Inter-Ministerial Committee Report, 2019 on virtual currencies ?
In November 2017, a high-level Inter-Ministerial Committee was formed to evaluate the challenges surrounding virtual currencies and make recommendations for action. The Committee submitted its findings on February 28, 2019, and on July 22, 2019, the report was made public. The Committee’s scope includes looking at the policy and legal framework for virtual currency regulation. Key observations by the committee have been provided hereunder:
1. Virtual currency and its definition: A digitally transferable type of value, virtual money can be used as a means of trade, a store of value, or a unit of account. It does not have legal tender status. The Central Government guarantees legal tender, and all parties are legally obligated to accept it as a form of payment.
Issues related to virtual currencies: Due to a number of concerns, the Committee concluded that cryptocurrencies cannot replace traditional currencies. The major concerns have been provided hereunder:
2. Cryptocurrency prices fluctuate with the market. In less than a year, the value of Bitcoin cryptocurrency fell from about USD 20,000 in December 2017 to USD 3,800 in November 2018.
a. Cryptocurrencies are decentralized, making regulation difficult.
b. The design of cryptocurrencies contains various flaws that expose users to phishing cyber-attacks and ponzi scams. Furthermore, transactions are irreversible, which means that they cannot be reversed.
c. Cryptocurrencies necessitate a large amount of storage and processing power, which can have negative consequences for a country’s energy resources.
d. As cryptocurrencies are more anonymous, they are more prone to money laundering and terrorist financing.
3. Regulatory framework for virtual currencies: The Committee noted that different nations have varied regulatory frameworks in place when it comes to cryptocurrencies. Cryptocurrencies are accepted as a form of payment in countries such as Japan, Switzerland, and Thailand. They can be used as a medium of exchange (barter exchange) in Russia, but not as a means of payment. China, on the other hand, has outright banned virtual currency. No government has approved the use of virtual currencies as legal cash, according to the Committee. The Committee suggested that all private cryptocurrencies be prohibited in India, with the exception of those issued by the government, and that any conduct using cryptocurrencies be criminalized through legislation. It was also suggested that the government create a Standing Committee to keep track of global and local technology changes in the industry and address problems pertaining to virtual currencies as needed.
4. Official digital currency: The Committee noted that an official digital currency might offer a number of benefits over current payment systems. These include the accessibility of all transaction data, a less expensive alternative for cross-border payments, and distribution convenience and security. There are various dangers and concerns linked with its execution, according to the Committee. To issue digital money, significant infrastructure investment would be necessary. Validating transactions in a dispersed network would consume a lot of electricity and need a lot of processing power. Furthermore, there may be infrastructure issues due to power outages and internet access. The Committee advised that when it comes to the creation of an official digital currency in India, an open mind is required. It was suggested that, if necessary, the Ministry of Finance organize a committee including members from the RBI and the Ministry of Electronics and Information Technology (MEITY) to evaluate and design an acceptable digital currency model in India.
5. The Distributed Ledger Technology (DLT) and its application: While cryptocurrencies do not offer any advantages as a currency, the underlying technology (DLT) offers various potential uses, according to the Committee. As DLT makes it simpler to spot duplicate transactions, it may be used for fraud detection, processing KYC requirements, and insurance claim management. It can also be useful for reducing mistakes and frauds inland markets if it is utilized to keep track of land records. The Committee suggested that the Department of Economic Affairs identify DLT’s applications and take steps to make them easier to use. Similarly, authorities in the financial industry should assess the technology’s value in their particular domains.