The Rise Of Cryptocurrency In India: Blockchain, Legal Frameworks, And Future Prospects

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Index

  1. Introduction 
  2. Understanding Cryptocurrency And Blockchain Technology
  3. What Is Blockchain Technology
  4. India’s Journey To Becoming A Major Player In The Cryptocurrency Market
  5. The Evolving Legal Framework Of Cryptocurrency In India
  6. Challenges And Concerns In The Unregulated Cryptocurrency Market
  7. The Potential Of Cryptocurrency And Central Bank Digital Currencies
  8. Popular Forms Of Cryptocurrency Today
  9. Advantages Of Cryptocurrencies
  10. Government Measures And The Future Of Cryptocurrency In India
  11. Conclusion 

Introduction 

Cryptocurrency, a highly popular form of digital currency, utilises decentralised blockchain technology to ensure secure transactions in purchasing goods and services. As a decentralised currency, cryptocurrency operates independently of financial institutions or governments. Transaction details are meticulously recorded through a systematic procedure on computer networks, making them less vulnerable to manipulation.

 

Understanding Cryptocurrency And Blockchain Technology

Cryptocurrency is a popular form of virtual currency based on blockchain technology, which uses encryption to safeguard against online fraud and breaches. Despite its potential as a financial asset, most countries do not accept cryptocurrency as a legal form of transaction. This means cryptocurrency can rarely be used for purchasing or selling, as it is not considered legal tender. Although decentralised and not created by a single entity, its status as a non-legal tender complicates its use in transactions.

 

What Is Blockchain Technology

Blockchain technology, which underpins cryptocurrency, enhances financial transactions by systematically recording all past transactions within the network. This ensures the authenticity and integrity of the information. The process requires all participating members to work with the same information, assumed to be derived from a single source of truth. A key feature of this technology is that recorded information cannot be deleted, making communication more authentic and ensuring secure transactions.

India’s Journey To Becoming A Major Player In The Cryptocurrency Market

India’s significant contribution to the cryptocurrency market and its large crypto exchanges is indeed fascinating. To understand how India emerged as a key player globally, we need to trace its beginnings.

The evolution of cryptocurrency in India started in 2009 with the introduction of Bitcoin. The first commercial transaction occurred in 2010, and the first cryptocurrency exchange was established in 2013.

In 2018, the Reserve Bank of India (RBI) dealt a significant blow to the cryptocurrency industry by issuing a ban on cryptocurrency transactions. This decision sent shockwaves through the Indian crypto community and raised concerns about the future of digital assets in the country.

On April 6, 2018, the RBI issued a circular directing all regulated entities, including banks, financial institutions, and payment gateways, to cease dealing in or providing services related to cryptocurrencies. This move effectively prohibited banks from facilitating cryptocurrency transactions, making it extremely difficult for individuals and businesses to buy, sell, or hold crypto assets.

The RBI’s rationale for the ban was rooted in concerns about financial stability, consumer protection, and the potential use of cryptocurrencies for illicit activities. The central bank highlighted the inherent volatility and speculative nature of cryptocurrencies, emphasising the risks associated with investing in them. Additionally, the RBI expressed concerns about the potential impact of cryptocurrencies on the stability of the Indian rupee and the country’s financial system.

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The ban sent shockwaves throughout India’s cryptocurrency community, causing a sharp decline in trading volumes and eroding investor confidence. Many cryptocurrency exchanges and businesses were forced to shut down or relocate overseas, unable to operate within the restrictive regulatory framework.

However, the ban did not entirely quash enthusiasm for cryptocurrencies in India. Many individuals and businesses continued trading crypto assets through peer-to-peer networks and offshore exchanges. Additionally, the underlying blockchain technology garnered attention, with numerous startups and enterprises exploring its potential applications in various sectors.

This led to a significant downturn in the Indian crypto market sentiment. However, in March 2020, the Supreme Court of India delivered a landmark judgement in the case of Internet and Mobile Association of India vs. Reserve Bank of India. The court unanimously struck down the RBI’s circular banning cryptocurrency, deeming it unconstitutional as it infringed on the right to freely trade and conduct business under Article 19(1)(g) of the Constitution of India.

