The virtual session titled ‘All You Wanted to Know about Cryptocurrency’ organised by the Ladies Studies Group (LSG) saw Usha Thorat, former deputy governor, Reserve Bank of India and Anup Sinha, chairman of Bandhan Bank and former dean of Indian Institute of Management, Calcutta decode all things cryptocurrency. LSG president Sumita Roy presided over the session.
Thorat gave an informative and in-depth talk about the complex and raging topic of cryptocurrency, from the nature of the currency, its legal status in various countries to the technology, the regulators and the risks of legalising cryptocurrency in India, while Sinha took over from her and talked about quite a few aspects such as the history and speculated reasons of cryptocurrency coming into existence. He also touched upon the aspect of confidentiality of the transactions, and how unregulated cryptocurrency hampers the financial stability of the economic system, among others. Excerpts from Thorat’s talk:
What is Cryptocurrency?
Cryptocurrency is a decentralised digital currency. A Rs 100 note, say, is a paper currency, but it is a currency because it has got a promise to pay by the Reserve Bank of India. And that promise to pay is to say that at any point of time, this piece of paper will be exchanged for the value equal to whatever that piece of paper says. That is known as the legal tender character of currency. But cryptocurrency has got no backing. It is independently and privately used, privately issued. So, there is no central bank or no single administrator. It can be from user to user. It’s a peer-to-peer network and there is no need for intermediaries. All transactions are distributed through cryptography and they are recorded in a public distributed ledger — a new kind of a technology called a blockchain.
So, like I mentioned, unlike fiat currency, every country’s sovereign currency is backed by the sovereign, or any sovereign class. Currently, it is said that cryptocurrencies are mined using an algorithm or a computer programme. And it is issued in a completely digital way. So, the price of a cryptocurrency is just determined by the buyer, whoever is buying the cryptocurrency. There are so many buyers, and the supply is limited; that is how the currency values it up. If people start losing faith in cryptocurrency, then its price will go down and vice-versa.
Cryptocurrency is enigmatic. I am talking about privately issued cryptocurrencies in this talk. They can be issued like stable coins. The most recent example of this was Facebook saying that they will issue a cryptocurrency. They said they are going to call it Diem and that it will be linked to a dollar. So, at all times 1 Diem will be equal to a dollar and they will maintain that value. Otherwise, Bitcoins, Ethereum, these are all different kinds of cryptocurrencies. Their value is just determined by supply and demand. Only a limited number — 21million Bitcoins — have been issued. But there are 100 or more types of cryptocurrencies in the world. A cryptocurrency will have one unique algorithm and a unique set of members who form a club with mutual agreement and mutual rules — they all accept the rules of the game. Bitcoin was the first cryptocurrency and it began in 2009.
Extent of usage
When we look at the extent of usage, because after all cryptocurrency can also be used as a means of payment, it is widening. Any currency is a means of payment. It is a store of value. It is a unit of account. These are the common things which we associate with cryptocurrency. Today, it’s estimated that there are 300 million cryptocurrency users in the world. In 2018, it was just 5.8million, so you can imagine what has been the extent of growth of this market.
Cryptocurrency in India
In India, of course one has been hearing about Bitcoin for a long time. So the Reserve Bank of India had through public notices in December 2013, in February 2017, December 2017, been cautioning users, holders, traders of virtual currencies including Bitcoin, regarding the various risks associated in dealing with such virtual currencies. The fact that there was no legal backing, no assurance that if you put Rs 1,000 in Bitcoin and tomorrow if you want it, you will actually get it or not. And the fact that if the Rs 1,000 can become Rs 10,000, then day after tomorrow, it can become Rs 50 too. The fact of growth volatility. There could also be repudiation — you can get back the money.
Those were the kind of concerns, and RBI has been regularly announcing and issuing public notices. In April 2018, when it was found that business was really growing, RBI asked all the regulated entities to terminate their business relationships with any firm or any individual that was dealing in cryptocurrency. And the final date was given as July 5. Now, the Internet and Mobile Association of India filed a case against the April 2018 circular and the Supreme Court in its judgment in March 2020, overturned the RBI’s 2018 circular. The Supreme Court noted that in the absence of any legislative bank for the buying and selling of cryptocurrencies, RBI cannot enforce disproportionate restrictions on trading in these currencies. Because the underlined activity was not banned by the government, therefore it was a fundamental right of people to continue to do that activity and what was necessary to do that activity could not be banned by RBI. While this was going on, banks were still reluctant to extend facilities to the coin exchanges or the exchanges which were dealing in cryptocurrency, or the people who were in the business of cryptocurrency. The RBI issued a circular in May 21, telling the banks that you cannot cite your 2018 order as a reason to deny banking services to customers who actually dealt in cryptocurrencies. The government of India had set up a working group and they had prepared a bill which is to be introduced in the Parliament this year. It’s called the Cryptocurrency and Regulation of Official Digital Currency Bill 2021. The draft bill actually sought to prohibit mining, trading, selling, holding, issuing or disposal of cryptocurrency. In other words, it proposed a ban on cryptocurrency. There have been high-level meetings in the last few days about the discussion of whether cryptocurrency should be banned or it should be regulated. And that is the situation where we are today, the winter session has to debate and decide whether to ban cryptocurrency or to regulate them.
Growing demand for Cryptocurrency
Demand for cryptocurrency has really grown. There are five leading exchanges in India which are advertising, urging the public to trade in Bitcoins. While Bitcoin has a big market share of about 66 per cent, Ethereum has got a significant share. There are other cryptocurrencies which have much smaller market share.