Economic Issue: The future of crypto-financing in India
The unexpected rise in the value of bitcoin and its notorious volatile nature has hit the headlines in the last few weeks. The IAS aspirants preparing for IAS Exam 2018 must aware of its basics and implications affecting an economy. The central bank of India, RBI looking forward to drafting a policy on Cryptocurrency and its internal group is involved in exploring the possibility of issuing such virtual currency in India. Here, we have analysed the fundamentals of Cryptocurrency and the future of crypto-financing in India.
What is Cryptocurrency?
It is a digital or virtual currency created and stored electronically in block chains (a master ledger records and stores all the information regarding the currency along with its owner) while it has no physical existence and cannot be redeemed in another commodity like gold. Encryption techniques have been used to control its creation as a monetary unit and to verify the transfer of funds involved. Till date, there are no guidelines or policies regarding its supply available from any regulatory authority in India. So, a completely decentralised network is involved in the supply of Cryptocurrency.
Bitcoin, Litecoin, Ripple, Ethereum, PPcoin, Dogecoin, Coinye, Namecoin etc. are some of the examples of cryptocurrencies.
The cryptocurrencies a new avatar of blockchain-based financial products issued through initial coin offerings (ICO) has become a viable alternative to more traditional means of raising capital globally. ICO is like IPO (Initial Public Offering) but it differs in the extent that instead of issuing shares of a company or enterprise, ICO offers crypto-tokens at a predetermined rate.
What is the Global say on Cryptocurrency?
Since, the regulators of most of the countries around the world continuously struggle in formulating an appropriate regulatory framework for cryptocurrencies and also to address volatile nature of cryptocurrencies. The major issue with such Cryptocurrency is that it involved a complex cryptographic protocol technology which needs to be regulated in order to make the more efficient investment and ensure adequate investor-protection safeguards.
Recently, China has banned ICO due to its complex nature of volatility which can distort economic and financial order in the Chinese market. Chinese Government did not clarify whether the ban is permanent or temporary until the regulatory framework came into the existence.
The US Securities and Exchange Commission and the Canadian Securities Administrators have released investor bulletins specifying that some of the available ICOs may need to categorise as securities because of the nature of the crypto-token offered. This has been cleared that the US and Canadian authorities keen on regulating ICOs with adequate investor-protection safeguards.
The Monetary Authority of Singapore is looking the Cryptocurrency beyond being just a form of currency but they also look it as a form of an offer of shares, units in a collective scheme or a debenture. They have also directed to create a prospectus and security guidelines the investors should follow. A prior approval is needed from the Monetary Authority of Singapore for online trading of crypto-tokens as an approved exchange in a secondary market.
India’s stand on Cryptocurrency
Cryptocurrency like Bitcoin has registered a successful position at the global level in the last few years which encouraged Indian central bank, RBI to have its own Cryptocurrency and separate regulatory frameworks for it. A group of experts from RBI is exploring the idea to have its own Blockchain and fiat Cryptocurrency, an alternative to the Indian Rupee for digital transactions. Towards this initiative, State Bank of India is leading from the front to bring lenders and tech companies together on a single platform for using Blockchain technology to share information among banks which will eventually help prevent frauds and tackle bad loans that are almost one-fifth of banks' loan book. For creating Blockchain, SBI has done partnership along with other 10 commercial banks, tech companies and big firms like Microsoft, IBM, KPMG and Skylark.
However, for now, RBI has issued caution notice for the investors against the use of virtual currencies.
Till date, there are no regulatory frameworks available for Cryptocurrency in India but RBI has shown her interest to come up with strong and effective regulations regarding the ICOs in India.
There may be legal and regulatory challenges India will face in order to streamline and regulate ICOs in the country. Some of the challenges listed here:
- The first challenge will be the classification of ICOs. It is going to be crucial for the group involved in creating regulatory frameworks in classifying the cryptocurrencies based on their complex nature as securities or currency or a payment system or intangible property. If once the classification process of ICOs is done, then the incidence and rate of taxation can easily be determined accordingly. However, for effective regulatory or to avoid lapses, it may require a collective coordination from the major regulating authorities of money market and security market and other regulatory authority involved in the process. Here, is the coordination of RBI and SEBI will matter the most in formulating and implementing the respective policies.
- The second challenge is regarding the compliance required after classification of ICOs. In case of ICOs classified crypto-tokens as a currency then they required to follow the “know your customer” norms issued by RBI while in case of classifying offered crypto-tokens as securities they required to follow the anti-money laundering requirements to comply with SEBI’s listing regulations.
- The third challenge is to decide the jurisdiction of “crypto-token rating agency” however it may overlap and can misuse of its powers by favouring any individual or retail investors. So, the reliability of agencies is another challenge in India.
The concept of Cryptocurrency looks exciting as it has potential to alter the global finance for the better. It can minimise the monopoly of government on currencies involved. In India, if RBI is able to create its own fiat Cryptocurrency with lucrative schemes, it will consider as a new “technological revolution” in raising finance through ICOs.
For now, appropriate regulatory frameworks from RBI much in need to safeguard the interest of the investors.