Before coming on the topic of Bitcoin or Cryptocurrency, it is important to know
the existence of money and how it is trusted by people as an exchange of value.
Money represents value. It is given in exchange for something and it passes on
in exchange for things to other people. But to believe in these transactions,
there should be trust in people that it has some value. Like govt told its
people that it will be liable for the value paper currency which is basically a
Govt promise and people trusted this Fiat money.
It is a legal tender as it is
given by the central authority. It is regulated by the Central Authority and
they can print as much say want. In the present scenario, digital money came
into the picture which makes the use of physical money lesser. Bank keeps the
ledger of all the account to solve the double-spending problem. There are
attempts to make digital currency viable but the double-spending problem cannot
be solved without central authority as whenever entity gets the right to
regulate money, it leads to corruption, mismanagement and control on your own
money will be lost. In October 2008, Satoshi Nakamoto created a digital
cryptocurrency called Bitcoin.
It is a kind of distributed ledger which can be
seen by anyone and it has the property that once a data is saved in it then it
becomes difficult to change it. In this customer can digitally exchange the
value without the interruption of 3rd party which was present earlier. It
operates on the premise of solving encryption algorithms to create unique hashes
that are finite in number. It is combined with a network of computers and
verifies the transactions; users are able to exchange hashes as if exchanging
physical currency. There are a fixed number of Bitcoin that is generated and
more no. will not be generated to prevent the overabundance and to ensure its
Features of Cryptocurrency
Bitcoin is a kind of Computer-generated code which can be used by its owner who
has a unique password which makes the user spend or trade-in exchange of goods
or any other currency or even a coin with another person. To obtain a Bitcoin,
there can be two methods, first, by mining it or getting it in exchange for
other currency from Bitcoin holders.
These transactions are continuously checked
and recorded in the blockchain
which confirms and check that the coins which
are traded belonged to its rightful owner and it is tradable the way it is
submitted. This process of mining will stop when it reaches 21 million which
will further make the process more complex and at each try, less Bitcoin will be
given. To ensure the security, a person who wants to deal in the Bitcoin
must-have digital wallet which provides a unique two-part address.
On the first
part, it holds the address of the person and keeps it private and on the second
part, it is made public holding the information that the dealing happened which
can be viewed by anyone. There are two main advantages in this; first, it cannot
be traded twice at the same time as the two transactions are not feasible. And
second, it keeps the record of the old transaction while keeping the identity of
a person who is dealing in it secret.
How it will affect the economy?
It is already used as an exchange of goods and services and even it became the
de facto currency of many countries as it reduces the cost of business and it
stabilizes the prices and provides ease in trading internationally. It has a
major loophole which is associated with the upper cap of 21 million, it is
possible countries which has an abundance in oil will have more Bitcoin inflow
than the rest of the world. Fiat currency prevents this from happening as the
Governments have a control on this, unlike Cryptocurrency. It does not have a
capability to work in the real market as the market works on the demand and
supply and that is how inflation or deflation happens.
There is a need for the financial regulator to supervise the Bitcoin as it can
lead deep deflation in the economy because of the upper cap. It can be
characterized as a medium of exchange or store of value and it is possible that
in the case of inflation, the value of this can be less than its store of value
because of the lack of the trust in the people. Cryptocurrency holds the power
to shift the power from the State to its citizen who can take away the control
from the State and it can remove the corruption done by the Government.
The privacy rules in Bitcoin like the user's identity cannot be revealed can
lead to criminal activity and even hackers can take benefits from its
distributed ledgers. In 2010, by exploiting the loophole in code, the bunch of
hackers got 184 billion Bitcoin and it stimulated the security breach. However,
it was reversed in a few hours and codes were also modifies so that it cannot
happen in future.
There is a famous case on Bitcoin fraud in 2014. A leading Bitcoin exchange and
intermediary named Mt. Gox which was situated in Shibuya, Tokyo, Japan was
holding 70% Bitcoin transaction which was happening all over the world. Through
this theft from the hot wallet of the company (Mt. Gox) which was started from
the beginning of the year 2011, the company filed for bankruptcy protection in
Feb 2014 and it started with liquidation in April. The main reason for this can
be a lack of security.
