By Pratyaksh Arneja
Up until three years ago, the Reserve Bank of India (RBI) did not have any plans to regulate any sort of digital currencies, such as the Bitcoin. However, owing to a 5 billion market cap and its expansive digital reach, the tides may have turned for cryptocurrencies. They are essentially digital currencies which are mined through encrypting networks which function outside the vicinity of any central banking authority.
Conflicting interestsRBI versus SEBI
Last week, the finance ministry of India called a meeting in order to discuss the regulatory framework for cryptocurrencies. While the pretext of the meeting was simple, a conflict of interest ensued between two entitiesthe RBI and SEBI (Securities and Exchange Board of India) over Bitcoins future.
RBI wanted the cryptocurrency to be traded like commodity derivatives (also known as Futures). This may include things such as gold, metal, coffee, and so forth. This allows traders to hedge against market uncertainties, and lock a relatively safer investment. However, the proposal did not go well with SEBI, who thought otherwise. Their concerns stemmed from the nature of Bitcoin and whether it can be classified as a full-fledged commodity under current legal provisions.
The vulnerability of cryptocurrency
Having said that, concern regarding the digital currency’s accountability and the extent to which it should be monitored is not new. Countries such as Japan and Russia are already in the process of regulating such digital currency exchanges. On the flip side, there are a few, who have prohibited the currency from being traded. These include Iceland, Ecuador, and Vietnam among others. This is because the cryptocurrency is susceptible to sporadic price fluctuations. Bitcoin has demonstrated a huge capacity for both rapid appreciation and depreciation in a very short period of time. If there are strong and volatile undercurrents in the market, people would not purchase Bitcoin to buy goods and services. These high levels of speculation will instead result in lesser access to goods and services.
Bitcoins vulnerability is also reflected through the number of cyber-attacks that have taken place since its inception. Since the transactions are not reversible and the stolen data has immense value, the imminent threat of Bitcoin being used for digital malpractices should not be ruled out. A Bitcoin transaction necessitates anonymity and conversely, a lack of a digital footprint. These can be used for exploiting the decentralised network and commit theft or other frauds. A regulation would reduce these digital security dilemmas.
Looking for an appropriate regulation
Despite the fact that Bitcoin is being traded exponentially every day, its risky connotation still impedes purchasers from buying it. Bitcoin’s vulnerability to geographical events and other security breaches has resulted in lower rates of adoption for the currency.
Interestingly, this turbulent stature of the currency can be corrected by appropriate regulation. If pursued correctly, the regulation will create sufficient demand and legitimise the digital currency altogether. By ensuring adequate safeguards with respect to online financial transactions and distributing information, confidence can be built among investors. This would imply that the government fully supports the idea of digital currencies running parallel to the actual legal tenders in circulation, something that the RBI has vehemently discouraged in the recent memory.
The way ahead
With a number of cryptocurrencies running in the digital currency market (Ethereum, Litecoin, Ripple, PPCoin), the Indian government has to be quick enough to catch up with the times. Ideally, this should manifest in a form of an all-encompassing law for cryptocurrencies. It is indeed correct to assume that Bitcoin does not fall under the commodity derivatives ball park and the government needs a new definition before actually bundling the cryptocurrencies inside a specific category.
Once it is clear where it belongs, the cryptocurrency should ideally be under the scrutiny of SEBI as opposed to the RBI. This is because the latter (as a central bank) cannot control the inflows/outflows of the currency since Bitcoin is centrally tied to a block chain. However, the RBI can definitely step in and ensure that the scope of illegal activities is significantly lesser. Keeping the aforementioned scope for regulation in mind, the Bitcoin economy still has a long way to go, especially in the South East Asian market.
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