The Union government is reportedly going to table a bill in the Budget Session of Parliament banning all private cryptocurrencies such as bitcoin in India and which will also deal with the creation of a legislative framework for an official digital currency. The Reserve Bank of India (RBI) is also exploring the option of issuing a digital version of the rupee, which could serve as the Central Bank Digital Currency (CBDC), a booklet on payment systems has said.
Here’s what you need to know about cryptocurrencies and the government’s move to regulate it:
What are cryptocurrencies?
Cryptocurrencies are also known as convertible virtual currency, which can be exchanged for fiat currencies. However, not all virtual currency can be exchanged for conventional money and so not all virtual currency is convertible. Cryptocurrencies are not backed or regulated by central banks, like conventional currencies are. Anybody on the internet can mine or create and trade in them. In the United States dealing in cryptocurrencies invites taxation however, this is not the scenario everywhere else in the world. Unlike regular currency, cryptos have no physical entity and only exist online.
Bitcoin is the world’s most popular cryptocurrency, it has a convertible value, which has been witnessing record highs the past few months. It came into existence following the 2009 housing market crash. All bitcoin transactions are maintained in an open-source ledger that anyone can get access to. Bitcoins are convertible into US dollars.
Bitcoin saw a flurry of activity recently and a mild endorsement by Elon Musk has attracted the attention of Indian investors. WazirX, BuyUCoin, CoinSwitch Kuber are some of the most popular cryptocurrencies in the country.
Why is the government bringing a bill to ban cryptocurrencies?
The Regulation of Official Digital Currency Bill, 2021, which is scheduled to be tabled at the upcoming Union Budget session, aims “to create a facilitative framework for the creation of the official digital currency” and “prohibit all private cryptocurrencies in India” a Lok Sabha bulletin released on Friday said. Adding that “It allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,”.
In the January 25 booklet, RBI had said that the government is wary of cryptocurrency and the risk that comes with their operation, but the option of digitizing the current fiat currency is being explored. “In India, the regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks. Nevertheless, RBI is exploring the possibility as to whether there is a need for a digital version of fiat currency and, in case there is, how to operationalize it,” said RBI.
Cryptocurrencies are decentralised payment systems, ie they are not backed or regulated by any central banks like conventional fiat currencies are. This creates a point of worry and contention for central banks like RBI. RBI joins the chorus of the European Central Bank, which too has issued similar warnings and cautions against cryptocurrencies.
RBI had previously attempted to ban cryptocurrencies in 2018, but the order was overturned by the Supreme Court in 2020. Another similar bill proposing a 10-year imprisonment for any individual found to be dealing with cryptocurrencies was drafted in 2019.
What is Central Bank Digital Currency?
Central Bank Digital Currencies (CBDC) like the one RBI aims to create are just fiat or conventional currencies in their digital form. The “technology” that the new bill seeks to protect is the blockchain technology that backs the operation of cryptocurrencies. CBDC is designed to act as a digital version of a country’s fiat currency and is backed by a suitable amount of monetary reserves like gold or foreign currency reserves. Central banks are supporting the creation of CBDC to compete with cryptocurrencies. CBCDs essentially are a digital currency that has the regulation and backing of the government and the accessibility of a digital currency.