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Why in news?

The Supreme Court set aside a ban by the Reserve Bank of India (RBI) on banks and financial institutions from dealing with virtual currency holders and exchanges.

Why did SC put aside ban?

  • The court held that the ban did not pass the “proportionality” test. 
  • The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1)(g), which states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.
What is proportionality test?
  In the test of Proportionality the courts will quash exercise of discretionary powers in which there is no reasonable relation between the objective which is sought to be achieved and the means used to that end, or where punishments imposed by administrative bodies or inferior courts are wholly out of proportion to the relevant misconduct.
So the administrative action which arbitrarily discriminates will be quashed by the court.
The implication of the principle of proportionality is that the court will weigh for itself the advantages and disadvantages of an administrative action and such an action will be upheld as valid if and only if the balance is advantages  

What are virtual currencies? Are they different from cryptocurrencies?

  • There is no globally accepted definition of what exactly is virtual currency.
  • Some agencies have called it a method of exchange of value; others have labelled it a goods item, product or commodity.
  • In its judgment, the Supreme Court observed, “Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism, who attempt to describe an elephant, but end up describing only one physical feature of the elephant.”
Cryptocurrency Cryptocurrency is a virtual or digital currency for which encryption techniques (the process of encoding a message or information in such a way that only authorized parties can access it) are used to control its creation as a monetary unit and to verify the transfer of funds involved. Decentralized: unlike, fiat currencies (like INR, USD, EUR, etc) cryptocurrencies are not regulated or controlled by any bank, government or centralized financial authorities instead they are created and stored electronically through blockchain technology. Cryptocurrencies are transferred from “peer to peer” without the intervention of financial institutions, with transactions moderated by miners who record them in a blockchain. It has no physical existence and cannot be redeemed in another commodity like gold. Bitcoin, Litecoin, Ripple, Ethereum, PPcoin, Dogecoin, Coinye, Namecoin, etc. are some of the examples of cryptocurrencies. Note:  Facebook has announced the launch of a cryptocurrency called Libra by 2020.  
Blockchain Technology The National Payments Corporation of India (NPCI) is considering using highly scalable blockchain solution to further strengthen digital payments, which have seen an exponential growth in recent times. A blockchain is a list of records, linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. At the basic level, a blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable manner. Data security is there as data stored in a block cannot be changed without altering subsequent blocks. As per a recent report of global consultancy firm PwC, India would be one of the world’s blockchain leaders by 2023.  

Why did the RBI ban virtual currencies?

  • Owing to the lack of any underlying fiat, episodes of excessive volatility in their value
  • Their anonymous nature which goes against global money-laundering rules
  • Risks and concerns about data security and consumer protection
  • potential impact on the effectiveness of monetary policy

Extra coverage:

What is Fiat Money?

  • Fiat money gets its value from a government order (i.e., fiat). That means, the government declares fiat money to be legal tender, which requires all people and firms within the country to accept it as a means of payment.
  • By definition, its intrinsic value is significantly lower than its face value. Hence, the value of fiat money is derived from the relationship between supply and demand. Most modern economies are based on a fiat money system.
  • When fiat money is backed by gold or silver standard, it’s called “representative money”, and when central bank promises “to pay bearer the sum of this many rupees”, currency becomes an “anonymous bearer bond with zero interest”.

What is Fiduciary Money?

  • Fiduciary money depends for its value on the confidence that it will be generally accepted as a medium of exchange. Unlike fiat money, it is not declared legal tender by the government, which means people are not required by law to accept it as a means of payment. 
  • Examples of fiduciary money include cheques or drafts.
Q. Currency notes and coins are called Fiat money because    (a) they do not have intrinsic value like gold or silver  (b) made on special imported paper  (c) they are printed by government  (d) exchanged for goods and services   Answer a.
March 2024