Q) In the face of growing technological innovation in the financial sector, there is a need for a detailed regulatory framework on cryptocurrency and its usage. Discuss.
Why this question
Important part of GS paper- III.
Key demand of the question:
Explain what cryptocurrency is, its mechanism and its applications. Also mention the challenges associated with it due to which a detailed policy is needed.
Discuss- back up the answer by carefully selected evidence to make a case for and against an argument, or point out the advantages and disadvantages of the given context and finally arrive at a conclusion.
Explain the concept of cryptocurrency and current regulations o it in India. Mention about the recent bill on cryptocurrency.
In the first part, mention the mechanism of cryptocurrency, its applications and the advantages of using it.
In the next part, give a list of challenges associated with the usage of cryptocurrency and the need for a regulatory framework.
Conclude with a way forward.
Cryptocurrencies are digital assets designed to work as mediums of exchange that use strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders. They use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank. Eg- Bitcoin, Litecoin, Ripple, Libra, etc.
- Accessibility- it is readily accessible to all its intended users. It can be used by whoever wants it. It is a decentralized system of currency which can be used and accessed globally.
- Less time consuming- It is a quick transaction process in which there is no obligation to disclose and share the personal details unless the details of the crypto wallet.
- Flawless- Since it is based on blockchain technology, it works in peer-to-peer algorithm and the payment settlement gets completed flawlessly almost immediately.
- No human errors- Human and machine errors are minimized as all transactions are recorded.
- Globally Accepted – it is a global currency and there is no restriction of using or paying by this global currency, which is easier and convenient for business and shopping portals.
- Less risky- There is no risk of identity theft as personal details of the users are not disclosed.
Challenges associated with cryptocurrencies:
i. It is prone to losses arising out of hacking, loss of passwords, etc.
ii. There is no underlying asset for cryptocurrencies, making its value a matter of speculation.
iii. Since, exchanges are located globally; law enforcement for multiple jurisdictions is difficult.
iv. It can be easily used for illegal activities anonymously like terror funding, smuggling, drug trafficking, etc.
v. Since it is based on blockchain technology, it is difficult to understand for users.
vi. These currencies are highly volatile in nature. Eg- The price of Bitcoin suddenly rose to almost $20,000 and then dropped to $6,000.
i. India can take help from countries that are using cryptocurrencies.
ii. Opinions of expert in the field of finance and cybersecurity should be taken.
iii. Local cryptocurrency exchanges could be asked to adhere to the KYC norms followed by stock exchanges.
iv. A regulatory body can be established solely for the purpose of regulation of cryptocurrency and activities related to it.
Looking into the above challenges it has become necessary for RBI that looks into all the transaction related activities in the country to form a detailed framework regulating the use of cryptocurrencies so that they can be used. Else, India will miss out on opportunities that are enjoyed by many markets around the world. Looking at the number of benefits that they have, they can make transactions worldwide simpler and convenient for users. Smart regulation is preferable, as a ban on something that is based on a technology of distributed ledger cannot be implemented for all practical purposes.