Efforts taken by the Countries to regulate the Cryptocurrency
While many countries like China, Russia and Columbia prohibit the dealing in
Cryptocurrency due to the shift of power from Government to the people and
decentralized economy, Countries like the US, Germany, UK and Brazil tried to
regulate these virtual currencies.
In the US, regulatory measures mostly cover agency level, which comprises of the
Department of Treasury, Securities and Exchange Commission (SEC), Federal Trade
Commission (FTC), Internal Revenue Service (IRS) and Financial Crimes
Enforcement Network (FinCEN). Each of the department has a different definition
and a different viewpoint on the application of regulation on
Cryptocurrency. It is done to protect the interest of the consumer and
financial market which will be affected by the Bitcoin. The Constitution of the
US prevents the State for Coining money and not the private person unless it is
similar to US dollars which are a legal tender.
We can see the case of Bernard
von Nothaus who was convicted for creating Liberty Dollar and which is also in
the form of paper currency. He was convicted to form a currency which is similar
to the US dollar and his plan was to make it in circulation.
In the US case, Securities and Exchange Commission vs. Trendon T. Shavers and
Bitcoin Savings and Trust, Judge Mazzant
gave the landmark judgement that
Bitcoin will be treated as currency and it will be treated as currency
transaction and the US Court has jurisdiction to hear all the disputes related
to the Cryptocurrency and the dealings in it. Now Securities and Exchange
Commission has the authority to decide any matter of fraud related to the
In Germany, Cryptocurrency is treated as a financial instrument. The Federal
Ministry of Finance had brief talk related to the tax treatment but still, there
is no fixed regulation passed related to the same. In UK also, Bank of
England have not passed any circular or regulated related to the stand of
Bitcoin but it considered as 'single purpose vouchers' and this classification
will levy 10-20%of Vat on the sale and it was opposed by the people as it will
hamper the growth of this business in the UK.
Scenario of India on the Regulation of Cryptocurrency
The central government had not laid down any laws and regulation related to this
virtual currency. After demonetisation, Indians faced a challenge in trusting
the government on their money and they got attracted to this new form of
currency but due to the prohibition on cross border supply of Bitcoin and slow
process of mining because of lack of infrastructure in India, people are facing
problem in dealing with the Bitcoin.
We can know the stand of India through its landmark judgement on Cryptocurrency.
Internet and Mobile Association of India vs. Reserve Bank of India
In this case:
Statement on Developmental and Regulatory Policies
was issued by
Reserve Bank of India. According to Section 10(2) r/w Section 18 of the Payment
and Settlement System Act, 2007. Through this RBI commanded the entities which
it regulates that they cannot deal with the virtual currencies like
cryptocurrency nor they can facilitate the same to any person or institution in
doing transaction related to this and they have to end the relationship with
that person or company who is already dealing with virtual currency. Supreme
Court held that the Circular is unreasonable and it should be subjected to
proper rule and regulation instead of a complete ban. Therefore the Supreme
Court revoked the said Circular.
Petitioner contended that RBI regulates currency and any payment system but
Cryptocurrencies does not come in this purview, therefore, it has no
jurisdiction to pass such circular. This virtual currency can be similar to
money but it cannot change the element of legality in this cryptocurrency.
are more like tradable goods rather than a type of currency, therefore RBI will
not come into the picture while dealing with it. The Petitioner further
contended that occupation or business until the legislature puts any ban on this
and announce this kind of business a, res extra commercium
which means 'a
thing outside commerce'. It was also contended that RBI believes that it is
impractical to govern or regulate these virtual currencies by putting such
complete ban on this but this is very unreasonable and inappropriate on the part
of RBI for taking such decision on the basis of their wrong understanding on Cryptocurrencies.
RBI argues that these virtual currencies can be used for unlawful cause because
of blockchain technology. It will sabotage the credit system of India and will
also hamper fiscal stability. It is a proper authority for the control of
banking activities in India. Supreme Court respected the authority of RBI
regarding its decisions related to the economic policy of India.
Supreme Court held that it is not legal tender but it functions like a store of
value or unit of account or a medium of exchange or a combination.
notify particular instruments as currencies but it had not done this in the case
of Cryptocurrencies because it believed that it will not come in the purview of
'currency' definition which is given in the statute. The Apex Court observed
that the way in which this virtual currency is used in India as consideration
for the transaction of any goods and services or like a facilitator between the
parties in their dealings, it can be said that it will fall under the purview of
RBI and it has the power to regulate.
