THURSDAY, APRIL 25, 2024
Siddharth Desai
The global financial stability report published last month by the IMF, states the popularity of crypto assets is growing. This report also brings to light the risks associated with the spread of crypto assets, these include fiscal risk to the government and systemic risk to the financial system suggesting that an increased usage can reduce the ability of central banks to implement monetary policy effectively. India is not a stranger to cryptocurrencies, 2021 global crypto adoption index released by Chainalysis has placed India 2nd out of 154 nations, however, cryptocurrencies are not accepted as legal tender in India. As legislation on this issue is also being worked out by the government, RBI on its part has also cautioned users, holders and traders in virtual currencies regarding various risks associated with dealing with such virtual currencies through its public notices over the past few years. RBI has also said that it is working on a phased strategy for the launch of its digital currency by year end.
The first country which recognised Bitcoin as a legal tender is El Salvador this June. The operators follow a blockchain technology, it is very secure in terms of the IT tools and because when you have any currency or any internet-based mechanism, hackers intrude into the picture but here it follows a blockchain technology which makes it impossible or nearly impossible to hack the system. The second issue is that if there is an error or somebody is tinkering into the blockchain, only that node (the technical term) gets affected by it and the whole system of the chain, checks its credentials so the chances of pilferage are very less. So, it's more secure, the problem is when you have assets or shares, when you invest into the monetary value of money you know how much return you will get. Cryptocurrencies have the problem that they’re theoretical, you do not know how the value is determined because it is purely theoretically driven by demand and market forces.
People go with the flow; people think that this is something where the growth of the bitcoin in the last few years has titillated a lot of people to migrate into the cryptocurrency and then some of the exchanges which are now fairly getting prominent like WazirX or ZebPay are also trying to garner a lot of people. So, the larger policy perspective of securing or making an alert or making the awareness campaign well for individuals is very important because a larger cyber hygiene practice put across to our users is more important than transactions in between being hacked and money siphoned off.
The cryptocurrency is not backed by the central government of the country except for El Salvador and to that add Cuba which is also thinking of treating the cryptocurrency itself as a digital currency or as a legal tender, otherwise, no country in the world has adopted it till now. Cryptocurrency because of very big penetration of digital payment and if you look at the spread of cryptocurrency you will be amazed to know it is the women, students, tier 2 & tier 3 cities which are going in a very big way of investing in the cryptocurrency. We must treat it only as a speculative market and the most important worry is the crypto crime and money laundering. Because the worry is whether the cryptocurrency exchanges indulge in KYC and also the AML (anti-money laundering) perspective. The new claims made by these WazirX or Coinbase and other exchanges are all claiming that they are now indulging in KYC as well as the AML. Recently lot of advertisements are launched to educate people about cryptocurrency through these exchanges but not by the government and therefore we must understand that crypto does have a security risk, it has a market risk, there is no inheritance mechanism.
If this is only used as a digital currency perhaps there is no issue but the vulnerability comes from where it is being used for an investment purpose, short term and long term. Then when you are taking a very high risk, what happens if it crashes, because it is purely on a market-driven force. So, what happened in 1998 fall off Goldman Sachs, the government came out with a bailout plan. Here without knowing who are the users, without knowing who is the one who is providing this blockchain facility, which government will bring that kind of security to its consumers? If it fails who is responsible? What kind of bailout package will follow? The second very important thing is, it's not only anti-laundering, it can go into terrorism, into drug trafficking. If India comes out with only regulation and the rest of the world doesn't come out, so one can go to Nepal, Bangladesh and operate it, what will one do? And therefore there needs to be not only a national discipline but also an international discipline.
These are various aspects of cryptocurrencies or virtual currencies. A lot of complexities are involved, there is a positive aspect in terms of the use of blockchain technology but then there are risks involved because it is speculative. The regulatory framework will have to be robust and will have to be put in place soon so that these can be regulated effectively and the interests of consumers specifically and the interests of the country as a whole in terms of security is also protected.
(The author is an Advocate by Profession)