 

The Evolving Legal Framework Of Cryptocurrency In India

The legal framework for cryptocurrency in India remains incomplete, with some aspects addressed while others remain ambiguous.

As of 2023, there are several key points that a crypto user in India should be aware of:

An individual can trade, hold, and invest in cryptocurrencies, but they cannot be used for official purchases, meaning they are not recognized as legal tender. The Finance Bill of 2022 defines cryptocurrency under the category of ‘Virtual Digital Assets’. Income from the transfer of virtual digital assets, such as cryptocurrencies and NFTs, is taxed at 30%.

One of the main challenges in regulating cryptocurrencies is their decentralised nature. Cryptocurrencies operate on distributed networks like blockchain, which are not controlled by any central authority. This decentralisation makes it difficult for regulators to apply traditional financial regulations, which are typically designed for centralised systems.

Another challenge is the global nature of cryptocurrency markets. Cryptocurrencies are not confined to any single jurisdiction and can be traded 24/7 on decentralised exchanges. This global accessibility makes it difficult for regulators to enforce regulations and coordinate their efforts across borders.

Due to these challenges, the regulatory landscape for cryptocurrencies is still in its early stages. Some jurisdictions have taken a proactive approach to regulating cryptocurrencies, while others have adopted a more cautious stance. Key regulatory issues still under debate include:

  1. Classification of Cryptocurrencies: Determining whether cryptocurrencies are commodities, securities, or something else is crucial, as this classification will dictate the applicable regulatory framework.
  2. Regulation of Cryptocurrency Exchanges: Regulators are working to figure out how to regulate cryptocurrency exchanges to protect investors and ensure market integrity.
  3. Addressing Risks: Cryptocurrencies are volatile and speculative investments, posing several risks to investors. Regulators are striving to find ways to address these risks and protect investors.

The regulatory landscape for cryptocurrencies is likely to continue evolving in the coming years. As the cryptocurrency industry matures, regulators will need to adapt their regulations to keep pace with the changing environment.

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Challenges And Concerns In The Unregulated Cryptocurrency Market

The unregulated status of cryptocurrency brings significant stress due to its inherent volatility. This volatility can lead to substantial financial losses for both inexperienced and seasoned investors, and a sudden market decline may trigger panic-selling, which can impact the broader economy.

One major concern, and a reason for the initial ban on cryptocurrency, is money laundering. The unregulated nature of cryptocurrency makes it difficult to curb money laundering activities, as these transactions can be disguised as trades or gifts. Unlike traditional stocks, cryptocurrency facilitates easier cross-border trading, complicating regulatory oversight.

The government’s concerns about the misuse of cryptocurrency are valid, given its anonymous and hard-to-track nature. There are fears that criminals could use this technology for illicit activities, such as funding terrorism or drug trafficking. In August 2023, the Enforcement Directorate seized Rs 1,144 crore and arrested 20 individuals in cases related to cryptocurrency fraud.

There are no clear guidelines outlining legal remedies for consumers and investors, making dispute resolution unclear. The lack of investor protection plans discourages potential investors, hindering the growth of the crypto market.

The ambiguous legal landscape also affects the development of blockchain-based applications, which have the potential to benefit many businesses.

Additionally, the misuse of cryptocurrency extends beyond money laundering. Scams have proliferated, with losses reaching $300 million, highlighting the need for better regulation and consumer protection.

The Potential Of Cryptocurrency And Central Bank Digital Currencies

While cryptocurrency misuse is a significant concern, it doesn’t negate its potential to revolutionise our long-standing payment systems. By looking beyond traditional currencies and remittances, we can see a future where these innovations become reality.

Central Bank Digital Currencies (CBDCs), or the eRupee, represent a transformative government initiative to create a digital token of the national currency. If implemented correctly, CBDCs can address several issues, such as:

  1. Reducing money laundering
  2.  Monitoring cross-border transactions to track illegal activities
  3. Increasing transparency to help reduce corruption and bribery

However, CBDCs also have potential downsides, including:

  1.  Government surveillance of citizens
  2. Data privacy breaches

Blockchain technology itself can streamline various financial processes, cutting costs and reducing fraud in areas like supply chain management and healthcare. Moreover, cryptocurrency can integrate unbanked and underbanked populations into the formal financial system, enhancing financial literacy and access to financial services.

