By Priyanka Venkat
‘Cryptocurrency’, a form of digital money, has taken the world by storm. India too has gotten on the bandwagon, with over 200,000 users being added to the industry every month. The Indian government, so far, has taken a rather docile approach towards such transactions in cryptocurrency, with its intermittent warnings but no announcement of an explicit ban. This does not mean, however, that the government isn’t keeping a watchful eye on the dealings.
Reach of cryptocurrency users
A recent nationwide survey revealed the extent to which such transactions are being made, prompting the Income Tax department to send tax notices to thousands of individuals dealing in the currency. The survey showed that transactions amounting to $3.5 billion have been conducted over 17 months. In a statement to Reuters, tax officials said that investors in such virtual currencies include jewellers, those in real estate and also a large number of tech-savvy young individuals.
The IT department in its notices has asked for the payment of tax on the capital gains made by those dealing in such currencies. Additionally, such individuals have been asked to reveal the extent of their holdings as well as the source of their funds.
Let’s get to the basics. Cryptocurrency is like cash, except that it differs in two important ways. One, it has no physical form like that of cash does. Second, it isn’t issued by any central authority like a central bank and is therefore decentralized. So basically, cryptocurrency acts as a medium of exchange much like cash, but it is in digital form. Another very important distinction between cryptocurrencies and currencies of the non-virtual world is the use of cryptography to secure transactions. In simple terms, cryptography is the use of codes to protect and keep the information a secret. This means that it converts the information into a form that is unreadable for an unauthorised person unless he has the key required to decrypt (decode) it.
There are various cryptocurrencies such as Ethereum, Litecoin, Ripple and so on. However, the most famous and largest cryptocurrency is Bitcoin. Bitcoins are not issued by any central banks or governments and are structured through a network called a ‘blockchain’. This is like a ledger online, that keeps a record of all buy and sell transactions in one place. Every time an exchange occurs, the entire system gets updated with this information, creating a block. These blocks are basically large amounts of data that need to be solved to get access to more bitcoins.
Unprecedented returns to Bitcoin investors
The question is, why is everyone crazy about virtual currencies like Bitcoin? For starters, the possibility of enormous returns entices investors. In 2017-18, some traders earned a return as high as 1600%. Secondly, anonymity is another advantage that users receive. Unlike cash purchases, the buyer’s personal identity cannot be traced back to him through Bitcoin purchases. Thirdly, the lack of interruption in transactions by governments and central banks is an appealing factor. In the non-virtual world, wire transfers are costly and involve a lot of paperwork. Through the use of Bitcoin, wire transfers are easier and cheaper. Additionally, because of the lack of government control allows, no freezes can be placed on Bitcoin accounts.
Regulating and authorising to prevent crypto-crimes
In India, while cryptocurrencies can be bought and sold on online exchanges, they cannot be used to pay for good or services in the country. It is understandable why governments are wary of virtual currencies considering the risks involved. In addition to valuation difficulties, the volatility of such currencies is also an issue. This means that the value can fluctuate significantly in a short frame of time such as a single day, leading to a large loss in investment. What makes this situation more problematic is the lack of a historical track record. Without a track record to analyse, it makes it harder to know whether such volatility is normal or abnormal. There is also a lack of clarity as to whether cryptocurrencies like bitcoin can be termed as a currency or a commodity. This lack of definition makes it risky for those trading with and investing in bitcoins, as no tangible backs the currency.
The lack of regulation adds to the problem. While the RBI has issued three warnings related to trading in cryptocurrency, there is no explicit ban announcing that it is illegal to do so. This silence by the RBI on its legality further impedes any efforts to regulate such transactions. In case of fraudulent transactions, there is no designated body like the SEBI that can be approached to solve the issue. Mr Pavan Duggal, a supreme court lawyer who specializes in cyber crimes said- “Considering cryptocurrencies are here to stay, the government must consider granting limited legality while ensuring that these are not used for crypto crimes.”
The enthusiasm for such currencies is at an all-time high. It is perhaps time for the Indian government to take a leaf out of Japan’s book and realize that the use of virtual currencies in some form or the other is inevitable. It is therefore imperative that concrete action is taken to regulate the virtual currency sphere to protect its participants before it is too late.
Featured image source: MaxPixel
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