Making India Ready for Virtual Currency

1. INTRODUCTION

Virtual currency, also known as virtual money, is a type of digital currency that is largely unregulated, issued and usually controlled by its developers, and used and accepted electronically among members of a particular virtual community. These currencies are decentralized in nature and run on blockchain technology. Some of the popular virtual currencies are Bitcoin and Ethereum. India, a major growing economy, has seen swift adoption of cryptocurrencies, especially by youth. Virtual currencies have been in use since the 1990s, but with the introduction of Bitcoin in 2009, their use became more popular, and more people began to see it as a viable currency. In a globalized world, India must view virtual currencies favourably while filling the current gaps. This article primarily focuses on cryptocurrency, a specific kind of virtual money that uses cryptography to secure its networks.

2. HISTORY OF VIRTUAL CURRENCY

One of the first virtual currencies to come out was E-GOLD in year 1996. It was started by Douglas Jackson. It became very popular over time and at its peak in 2009 it had 5 Million users. It was backed by gold and was even accepted by merchants as a currency.[1] But due to many loopholes, it was misused by money launderers and extortionists which finally led to its downfall. After the launch of E-GOLD, many new virtual currencies came out like WEBMONEY, LIBERTY RESERVE and PERFECT MONEY but it was Bitcoin, launched in 2009 that was revolutionary. Bitcoin is decentralized which prevents bitcoins from being manipulated or being monopolized by anyone. Bitcoins fixed many of the loopholes that opportunistics exploited earlier. Bitcoin remains a crypto behemoth with a combined value of more than half a trillion Doller.

3. DIGITAL CURRENCY VS CRYPTOCURRENCY

There is a general misconception in general folks that digital currency and cryptocurrency are similar but in reality these are distinct. Digital currency is a fiat currency in electronic form that can be used in contactless payments. It is just an electric version of hard fiat currency. It is stable and is under the regulation of the central bank.[2] Whereas, cryptocurrencies itself are a store of value present on a blockchain. Different cryptocurrencies are unique currency with unique value that keeps on changing. It is highly volatile and is not under the regulation of the central bank.

4. TYPES OF VIRTUAL CURRENCY

Virtual currency can be categorized broadly into 2 types:

A. Convertible Virtual Currency: Also called Open Virtual Currency and one can exchange it for actual money and use it reciprocally. Virtual currency can be converted into another form of money. It operates in an open environment and its best example is cryptocurrencies.[3]

B. Non-Convertible Virtual Currency: Also called Closed Virtual Currency and is used in a particular environment it was designed for. It operates in a controlled and private environment and it cannot be exchanged for real fiat money. An example of it can be token money in games. It can used in a particular game only for purchase of a particular item.

5. ADVANTAGES AND DISADVANTAGES

The adoption of virtual currencies has its own set of advantages and disadvantages. Some of them are:

A. Advantages:

i. Decentralization: Since there is no central government body in charge of regulating cryptocurrencies, the government cannot interfere with them.

ii. Diversity: There are many options available with cryptocurrencies, each with special characteristics and advantages. Users are free to choose from a wide range of cryptocurrencies. For an investor, it reduces their risk in the overall portfolio.[4]

iii. Cost-effective transactions: Cryptocurrency works on blockchain technology which works on direct peer-to-peer basis thus eliminating the need for middlemen, therefore reducing the fees that add up due to multiple intermediaries.

iv. Innovation and Technological Advancement: Adoption of cryptocurrencies can spur innovation in blockchain technology and fintech solutions. This innovation has the potential to propel advancements in a variety of industries, including finance, supply chain management, healthcare, and governance.

