Cryptocurrency in India: Navigating Regulatory Uncertainty

In the dynamic world of finance, cryptocurrencies have emerged as a significant innovation, challenging the conventional monetary systems. These digital or virtual currencies, built on advanced cryptographic technology, operate independently of traditional central banking systems. 

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The global adoption of cryptocurrencies has escalated, particularly during the COVID-19 pandemic, marking an important shift in financial transactions and investments. In countries like India, where there is yet no regulation for cryptocurrencies, the diverse range of public engagement and interest in these digital assets is noteworthy.

Purushottam Anand, an advocate and founder of Crypto Legal, emphasises the intrinsic value of cryptocurrencies. "Cryptocurrencies are not primarily intended as investment tools. Their value is derived from the underlying blockchain technology," Anand explains. He further clarifies how the demand and supply mechanisms of cryptocurrencies are inherently linked to the blockchain's utility. "As more people use or interact with a specific blockchain, the demand for its native cryptocurrency increases, consequently driving up its value."

However, Rashmi Deshpande, a lawyer and founder of Fountainhead Legal, offers a different perspective. She argues that referring to these digital assets as 'currencies' might be misleading. "In most countries, cryptocurrencies haven't been recognised as official currencies. They are not universally accepted for trade or transactions," Deshpande points out. She suggests that the term 'crypto tokens' might be a more appropriate designation than 'currency', highlighting the limited acceptance of cryptocurrencies in global markets.

IMF's Warning on the Unregulated Cryptocurrency Market

The International Monetary Fund (IMF) has raised alarms about the potential for unregulated cryptocurrencies to foster an alternative financial system. The IMF acknowledges the benefits that these digital currencies might offer, but it also points out the significant risks and costs, especially in developing countries. There is a mounting concern that without regulation, cryptocurrencies could adversely affect national economies over time.

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Purushottam Anand underscores the concerns echoed by both the IMF and the Reserve Bank of India (RBI). "There are serious worries about financial stability and the risk of losing monetary control," Anand says. He explains that these concerns stem from the rapid adoption of cryptocurrencies, which, if unregulated, might pose threats to financial stability due to the lack of governmental oversight akin to that in traditional banking.

Economic Impact of Cryptocurrencies

Dhananjay Sinha, Co-Head of Equity and Head of Research at Systematix Group, elaborates on the economic implications. "A substantial increase in the use of cryptocurrencies could disrupt liquidity, interest rates, and other financial markers," he explains. Sinha highlights the RBI's concerns regarding the widespread acceptance of cryptocurrencies and its potential to challenge the traditional banking system. He notes that these apprehensions have led to discussions about a central bank-issued digital currency as a countermeasure.

The Regulatory Conundrum in the Cryptocurrency Sector

As the digital currency landscape evolves, a vital question arises: why is the government's approach to regulating cryptocurrencies so cautious? Despite extensive discussions and significant investments by citizens in these digital currencies, the government's regulatory goals remain unclear and undefined.

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Revathi S. Raghunathan, a Regional Council Member of SIRC, ICAI, points out the complexities in regulating this market. "The challenge lies in ensuring cryptocurrencies are not used for criminal activities, like money laundering or terrorist financing," she says. Raghunathan emphasises the need to protect ordinary people from the speculative risks prevalent in the crypto market.

Rashmi Deshpande echoes this sentiment, highlighting the absence of regulations in most countries. "The risk with unregulated commodities is that governments can impose sudden bans," she notes, cautioning against using cryptocurrencies as traditional currencies.

Confusion Over Government's Stance

The government's stance on cryptocurrencies appears to be mired in confusion. There's a reluctance to impose a complete ban, yet there's a strong demand for robust regulations to safeguard citizen investments and prevent potential economic instability.

Purushottam Anand discusses the ambiguity surrounding the proposed regulatory bills. "The 2021 Bill was never made public, leaving us without clarity on the government's vision for cryptocurrency regulation," Anand states. Rashmi who has read the older version of the draft states that the Bill lacks depth and understanding, remarking that it didn't seem like the government took crypto regulation seriously.

In conclusion, the need for clear cryptocurrency regulations is evident, with the goal of protecting investments and ensuring national financial stability. However, the lack of decisive action from the government continues to leave the future of cryptocurrency regulation in a state of uncertainty, worrying investors and the market alike.