Imagine having a currency that is accepted everywhere that too in a virtual form. Imgine you can buy or sell anything, anywhere in the world at a same price through an integrated system without using any paper money? Imagine if we do not have to wait for any employee of any regulated bank just for their lunch break to get our work done. Imagine a bank or exchange that operates 24*7. No any agency or any regulated authorities can track your transactions. Sounds cool, right? But there are many roadblocks and intricacies to make it possibly happen. The legality of cryptocurrency in India is not quite clear as there isn’t any proper mechanism or say law to regulate cryptos. This article depicts the legality and importance of cryptos for our future financial system. In this article, I have tried to cover the scope and limitation of cryptos and the banking systems.
People have received mails from major banks of India with a drafted subject head as ‘Caution Advice”. It stated that trading or investing in Virtual Currency or Cryptos or having probable Virtual Currency transactions are not permitted as per the RBI circular DBR. No. BP.BC. 104/08. 13.102/2017-18 dated April 06, 2018. They have also mentioned that regulated entities (Banks) shall not deal in virtual currency or provide services for facilitating any person (traders) or entity (Crypto platforms) in dealing with virtual currency. Banks also need to exit relationship with such customers as per the RBI guidelines. Banks are threatening the customers to restrict or close their account if they don’t comply with the RBI Guidelines.
Reserve Bank of India (RBI)’s 2018 decision to bar banks from providing services to crypto companies was set aside by the Honorable Supreme Court of India, ruling the ban on crypto was unconstitutional on March 2020. But banks are still citing that circular to deny banking services to the platforms and the traders. The Reserve Bank of India (RBI) on Monday, issued a notification, clarifying these banks and other regulated entities cannot cite 2018 circular that was set aside by the Hon’ble Supreme Court, declaring the ban on cryptos unconstitutional on March 04, 2020 in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India.
Although, the Central Bank advised banks and the regulated bodies to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.
The banks have observed that the trading in crypto platforms has increased significantly. The crypto market is booming and volume of money that is flowing is around $2 Trillion where, India constitutes around 1.5 million investors pouring about $2-3 billion in cryptocurrencies.
According to India’s major crypto trading platforms this number is supposed to increase exponentially. India’s biggest crypto trading platform WazirX claims to have hit $5.4 billion in transaction volumes in April as it deals $19-26 million daily trading volumes, with 89% of the transactions coming from India. CoinDCX, the platform sees $20-25 million worth of trading every day. CoinSwitch Kuber also raised $25 million with a valuation of 500 million.
The global equities market represents around $90 trillion in assets like gold and silver and other precious metals accounts for another $12 trillion. When we include other assets like physical cash in circulation plus deposits, global real estate and other liquid money instruments is mounting to $70 trillion. When we include other forms of investment like, global debt, and financial derivatives, the world’s total wealth tops at somewhere just over $1 quadrillion. The total value held by cryptos of the world’s total wealth is around 0.2% i.e., miniscule and that if we assume that this quadrillion roughly represents the total value of assets in the world.
Nigeria and China banned its financial and banking services to all the crypto platforms. and the prices of cryptos have declined gradually and still plummeting. Turkish central bank also issued a ban on the use of Cryptocurrency as a payment method in Turkey. Counties like Iran, Nepal, Thailand, India, Bolivia, Kyrgyzstan have also been reported to ban Cryptocurrency. It does seem the growth of cryptocurrencies are affected by the actions and statement of the government and federal officials.
The prices of cryptos have declined gradually and still plummeting after these events. The total market cap of cryptocurrencies i.e., (9,541 types of cryptocurrencies) has increased from $1 trillion to around $2.5 trillion within three months amid the pandemic. After the circulation of ban of cryptos in these countries, the total market cap of cryptos had contracted to 38 per cent from $2.5 trillion on May 12 to $1.5 trillion, according to the data from CoinMarketCap.
Despite of huge dips and certain market crashes crypto’s investors still manages to obtain huge profits from it. Cryptos have now a 10 year of track record and has generated more returns than any other investment in the same time period. Huge returns from cryptos attracted many investors in India and as for now 1.5 crores are investing actively in Cryptos.