SC also rejected the contention that RBI
has no idea while passing the circular, though the Apex Court concluded that it
was an inappropriate regulatory action taken by the RBI bypassing such circular.
The SC held that RBI does not satisfy the court related to damage which is
caused by the usage of Cryptocurrency and also it does not recognise the
unfavourable impact of it on banking and financial sector. By putting such
regulation on the institution that is dealing in these Cryptocurrencies which
does not harm them, RBI acted in a very inappropriate way bypassing such
circular. Therefore, the Supreme Court ordered to set aside the same.
The judgment is an essential growth in the field of Cryptocurrency as after this
bank is no more a regulator for the entities which are dealing in these virtual
currencies and this makes business in this workable in India. There is a need
for classification in this sector which is already done by another country but
in Indian law, it still needs to be explained. The way the laws are framed by
the RBI and the legislature plays a vital role in determining whether Crypto
currency can be treated as money in future and will it come under the purview of
There is a need for a regulatory procedure for the implementation of blockchain
technology and in the dealing of cryptocurrencies and regarding this many
petitions was also filed. Seeing the draft of the Cryptocurrency & Regulating of
Official Digital Currency Bill, 2019 (Bill) which ban the mining, holding,
selling, trade issuance, disposal or use of cryptocurrency also makes it
punishable with fine and imprisonment of up to 10 yrs or both, we can say that
India is not ready to adopt this method.
As there is a possible risk
involved in this like money laundering, customers in danger and there is a
threat to fiscal stability. But there are advantages associated with this
technology like in record-keeping and efficiency in a cross-border transaction.
Blockchain Technology in Banking System
Blockchain has a very good computing system. Through Blockchain technology, the
data of the person get saved in the central ledger and every minute change in
the token which is generated from the transaction will create a new entry as it
will not make changes in a past entry, therefore there will be two entries. It
will solve the problem of hacking as the person will get to know about the fraud
as he will get to know that he had done only one entry but the system is showing
If it is implemented in the Banking sector, there are many benefits
attached to it like that people will not be able to do backdate entry which is a
major cause of corruption as people will get to know that there two entries.
The problem is in Blockchain key which holds all the information, if somebody
sends the value, the bank will have the code to open the key to read the token
that the person has generated and to know, whom they need to transfer that
money. But it will be done by the computerised system, not by any bank employee.
But to crack the value, it needs a high computing power which means that the
bank will need the proper server rooms which are not possible as Bitcoin coin
mining require hours to do it which needs a high level of infrastructure which
lacks in India and to establish it also it requires a lot of expense.
In India, the oldest product named Finacle is still used by many banks,
therefore we can say it will be difficult for Indian Banking sector to adopt
this new technology and the main reason can be lack of infrastructure and
technological advancement in the banking sector.
India has a very strict policy regarding exchange control which include for
every overseas transfer. A person has to do paperwork and it will go through
proper banking procedure and with the strict supervision of RBI. But the main
aim of Cryptocurrency is decentralization which will the RBI outside the picture
and it may lead to funding illegal activity or may get hacked or misused by an
- Power to make rules can be given to self-regulatory association as they
can expertise in this technology but RBI should have the ultimate control.
- There should be compulsion on the dealer to register them and comply
themselves with the rules. It will help in the transparency issue and
Government will be able to supervise the transaction and will be able to
take action in illegal activities.
- The government needs to do the classification of Cryptocurrency so that
they can levy taxes on them which can actually help the economy to grow.
- The legislature needs to make laws for the regulation and penalising the
person who gets involved in the illicit activity through Cryptocurrency.
There is a need for regulatory framework work for the regulation of
Cryptocurrency as huge fraud can be committed by the hackers, the right of the
consumer can be violated and even it has a power destabilise the financial
market and in absence of regulatory authority.
To adopt this technology by the underdeveloped nation or developing nation like
India, there will be a need for good infrastructure and internet facility and
also a strong legal framework. One of the reasons for not adopting this
technology by many Governments can be the decentralization of the economy and
their power will be shifted to the people.
And the second reason can be this technology needs people who have expertise in
this as single loophole can lead to major frauds. There can be a problem related
to the classification of these virtual currencies and regulating it. And these
regulations may defeat the sole purpose of introducing such virtual currency.
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