Cryptocurrency: Why is the government worried?

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The crypto sector is currently one of the fastest-growing investment markets in the world and India is not far behind. In the last few years, as real interest rates have gone down, traditional and even first-time investors have been looking for high yield investment options and cryptocurrencies have been an attractive alternative.

More than 10 crore Indians, largely young individuals, but also senior citizens, are said to have invested in cryptocurrencies, making the total investments in cryptocurrencies to more than 10 billion USD in 2021 from a little under USD 1 billion in 2020.

Amidst the tremendous price swings in the crypto market, the central government is set to introduce a bill to regulate crypto assets and cryptocurrencies in India in the ongoing Winter Session of Parliament. Earlier in 2019 and in February this year, the government had tried to bring legislation to regulate crypto but those efforts had to be abandoned. Prior to that, in 2018, the Reserve Bank of India had issued an order prohibiting banking support for the purchase and sale of cryptocurrencies, which was overturned by the Supreme Court due to the lack of legislative force.

To understand better why the Reserve Bank of India and the government are so apprehensive about large scale public adoption of crypto in India, it’s imperative to cognize the design of cryptocurrencies.

Hitesh Malviya, founder, itsblockchain.com, said that the government is concerned about potential risks associated with the rise of cryptocurrencies like money laundering and scams. 

"These risks are also associated with INR, or any other Fiat currency, so it’s next to impossible to remove these risks from both Fiat and cryptocurrency. But with the right regulation, and investor awareness government can at least provise a shield to the investors, thus minimising the impact of risk," he said.

Ashish Anand, Co-founder & CEO, Bru Finance, said that there is no regulation or ban in the country on cryptocurrency at present. The Reserve Bank of India has maintained its strong views against cryptocurrencies, saying they pose serious threats to macroeconomic and financial stability.

"Undoubtedly, from economic sovereignty and also monetary stability lens, a cryptocurrency needs to be regulated. A regulatory body to support the development of the sector and its elements like institutional custody and clearing operations, developing information infrastructure, and licensing of financial advisers skilled in crypto assets will work wonders for the Indian crypto sector," he said.   

CONCERNS

1. What gives Bitcoin value? As the name itself suggests, cryptocurrencies like Bitcoin are designed to function as a medium of exchange using the cryptography technology, i.e. these cryptocurrencies are not issued by any country, are not backed by any asset/sovereign guarantee and it’s highly difficult to confine the flow of these cryptocurrencies within a particular geography.
2. Loss of monetary sovereignty: The students of economics will be very well aware of the role central banks like RBI play in determining the money flow within the economy. Using monetary policy tools, RBI controls the ebb and flow of money in the Indian economy with the objective of achieving a balance between economic growth and inflation. If a cryptocurrency like bitcoin has to become a significant medium of exchange in the country, it will be highly difficult for RBI to use monetary policy tools to manage money supply resulting in loss of monetary sovereignty by India. This is a concern shared by all the major economies of the world including India.
3. Flow of funds from one country to another: In addition, the easy in/outflow of cryptocurrency across borders makes cryptocurrencies 'hot money' and even if those are accepted as crypto assets, RBI is apprehensive about such hot money leaving the shores of India in times of economic crisis.  
4. Money laundering & terror financing: The pseudo-anonymity and censorship-resistant features of cryptocurrencies make them much easier to be used for money laundering/counter-terrorist financing making cryptocurrencies a favourite among fugitives and charlatans. Though there are tools to track such nefarious activities, the lack of trained manpower in law enforcement, among regulators and in government agencies makes it easier for the bureaucracy to ban the cryptocurrencies altogether than to monitor the activities across blockchains.
5. Tax evasion: Tax evasion by using crypto transactions is another major concern of the government. It has the potential to facilitate illegal activity broadly including tax evasion. It offers investors a way to shield income from tax authorities. In that way, it could lead to a tax gap, thus causing loss to the government.

READ MORE: Bitcoin will not be accepted as currency in India, says Nirmala Sitharaman