B. Disadvantages:

i. Regulatory Ambiguity: The lack of a clear regulatory framework creates uncertainty for cryptocurrency investors and businesses. Consumer protection and financial stability are also threatened by regulatory ambiguity.

ii. Tracking issue: The currency can be used for illicit works trade like drug and human trafficking and due to the lack of a tracking mechanism, the criminals can get away from the crime easily. This loophole can be exploited by criminals and virtual currencies can become a favourite currency for them in future.[5]

iii. Volatility: Cryptocurrencies' price volatility makes them vulnerable to speculative trading. This volatility can endanger investors and their financial stability.

iv. Pseudonymous transactions: Transaction in cryptocurrency is done in alphanumeric addresses rather than in personal name as done in the traditional banking system. This can be used to facilitate illegal transactions such as money laundering, terrorism financing, and tax evasion.

6. WHY CRYPTOCURRENCIES NEED REGULATION

In India, at present there is no regulations for cryptocurrencies. It is not recognized as a legal tender by any law. This hampers the growth of India in the cryptocurrency sector. To ensure that India is along with the rest of the world, on the Crypto- bus, regulations are important and pertinent. It will ensure:

A. Investors Protection: Presently the biggest boon and bane of cryptocurrencies is its volatility. People invest in crypto in a hope of huge gains. But huge losses are also inevitable in this type of trades. Regulation will bring data of a particular cryptocurrency in an open market which will ensure rational investment by investors. Investors will look into the risk associated and future potentials before investing. Thus will reduce speculative price rise and fall and intentional manipulations.

B. Prevention of Financial Crimes: Due to their anonymity in transactions, cryptos are often used for financial crimes like money laundering. Hackers use cryptos to keep their money obtained through data thefts knowing that they cant be tracked. Regulating cryptocurrencies through advanced technologies which identify the sender and receiver of money will significantly reduce financial crimes.

C. Recognizing technological damage: The use of cryptocurrencies is a new technology that has several risks. They can, first and foremost, be utilized to fund criminal activities, hackings, virtual thefts and even terrorism. Secondly, to avoid paying taxes. Third, to control the market and make unfair gains.[6] Cryptocurrencies need to be regulated in light of these risks.

7. CURRENT SCENARIO IN INDIA

In India Cryptocurrency Bill is pending so at present there is no act governing cryptocurrency. Cryptocurrencies are not recognized as legal in India but there is also no specific ban on it. They are unregulated but according to the recent Union Budget 2022, the government of India announced a 30% tax on gains from cryptocurrencies and a 1% tax deducted at source.[7] When cryptocurrency is transferred or received as a gift, the recipient is liable for taxes.

8. RECOMMENDATIONS

A. Regulatory Clarity: To give market participants confidence, a thorough and well-defined regulatory framework must be developed. To create regulations that effectively balance modern technology and ensure a safe environment, officials, industry stakeholders, experts, users, and investors must work together.

B. Technical Infrastructure: To guarantee the secure and effective operation of cryptocurrency exchanges and related platforms, it is essential to develop strong technological infrastructure and security protocols. This covers smart contract auditing, KYC/AML compliance, and cybersecurity precautions. The virtual currency will gain legitimacy and trust when the sender and recipient can be identified with the use of modern technology. Collaboration between private institutes and IITs is necessary to make these technologies a reality.

C. International Cooperation: Since cryptocurrency assets are decentralized by nature, international cooperation is necessary to avoid regulatory arbitrage. Coherent and interconnected regulatory frameworks can be developed with the assistance of international regulatory bodies which will help with regulatory compliance, cross-border transactions, and, most importantly, the prevention of international financial crimes.

9. CONCLUSION

India must adopt virtual currency at this critical time. This is the time when all developing world are aboard Crypto-Bus and are reaping the benefits of huge investments coming through cryptocurrencies in the economy. India neither recognizes cryptocurrency nor bans it. With advancing technology and the internet, cryptocurrencies and virtual currency in general will become more relevant. Although there is no denying the potential advantages of cryptocurrencies, their effective integration into the nation's financial ecosystem depends on resolving regulatory issues and reducing related risks. The current situation calls for a well-balanced strategy that promotes innovation while guaranteeing consumer protection and financial stability.