The uncertainty around cryptocurrency

Why has the latest Bill regarding digital currencies, which is to be tabled in Parliament, caused widespread distress among crypto-investors?

The story so far: A bill that the Centre is set to introduce in the Winter Session of Parliament has got investors in cryptocurrencies worried. The prices of cryptocurrencies across the board fell by as much as 20% after news of the Centre’s new cryptocurrency bill hit the market on Wednesday. With details of the bill not out yet, many investors are left hoping that there will be no blanket ban on cryptocurrencies.

THE GIST

  • A bulletin released by the Government on Wednesday stated that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India.” It also seeks to “prohibit all private cryptocurrencies in India” except for a few in order to “promote the underlying technology of cryptocurrency and its uses.”
  • If so, it would be illegal to purchase goods and services using any cryptocurrency and people would only be able to speculate on the price of cryptocurrencies.
  • Crypto enthusiasts, however, still argue that cryptocurrencies can serve as an asset like gold or silver that helps people protect their wealth from inflation.

What is it?

A bulletin released by the Government on Wednesday stated that the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will be introduced in the Winter Session. The stated purpose of the bill is to “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India.” Towards this end, the bill seeks to “prohibit all private cryptocurrencies in India” except for a few in order to “promote the underlying technology of cryptocurrency and its uses.”

The “official digital currency” here refers to the central bank digital currency that is expected to be issued by the RBI. A number of central banks across the globe have been working on issuing their own digital currencies. This, some say, is to offer an alternative to private cryptocurrencies. It should be noted that the RBI, in an order in 2018, banned financial institutions from facilitating cryptocurrency transactions. The RBI’s order was overturned by the Supreme Court last year saying that there was no legal basis for the ban. But the new cryptocurrency bill may offer a legal basis for a strong ban.

Is this the end of the road for cryptocurrencies?

The bulletin released by the government has led to some confusion over what counts as “private cryptocurrency” in the context of the bill. Since, at least according to the bulletin, the primary purpose of the bill seems to be to facilitate the creation of an official digital currency issued by the RBI, “private cryptocurrencies” in this context likely refers to digital currencies created by entities other than the state. Others, however, have argued that “private cryptocurrencies” refers only to a small number of cryptocurrencies that do not make their transaction ledgers and other data available to the public.

What seems clear as of now, however, is that cryptocurrencies will not be allowed to function as a full-fledged medium of exchange. So, it would be illegal to purchase goods and services using any cryptocurrency. People may only be able to speculate on the price of cryptocurrencies. This was expected given the risk that private currencies could possibly out-compete fiat currencies issued by central banks. Fiat currencies are seen as assets that can be easily debased by governments.

Crypto-enthusiasts point out that the ban on cryptocurrencies in other countries has not led to a halt in crypto trading. They say that it is hard for authorities to crack down on cryptocurrencies and further argue that blanket bans on cryptocurrencies will only push cryptocurrencies into the black market.

Central bankers, however, may not be concerned about such underground trading as long as the value and volume of these transactions are limited and pose no serious threat to their monetary powers.

What does this mean for the value of cryptocurrencies?

Cryptocurrencies were initially flaunted by many as alternative currencies that could compete against fiat currencies such as the U.S. dollar and the rupee. But governments and their central banks have been unwilling to accept these private currencies as a legal form of money. This, some argue, is because the ability of the State to create money out of thin air may be constrained by citizens switching to private currencies. With the Centre now likely to ban cryptocurrencies as a medium of exchange, the real fundamental value of cryptocurrencies as currency may come under question.

Crypto enthusiasts, however, still argue that cryptocurrencies can serve as an asset like gold or silver that helps people protect their wealth from inflation. But it should be noted that assets like gold and silver are able to act as hedges only because they possess fundamental value either as a medium of exchange or as a useful commodity in the first place. This is what allows their price to rise in tandem with fiat money supply.

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