Cryptocurrency is a household word these days, thanks to the advertisements especially during the T20 World Cup this year. I am sure most millennials would have heard about it and most boomers might be confused trying to understand it. According to one of the recent surveys by Kaspersky, Russia’s multinational cybersecurity company, only one of ten Indians understands cryptocurrency, and only 1 in three investors knows what it is.
Before diving into the economics around crypto, it is important to understand what it is. Cryptocurrency is an open source decentralised computer code that generates its value from demand and supply. Just like the price of onions is decided based on how much the demand is and what the supply is going to be, cryptocurrency works in a same manner.
But why is cryptocurrency so famous? It was invented in 2008 by a person named Satoshi Nakamoto to solve two issues in traditional money system. First, double spending (a prerogative of banks too) and second, decentralising money to not let banks control and recognise those transactions and take a cut from it, also known as cryptocurrency mining. For example, Bitcoin transactions are recognised by its community and those who solve the complex mathematical problems behind it and authorise the transaction or recognise it, and will be rewarded for it.
Now that we know what cryptocurrency is, let’s put in some numbers to understand where we stand in India. India has over 20 million or 2 crore crypto account holders, more than the stock market, and a cumulative of Rs 6 lakh crore crypto investments. Of these 20 million crypto holders, the average age of investors is around 25 years and most of the investors are in the age group of 25-34. The rise of cryptocurrency has been phenomenal — the price of one Bitcoin in February 2011 was around $1 and today it is around $56,000. If crypto is such a great investment, then why are people not investing in it? The answer is lack of regulation. The crypto market is an unregulated community-driven market that is volatile and lacks a regulatory body to keep a watch over it. For example, to launch a stock in the share market, one has to submit the paperwork in the Securities and Exchange Board of India (Sebi), which is a government body, but for cryptocurrency, one will have to write a code on blockchain technology and then the crypto exchange platforms onboard it to buy or sell cryptocurrencies.
The crypto market is one of the fastest-growing markets in the world and India is not far behind. Prime Minister Narendra Modi had recently chaired a meeting on the rising concerns around the crypto market and how companies are promoting these products, which might take youth in the wrong direction. A bill on cryptocurrency regulation will be tabled in the Winter Session of Parliament. A regulation is much-needed. But there is one section in the government that is advising for a ban on cryptocurrency and that is the Reserve Bank of India.
The RBI is concerned that when people start investing in assets which are out of its purview, there could be a decline in investments in bank-governed assets such as Provident Funds and government bonds. This, in turn, can affect banks’ lending capacity for economic activities.
This leads to another question — can cryptocurrency be banned in India? In 2018, the central bank had issued an order banning cryptocurrency, which was quashed by the Supreme Court because of the absence of any legislative ban on its buy and sell. Along with the boom in the Indian market, cryptocurrency sector (if one can call it that) too is growing exponentially and its value is expected to reach up to $241 million by 2030.
Also, with the investments of big and small players and with Bollywood celebrities such as Amitabh Bachchan and Sunny Leone bringing in their NFTs (digital assets traded in cryptocurrency), it is difficult for the government to put a blanket ban on cryptocurrency.
China, for example, has banned cryptocurrency but it has not been able to kill the crypto market as big firms have invested in it and a complete embargo led to crypto mining from China to the United States. The crypto ban will result in loss to investors as well as to employment opportunities provided due to the blockchain technology. Given how the US has become the hub for crypto mining after the ban by China, a blanket ban on cryptocurrency will be a loss for one country and gain for others.
India, which also has the fastest growing startup sector in the world, needs to safeguard the interest of innovators and promote innovation, and can very well learn from global markets such as the United Kingdom and Singapore where cryptocurrency is not a legal tender (money which can be offered as a payment to pay the debt) but is considered a property, mandating the crypto-exchanges to comply with the financial regulators.
Cryptocurrency is also banned from derivative trading (contract or product deriving its value from the underlying asset) and the exchanges have to comply with the financial regulators. This helps the government with KYC (know your customer) and the capital gains tax from the trading of cryptocurrencies. Not just in the UK or Singapore, courts in Ohio, California and South Korea have also handed a similar decision, and considered cryptocurrency a property. The future of cryptocurrency as a legal tender, however, looks bleak. Big economies like China are against it even as a small country like El Salvador, which is the only country to recognise Bitcoin (one of the cryptocurrencies) as a legal tender, is planning to build an entire city based on it. It will be interesting to see how crypto exchanges comply with global trade rules, which are governed by economies such as the US and China. Till then, India needs a regulator for the crypto exchange platforms and a regulatory body to evaluate investments and advertisements on cryptocurrencies.
The writer is a Business Development Lead with an impact consulting firm and was previously part of the Delhi government and JP Morgan. The views expressed in this article are those of the author and do not represent the stand of this publication.