Q) Recently, El Salvador became the first country in the world to adopt bitcoin as legal tender and this highlights the increasing market for cryptocurrencies across the globe. In such a situation, an outright ban on cryptocurrencies by RBI can make India lose some significant opportunities in the coming era. Elaborate.

Why this Question?

Important part of GS Paper-III.

Key demand of the Question 

Discuss in detail the importance of adopting and regulating crypto currencies in India.


Elaborate – Give a detailed account as to how and why it occurred, or what is the particular context. You must be defining key terms wherever appropriate, and substantiate with relevant associated facts.


Start with growing dominance of crypto currency worldwide briefly.


In the first part, present the positives of Cryptocurrency and block chain technology first and the fears associated with regulation and use of Cryptocurrency.

In the next part, highlight the need for regulation of cryptocurrencies in India.


Conclude with a way forward.

For Model Answer

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.

Significance of Cryptocurrencies:

  1. Corruption Check- As blocks run on a peer-to-peer network, it helps keep corruption in check by tracking the flow of funds and transactions.
  2. Time Effective- Cryptocurrencies can help save money and substantial time for the remitter and the receiver, as it is conducted entirely on the Internet, runs on a mechanism that involves very less transaction fees and is almost instantaneous.
  3. Cost Effective- Intermediaries such as banks, credit card and payment gateways draw almost 3% from the total global economic output of over $100 trillion, as fees for their services.
  4. 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.

Cryptocurrencies in India

  1. In 2018, the RBI issued a circular preventing all banks from dealing in cryptocurrencies. This circular was declared unconstitutional by the Supreme Court in May 2020.
  2. Recently, the government has announced the introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to create a sovereign digital currency and simultaneously ban all private cryptocurrencies.
  3. In India, the funds that have gone into the Indian blockchain start-ups account for less than 0.2% of the amount raised by the sector globally.
  4. The current approach towards cryptocurrencies makes it near-impossible for blockchain entrepreneurs and investors to acquire much economic benefit.

Need for regulation

  1. Such currencies are prone to losses arising out of hacking, loss of passwords, etc.
  2. Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused and to protect unsuspecting investors from excessive market volatility and possible scams.
  3. However, regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
  4. India has not been able to tick these boxes, and we’re in danger of missing out in the global race altogether.

Way forward

  • Any new regulations made in this sector should prevent the misuse of these digital assets without hindering innovation and investments.
  • Clarity on Crypto-currency definition- A legal and regulatory framework must first define crypto-currencies as securities or other financial instruments under the relevant national laws and identify the regulatory authority in charge.
  • Strong KYC Norms- Instead of a complete prohibition on cryptocurrencies, the government shall rather regulate the trading of cryptocurrencies by including stringent KYC norms, reporting and taxability.
  • Provisions have to be made to route the value extracted from these networks transparently into our financial system.
  • Regulatory uncertainties over India’s position on cryptocurrency highlights the need for clear-headed policy-making.

India is currently on the cusp of the next phase of digital revolution and has the potential to channel its human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. Looking at the number of benefits cryptocurrencies 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.