Despite repeated warnings from India’s apex bank on high volatility and speculation, the price of a Bitcoin has been climbing up consistently, reaching a new high of USD 17,000 (as on 11 December). Presently, the capitalization of the total cryptocurrency market stands more than 500 billion dollars, leading the new-age digital gold rush. The rate of increase in the prices of various cryptocurrencies has sent alarming signals to governments across the globe, many of which have rather begun to accept these digital token as legalized forms of exchange.
The Indian context
Although the Indian government has been working to formulate a policy on cryptocurrencies, the clarity on their legal status is not yet clear. The Reserve Bank of India has already recognized the value in the blockchain, as The Institute for Development and Research in Banking Technology (IDRBT), a body under Reserve Bank of India, is working to develop a model platform for blockchain technology. The group is working towards developing a fiat cryptocurrency which could find its place as an alternative to the Indian rupee for digital transactions.
Experts believe cryptocurrencies are still a grey area for Indian government as it is yet to take a firm stand on the issue. “The underlying blockchain technology looks promising and is already being used to create breakthroughs. Will the Indian government make it legal or not, this will be defined by the certainty that the cryptocurrency ecosystem presents? RBI has been considering launching its own cryptocurrency, but all these are plans are uncertain till you see them in action, says Nirav Maniar, Partner- International Business Advisors.
Experts divided on cryptos
Experts are divided on the issue of cryptocurrencies. While some are concerned about the widening gap between the trading prices of these currencies and the true value of underlying technology, others believe it is the time the governments adopt them for reaping long-term benefits.
“Cryptocurrencies are the present and the future. So, the quicker the governments open their minds and adapt them to work in parallel with fiat currencies, the better it will be. The governments not legally recognizing cryptocurrencies are landing up losing money as people are using them anyway. Many of these governments are not able to tax either the trade of cryptocurrencies or the transactions using cryptocurrencies,” says Pavan Duggal, renowned cyber law expert.
Financial institutions explore cryptocurrencies
Even though there has been consistent distrust in the adoption of non-fiat cryptocurrencies, many private banks, along with few central banks across the world have accepted their effectiveness in terms of improving the financial infrastructure. More than 75 of the top global banks, including YES BANK and Axis Bank from India, have signed up with Ripple Labs to use its native cryptocurrency, XRP, useful in facilitating very fast cross-border payments at a fraction of a cost incurred today.
Apart from serving as a fast payment system, cryptocurrencies are being used by financial institutions to create smart contracts, digital IDs, and secure databases. The massive use of cryptocurrency tokens is putting pressure on the governments to mull over their legal status. "Cryptocurrency is nothing but electronic data and since it is electronic data, it is already legal thanks to section 4 of the IT Act. So, there is no law that is required to make it further legal. But, with the RBI repeatedly warning the users on the speculative nature of cryptocurrencies, people are slightly confused," says Duggal.
Centralized vs. decentralized financial systems
Cryptocurrencies like Bitcoin and Ripple are not governed by a central authority because one of the core principles on which they are designed is decentralization. The decentralized characteristic of cryptocurrencies is one of the major concerns of governments, which believe lack of a regulator could put the financial world at risk.
“The world is used to seeing currency as a governed commodity whereas Bitcoin presents an oxymoron that it is a currency yet not governed. The value is being driven by pure market mechanics of demand and supply. India is currently on a cautious foot keeping in view the uncertainty about the ownership of such currencies as well as the security risks,” says Maniar.