in 2017. It shut down all crypto exchanges and blocked access to all domestic and foreign cryptocurrency exchanges and ICO websites.
The Lok Sabha secretariat in a bulletin said, “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is scheduled to be tabled in the ongoing budget session of Parliament. The bill is intended to “create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India (RBI). The bill also seeks to prohibit all private cryptocurrencies in India. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses."
Apart from the bill, the panel has also asked the government to examine the idea of releasing an official government-affiliated and backed digital currency in India. This will function like any other legal currency in India and will be issued by the Reserve Bank. In the fifth session of the 17th Lok Sabha in 2021, it is expected that this bill and its provisions will be discussed in detail.
Why this cryptocurrency bill?
One of the primary reasons for keeping a check on cryptocurrency flow in India is due to its volatile nature. It may pose a threat to the existing traditional currencies as the value of the cryptocurrency has the potential to either fall or shoot up magnanimously.
Investopedia reported that historically Bitcoin has been very volatile. It was seen that with three months of October 2017 to January 2018, the volatility of the price of bitcoin reached nearly 8%. This is greater than twice the volatility of bitcoin in the 30-day period that ended on January 15, 2020. A research paper written by Dirk G. Baur and Thomas Dimpfl proves that the volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the euro and the yen).
Thus, it is difficult for the traditional currencies to keep up with this volatility and fluctuate this easily. It is also probed that several Indians will feel hesitant to majorly shift to a virtual exchange medium. Cryptocurrency also involves severe anonymity in its transactions. Their decentralized nature does not fall under the discretion of the government. Hence, without giving any identifiable information, one can engage in transactions.
Hence, a possible reason to propose this bill is to keep a check on the rise of cybercrimes, money laundering, misinformed investments by consumers, frauds, and terrorism financing.
It was seen in 2018 that the Reserve Bank of India had banned banks from accepting transactions relating to cryptocurrency post demonetization. However, In March 2020, the Supreme Court revoked this ban.
The Rajya Sabha too had questioned whether the central government is keen on issuing strict guidelines related to trading in cryptocurrency. To this, Finance minister Nirmala Sitharaman said, "A high-level Inter-Ministerial Committee (IMC) constituted under the Chairmanship of Secretary (Economic Affairs) to study the issues related to virtual currencies and propose specific actions to be taken in the matter recommended in its report that all private cryptocurrencies, except any virtual currencies issued by the state, will be prohibited in India."
What is the current impact on investors after hearing the probable bill?
The possible positive aspect of the bill is that India is finally hoping to have a law that will pay attention to the widespread use of a digital currency in India, along with regulations from the Reserve Bank Of India. However, with the lack of clarity and final verdicts, there has been severe panic induced in the market. It has sent out shivers for small and big investors due to the fact that the bill seeks to ban “private cryptocurrencies.” Thus, there is high speculative foresightedness of experiencing a huge loss or invalidity of assets after the bill is passed.
Live Mint commented that “The bill is likely to make mining, holding, selling, issuing, transferring, and using of cryptocurrency a punishable offense with a heavy fine or imprisonment or both.”
Several cryptocurrency trading platforms too, are awaiting the final decision of the government and express their anxiety about this uncertainty.
Unocoin co-founder and chief executive officer Sathvik Vishwanath spoke about this in an exclusive interview with BloombergQuint. He said, “We’re all waiting for details (of the proposed law) to come out to determine our next course of action. If the government goes ahead with banning all cryptocurrencies, except the one backed by the state, it will not make sense to continue our business in India.”
What is the way forward to this?
There is high anticipation about the ways in which existing cryptocurrency holders should deal with their assets. Hence, the market too is experiencing fluctuations after the news broke out about the ban on private cryptocurrency firms. It was observed that prices of the cryptocurrency fell by 30% between Jan. 30 and Feb. 1. However, when Tesla announced its huge investment in Bitcoins, it revived the market tremendously.
To the relief of several investors, the finance ministry official said that the ban will not be imposed overnight. It also specified that investors will be provided with a transition period of three to six months after the law is successfully implemented by the parliament. This gives investors scope to liquidate their investments and prevent the severe loss or invalidity of assets.
Commenting on this Sathvik Vishwanath also remarked, “Investors do understand that the ban won’t be sudden and there will be some lead time given by the government so they’re not going for immediate selling as well. ”