#IndiaWantsCrypto: Should it get it?
The expansive growth witnessed by the cryptocurrency market in the last four years has prompted national regulatory authorities across countries grapple with the regulations.
While some countries have outrightly banned cryptocurrencies and some others have used them for barter transactions and even as a means of payment, no country has still considered Cryptocurrencies as a legal tender.
The Inter-Ministerial Committee (IMC) set up by the Indian Government to study the issues related to virtual currencies and propose specific actions, recently recommended that all private crypto currencies should be banned in India except the ones issued by the Government.
While the Committee suggests that the Government keep an open mind on digital official currency and has highlighted the positive aspects of Distributed Ledger Technology (DLT) and its uses in banks and financial firms, it has proposed banning of all private cryptocurrencies given the risks associated with them.
In developing the final rationale and drafting the report ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’, the Committee has analyzed the challenges, the global scenario and regulations that impacts this industry’s growth and development.
The disadvantages of virtual cryptocurrencies have been further explained below with sources and rationale.
- Public blockchain needs decentralized verification such as in the case of Bitcoin. People who verify the transaction and get some Bitcoins are called miners. A complex mathematical problem is posed to verifiers and solving these problems takes up a lot of energy. Decentralization may help in keeping this process less cumbersome.
- Low scalability: To be used as a means of payment, the number of transactions that can be processed has to be much higher. At its peak, it would take Bitcoin more than a day to verify a transaction.
- High cost: The cost of verifying transactions through the Proof of Work protocol is very high. The report says that 19 US households could be powered for a day in the electricity it takes to mine one bitcoin. If such currency mining is not prohibited in India, it would be catastrophic. Developed nations such as Canada have had to buy power in the open market. India is already power starved.
- Irreversibility: All transactions on blockchain are irreversible. While this gives it credibility, it penalizes mistakes. Anyone who has worked at a bank would tell you that mistakes are common even while transferring money.
- Security: Wallets and even exchanges have been prone to cyber-attacks thereby causing a security concern.
- Password: If one forgets the Private Key, there is no recourse. Currently, we have the provision of verifying the identity of the person and regenerating a PIN or an OTP. No central authority exists in case of crypto currencies.
- Monetary policy: cannot be enforced by central banks. This can cause unchecked inflation.
- Cross border control: over currency cannot be exercised as there is no central clearing house.
- Anonymity: in transactions is causing cryptocurrencies to be used for criminal activities; from financing narcotics as in the case of Silk Route to terrorism.
Given the disadvantages, IMC proposes the enactment of a law to prohibit trading and mining cryptocurrencies and a fine of up to Rs 25 Cr and imprisonment of as much as 10 years for anyone dealing in them. However, it does recommend official digital currency with the status of a legal tender and appropriately regulated by the Reserve Bank of India.