Popular Forms Of Cryptocurrency Today

Various forms of cryptocurrency are created regularly, each with unique features and applications. Here are some of the most popular cryptocurrencies available on the market:

  1. Bitcoin (BTC): Created in 2009, Bitcoin is one of the most widely used cryptocurrencies.
  2. Ethereum (ETH): Launched in 2015 by Vitalik Buterin, Ethereum is the second-largest cryptocurrency after Bitcoin. Known for its decentralised applications, Ethereum facilitates smooth smart contracts.
  3. Litecoin (LTC): Developed in 2011 by former Google engineer Charlie Lee, Litecoin is considered a substitute for Bitcoin.
  4. Ripple (XRP): Created by Ripple Labs in 2012, Ripple is widely used for cross-border transactions, making international payments more efficient.
  5. Bitcoin Cash (BCH): Introduced in 2017, Bitcoin Cash addresses the scalability issues associated with Bitcoin.
  6. Cardano (ADA): Launched in 2015 by Charles Hoskinson, a co-founder of Ethereum, Cardano is primarily used for academic research and peer review.
  7. Dogecoin (DOGE): Created in 2013 by Billy Markus and Jackson Palmer, Dogecoin started as a playful alternative to Bitcoin.
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Advantages Of Cryptocurrencies

Cryptocurrencies offer several advantages due to their decentralised nature and innovative technology:

  1. Trustless System: Cryptocurrencies eliminate the need for central intermediaries like banks, reducing the risk of institutional failures and crises similar to the 2008 financial crisis.
  2. Security: Cryptocurrencies use advanced cryptography to ensure secure and verified transactions, making them safer than traditional payment methods.
  3. Accessibility: Anyone with an internet connection can access and use cryptocurrencies, regardless of their location, making them highly accessible.
  4. Low Transaction Fees: Cryptocurrency transactions typically incur lower fees compared to traditional payment methods, especially for international transactions involving foreign currencies.
  5. Speed: Transactions with cryptocurrencies are processed quickly as they do not require intermediaries, leading to faster transaction times.
  6. Transparency: Cryptocurrency transactions are recorded on a public ledger, ensuring transparency and accountability in the system.
  7. Potential for High Returns: The volatile nature of cryptocurrencies presents the opportunity for significant profits for investors willing to take risks.

 

Government Measures And The Future Of Cryptocurrency In India

In the Union Budget for FY 2022–23, the Indian government proposed a 30% tax on profits from crypto assets and introduced the Digital Rupee. This virtual currency reflects the government’s cautious and uneasy stance towards cryptocurrencies. While this has created uncertainty about the future of cryptocurrencies and among crypto enthusiasts, there is a growing belief that cryptocurrencies may soon be legalised in India. Despite being around since 2009, cryptocurrencies have only recently gained extraordinary popularity, particularly among risk-taking millennial investors. The “Global Crypto Adoption Index” of 2021, published by blockchain analysis firm Chainalysis, reported an 880% increase in global crypto usage. India ranked second, following Vietnam, with a 641% growth in its cryptocurrency market in just one year.

In response to the government’s cautious approach, a notification on March 7, 2023, placed crypto asset transactions under the Prevention of Money Laundering Act. The following types of transactions are covered:

  1. Exchange between virtual digital assets and fiat currencies.
  2. Exchange between different forms of virtual digital assets.
  3. Participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.
  4. Safekeeping or administration of virtual digital assets or related instruments.
  5. Transfer of virtual digital assets.

Conclusion 

In today’s dynamic world, cryptocurrencies, secured by cryptography, represent a relatively new technology with significant speculative risk. It’s crucial to understand these risks before investing in such assets. Given the high speculative risk associated with cryptocurrencies and initial coin offerings, investors must be well-informed and knowledgeable. It is advisable to only invest what you can afford to lose and to diversify your investment portfolio to mitigate risk. While cryptocurrencies offer exciting prospects, they should be approached with caution, as they may not be suitable for everyone.

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