A govt-backed digital legal tender?

IN PERSPECTIVE

The central government appointed a committee for evaluating the scope of cryptocurrency under the chairmanship of former finance secretary Subhash Chandra Garg. The committee in its report submitted in July 2019 denounced the usage of cryptocurrency for any kind of transaction unless it is recognized by the central government. The committee also submitted a draft proposal for a bill styled as ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’.

The sentiment behind such a perspective represents the seemingly minimal or no trust on the sanctity of cryptocurrency which, to be honest, is not smoke without fire; the volatile nature of cryptocurrency is known to everyone to go along with its direct clash with the modern banking system, and makes it less feasible for any government to readily adopt it.

However, the committee was not too pessimistic towards the idea of Blockchain, which surely shows promise for the future, but the usage of Blockchain for cryptocurrency is a complete no-no for a lot of other countries as well. Philosophically, cryptocurrency represents the extreme end of libertarianism, with a pinch of anarchism, where there is complete resistance to any kind of established organization. And today’s banking sector (including government-regulated banks) represents that form of regulation, which most of the extreme libertarians do not accept.

Interestingly, the story of cryptocurrency shot to fame after the 2008 global financial crisis, which raised several questions over the functioning and viability of banking sectors across the globe since the banks were the main perpetrators of the financial meltdown. Many of the technology gurus at the time were looking for a viable alternative to the established banking sector, which for most libertarians represents a form of oppression, in which a third party is regulating their way of life.

By 2008, they were able to stumble upon the viable option of cryptocurrency, something which was backed by Blockchain, under which there can be transactions taking place between individuals without the help of a third entity such as a bank. The process of Blockchain has been claimed to be immutable because of its verification method, under which every node in the system has to verify the transaction which took place, thus the possibility of fraudulent transfer or cheating being minimal.

Another major concern which has drawn the attention of the government in the working of cryptocurrency is its lack of inherent value. There is no actual monetary backing behind the idea of cryptocurrency, due to which it makes it subject to fluctuation. Even if someone looks at the draft bill of ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’, section 2(1)(a) which defines cryptocurrency, says: “Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.”

The phrase “with the promise or representation of having inherent value” shows the insecure nature of cryptocurrency, which becomes one of the main, if not the sole, reason for governments across the globe to subdue the existence of cryptocurrency. And that is why the corporate entities which are now looking to harness the Blockchain market and enter the cryptocurrency realm, are taking note of this shortcoming.

Facebook’s Libra is one such endeavour. It is an association of 28 corporate entities coming together for the creation of a cryptocurrency styled as ‘Libra’. The unique thing about Libra is that, unlike its predecessors, it will have an inherent value as it will be backed by a monetary reserve contributed by the founding companies, thus creating a more viable digital currency, which so far has conspicuously remained absent from the digital world. However, will just providing a monetary backing for cryptocurrency be good enough for governments to overturn their decision of not supporting cryptocurrency? That is hard to say for now. What one can say for sure, though, is that governments will think about the fact that accepting a corporate-sponsored cryptocurrency could mean delegitimizing their own legal tenders, or at the least losing monopoly over legal tender, which no sound government will agree to.

Probably that is why the Garg Committee preferred a government-issued digital tender, backed by the legitimacy of the central government. The committee well and truly knows it would be hard to stay immune to the new developing realm of Blockchain. Therefore, in order to regulate it, it has floated the idea of a government-backed cryptocurrency.

(The writer is Assistant Professor of Law, National Law University-Odisha)