3 min read.Updated: 04 Mar 2020, 05:03 PM ISTNeil Borate
Cryptocurrency is not issued by a centralised authority such as a central bank
Enforcement agencies in India grew worried about its potential to act as a store for illicit wealth
The Supreme Court today, struck down a ban imposed by the RBI on banks from allowing their systems to be used for cryptocurrency related payments in April 2018. The RBI ban applied only to the use of banking channels for crypto transactions and thus individuals continued to trade in cryptocurrencies using peer-to-peer networks, even after the ban. Trading between cryptocurrencies (without use of rupee payments for settlement), also continued. However the Supreme Court judgment may pave the way for revival of bitcoin and other cryptocurrencies as an asset class by reopening up the formal financial system to it.
A cryptocurrency can be defined broadly by two distinctive features. First, it is based on a distributed ledger meaning that records of its ownership are held across thousands of computers simultaneously, rather than any centralised system.
Second, it is not issued by a centralised authority such as a central bank. For example, bitcoin is created by computers solving increasingly complex mathematical problems. This limits the supply of cryptocurrency rather than leaving it to the discretion of a central bank.
The price of bitcoin, which accounts for roughly two-thirds of the market capitalisation of cryptocurrencies zoomed from a few cents since its inception in 2009 to about USD 14,000 in December 2017, a spectacular rise in price matched by no other asset class. Interest in it among global and Indian investors soared as the price pushed upwards throughout 2017.
However enforcement agencies in India grew worried about its potential to act as a store for illicit wealth. The RBI also repeatedly cautioned investors from buying bitcoin saying that it was not a recognised currency in India. The following year saw the price of bitcoin crash to roughly USD 3,700 in December 2018. Indian investors received a further shock in April 2018 when the RBI banned the use of banking system for crypto payments.
A large number of crypto exchanges shut shop in India and many investors were left stranded with stores of bitcoin that they could not liquidate. Bitcoin has staged a recovery since its crash and currently trades at about USD 8800 ( ₹6.43 lakh per bitcoin). However in 2019, news reports appeared of a draconian government legislation on cryptocurrencies that criminalised trade and even mere possession of them. The law has so far not been formally introduced in Parliament, however.
"The ruling is a historic one. Based on it, the government will have to revise its proposed legislation on cryptocurrency. This ruling is going to give a much needed boost to the struggling crypto currency platforms and work towards changing India’s image in adopting new age transactions," said Rashmi Deshpande, Indirect Tax Partner at Khaitan & Co., a lawyer who represented one of the exchanges who initially challenged the RBI ban.
Ajeet Khurana former Head of the BACC (Blockchain and Cryptocurrency Committee of the IAMAI) and former CEO of Zebpay sounded a note of caution, “The price of bitcoin has fallen a lot from its December 2017 peak, and this might discourage fresh investors at present.
However traders who accounted for the bulk of the volume profit from volatility and are hence likely to come back in bigger numbers. People should note that the government had proposed draconian legislation criminalizing mere possession of cryptocurrency although it was never introduced in Parliament. Such a law could still kill the legitimate crypto market in India," he said.
Financial planners have also cautioned investors from putting their money in cryptocurrencies. “Cryptos are still some way from being used in the mainstream as alternative currency so, if it’s not going to be used for real world transactions, you can’t assign a real value to it. As an investment, most people aren’t equipped to handle the volatility of equity which is backed by actual earnings, so handling the volatility that comes with cryptocurrency (in the past 9 months, Bitcoin is down by 20%) will be very difficult," said Nithin Sasikumar, co-founder, Investography.
Investors should stay away from this asset due to its inherently speculative nature. Even those who are confident about cryptocurrency should wait until there is more regulatory clarity.