This created a cavity among cryptos, traditional investment and banking and this has created anxiety among the banks. The Reserve Bank of India is concerned that cryptocurrencies may impact financial stability in Asia’s third-largest economy. Investors are running towards Bitcoin and other Cryptocurrencies as safe haven. It is therefore obvious that when people will invest in cryptos then the flow of money will automatically be diverted to crypto market and results in absence of money flow in stocks and will depreciate the value of stocks if cryptos continues its bullish market.
Crypto platforms also happen to be a major problem for banks. As it provides peer to peer exchanges, virtual currency wallets which entertains the traders to buy or sell products, exchange different currencies without using the paper money and of course it’s not traceable. Many organisations, companies and entities are now accepting cryptos to buy or sell services and products. Many fortunes and multi bagger companies like Tesla, Facebook, Paypal, Visa, Mastercard, many hedge funds, and even family institutions began investing in this new asset class and had shown interest in cryptocurrency as a hedge against their traditional investments.
Involvement of these fortune companies had set precedent to make money from cryptos and people have started putting their hard earned money in cryptos. The urge to make million figures within a small amount of time also escalated investment in cryptos. This was long due as banks are not providing much interests as compared to inflation and stocks and other equity markets are keep dipping amid pandemic. The looming threat of inflation has also encouraged investors to take risks to hedge against inflation.
According to various central banks of the world, cryptos could put an end to paper money as it can easily paralyse the real currencies and could endanger the financial mechanism of a country. It already replaced intermediaries, reduced transactions, cost, time, and eliminated the need of brokers to perform transactions, causing democratization of money. It can also be a channel for money laundering and the financing of terrorism as, cryptos transactions are not traceable.
The other thing that worries the most is the presence of multiple operational vulnerabilities and volatility of the crypto market as it can be plunged or increased upto (20-30) % in a day and as its not centralised or say regulated by any authority in the world. The frenzy of Dogecoin and the craze of other meme oriented cryptos like Shiba Inu and StopElon were key reasons that led to banks placing informal restrictions on transactions related to crypto.
There are many challenges that are being faced by the banks around the world as the banking systems are degrading in the current scenario and on the other hand block chain technologies and cryptocurrencies are quite promising and being seen as a part of a potential “revolution” in finance. But the question is how can a citizen going to trust a payment system that does not have a central authority supporting it? If people continue to use these cryptos then ultimately, they will lose faith in central banking system and this tends to be the edge that haunts the central banks when they talk about cryptocurrencies.
However, blockchain for digital payment systems technology is breaking with these myths to provide a safe and efficient system. Some banks have already integrated this idea, as a result, banks are trying to keep up, seeking to outpace cryptocurrencies with a new competitive concept, “stablecoins.” These are digital currencies that are like crypto coinage in some ways, but instead of being decentralized like Bitcoin which is not overseen or regulated by governments they are fully backed with safe and liquid assets in a domestic currency. Currently, some 80 percent of countries surveyed by the Bank for International Settlements are studying versions of stablecoins and what have become known as “central bank digital currency” (CBDCs), led by China and Switzerland.
In India, the government is considering to introduce a bill to create a sovereign digital currency and simultaneously penalizing anyone holding or trading private currencies. However, it would allow certain exceptions to promote the underlying technology of cryptocurrency and its uses. The Reserve Bank of India (RBI) is “very much in the game” in getting ready to launch its own digital currency, joining other central banks including China’s electronic yuan. The time will tell if we can actually have cryptos as a universal currency or stablecoin as a regulated currency will be taking it place. Whatever happens innovation will always win!
Crypto platforms also happen to be a major problem for banks. As it provides peer to peer exchanges, virtual currency wallets which entertain the traders to buy or sell products, exchange different currencies without using the paper money and of course it’s not traceable. Many organisations, companies and entities are now accepting cryptos to buy or sell services and products. Many big companies like Tesla, Facebook, Paypal, Visa, Mastercard, along with several hedge funds and even family institutions, began investing in this new asset class and had shown interest in cryptocurrency as a hedge against their traditional investments.