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257 viewsAll GS PapersGS Paper 3
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Approach:

  1. Introduction
  2. The need for cryptocurrency regulation, mentioning recent Financial Stability Board statement.
  3. Mention India’s regulatory stance.
  4. Conclusion

Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. It’s a peer-to-peer system, enabling payment by anyone, anytime and from anywhere.

Imperative for Cryptocurrency Regulation :

  • Prevent market manipulation and protect investors as market manipulation and price volatility are common in cryptocurrencies.
  • So, the lack of authorized information on these digital assets and the technological complexities makes it prudent to regulate them in for safeguarding investors.
  • Allowing to select cryptocurrencies from thousands of cryptocurrencies existing around the world. Most investors, however, are only familiar with a few.
  • So, to protect customers, a regulatory authority is required, which can disclose all information about the performance of the digital assets, their risks, and potential.
  • Understanding risks associated with technological advancement. Given the rapid rate of technological change, information infrastructure and professional financial advisors skilled in cryptocurrency are required. That way, investors can understand the technological risks, making informed decisions.
  • Investing in cryptocurrencies comes with another risk — online fraud. Hacking is a major threat worldwide, and cyber-attacks have become common.
  • Regulatory measures can be implemented to help investors protect assets.
  • Money laundering : Any unregulated system has the ability to fund criminal acts like money laundering.
  • A client due diligence process can help in keeping track of investors’ real identities and verifying their locations while buying/selling cryptocurrencies. Any infringement of such norms should be met with severe sanctions.

FSB : The FSB said the “recent turmoil” reveals the “intrinsic volatility” of fast-evolving cryptoassets. Their interconnectedness with the traditional financial system means cryptoassets must be subject to an effective regulatory framework, while “harnessing potential benefits of the technology behind them”. It will report to the G20 Finance Ministers and Central Bank Governors on regulatory and supervisory approaches  for international consistency and cooperation.

India’s Regulatory Stance: Cryptocurrencies are not legal tender in India and the status of exchanges remains murky. Although there is currently a lack of clarity over the tax status of cryptocurrencies,  in future, their transactions could face a 30 percent tax.

In 2018 the RBI banned banks and any financial institutions from “dealing with or settling virtual currencies.” The sweeping regulation prohibited trade of cryptocurrencies on domestic exchanges. In 2020, in a landmark decision, the country’s Supreme Court ruled that ban unconstitutional, allowing exchanges to reopen. In 2019, a draft bill Cryptocurrency and Regulation of Official Digital Currency Bill suggested that a blanket ban of cryptocurrencies – but made an exception for a proposed official digital currency. As of 2022, the cryptocurrency bill has not been approved by Lok Sabha, meaning the legislative status of cryptocurrencies in the country remains unclear.

The Centre is in the process of finalising a consultation paper on cryptocurrencies after gathering inputs from various stakeholders & institutions.

India should embrace the winds of change with strong controls in sync with the liberal free-market economy. By embracing new technologies in our democratic-progressive nation, the twin objectives of strengthening digital India and harnessing the Blockchain revolution will become a reality. There is no reason for India to impose a complete ban. Appropriate regulation and taxation are key tools to introduce it within the system for safe & legal use.

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