Govt may not legalise cryptocurrency soon

What do you plan to do in case you are an Indian citizen with some bitcoins? Dispose them of? Well, eventually, you may have to, as India may not legalise any private virtual currency, owing to its inherent vulnerabilities that can leave consumers open to risk and restrict the government’s ability to stabilise the economy.

The fate of over 2,000 cryptocurrencies, with a market capitalisation of $119.46 billion hangs in balance as no country around the world treats them as legal tender. India may go a step forward and declare even holding of cryptocurrencies an offence. But wait, there is no blanket ban on such virtual currencies as of now. What could happen in coming days and months will be discussed but first, what is cryptocurrency that has given the government and the regulators many a sleepless night.

Cryptocurrencies are a subset of virtual currencies that is decentralised, and protected by cryptography. Bitcoin is an example of a cryptographic virtual currency, and was the first of its kind. In terms of market capitalisation, Bitcoin has the highest capitalisation, followed by Ethereum, Ripple and Cardano. Trading and investment in these cryptocurrencies have been driven mainly by speculation, resulting in a volatile market. This severely limits the use of these cryptocurrencies as a store of value.

Countries like Russia and Canada allow virtual currencies to be traded for goods or services. These transactions are similar to using virtual currency as a mode of payment. Some countries like Switzerland and Thailand allow for virtual currencies to be the modes of payment. However, since they are not classified as legal tender, parties are not legally obliged to accept them. No country across the world treats virtual currencies as legal tender. Countries like China have completely banned virtual currencies.

Illegal in India

In India, though it is not a legal tender, over 50 lakh private traders are estimated to be trading in cryptocurrencies in 24 exchanges, with volumes in the range of 1,500 bitcoins a day or around Rs 100 crore. The explosion of such a magnitude has jolted the government and there are reasons for that.

Recently a Rs 2,000 crore scam came to light, which involved GainBitcoin in India, where people were promised returns on their investment in GainBitcoin in the form of Bitcoins. This turned out to be a ponzi scheme as investors were asked to bring other members on board to recover their investments, and were also paid in another non-official virtual currency instead of Bitcoin, the value of which fell rapidly.

There have been several such scams around the world, including USA that have rattled the countries’ central banks and the governments.

In India, a government panel set up to study cryptocurrencies and its usage has thus backed a digital currency floated by the government, which could even be the rupee.

But more than a currency, the panel has recognised the technological innovations surrounding cryptocurrencies, which have the potential to improve the efficiency and inclusiveness of the financial system. The government’s policy think-tank Niti Aayog too has recognised the underlying technologies such as blockchain may be used, to bring efficiency and transparency in government services for citizens.

The panel is of the firm view that the cryptocurrency can be used to defraud consumers. Besides, the inherent vulnerabilities in the design of some virtual currencies can allow miners to collude to earn more revenue by “forking”, or changing the programming protocol to benefit themselves.

This could put consumers’ finances at risk. The loss of a private key, analogous to a password, of a virtual currency wallet could mean that the amount held in the wallet is lost permanently. Transactions are irreversible and if a wrong transaction is made, there is no method of redress. Balances in wallets can be stolen by the use of malware and there is evidence that such malware is resistant to anti-virus software. So, RIP Bitcoin? Maybe.