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Q 43- It is imperative that the best of what digital currencies have to offer be integrated into the existing financial paradigm. Explain. (250 words)

Paper & Topic: GS III à Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. Science and Technology- developments and their applications and effects in everyday life.

 

  • Model Answer:

 

  • Introduction:

 

  • Cryptocurrencies are digital currencies that operate independently of a central bank and employ encryption techniques to govern the production of units of money and verify the transfer of funds.
  • It is built on the blockchain platform.
  • Anurag Thakur, the Union minister, stated that the government is willing to analyse and investigate emerging technologies, such as cryptocurrencies, in order to improve governance.

 

  • Body:

 

  • In India, cryptocurrencies are gaining popularity.
  • In 2018, the Reserve Bank of India (RBI) outlawed banks and companies regulated by it from providing virtual currency (VC) services.
  • The Indian cryptocurrency sector has been decimated since the prohibition took effect in April 2018.
  • This provision was declared illegal by the Supreme Court.
  • The central government is expected to consider a new bill titled Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which has not yet been approved.
  • The Bill also aims to outlaw all private cryptocurrencies in India, with few exceptions to encourage cryptocurrency's underlying technology, such as blockchain, and its applications.

 

  • Concerns about digital currency include the following:

 

  • Cryptocurrencies are feared not only for their speculative potential, but also for their potential to destabilise sovereign currencies (the latter is an exaggerated apprehension).
  • This might cause market instability, and if banks start trading crypto currencies, the problem of fraud could become more prevalent.
  • Virtual currency is traded anonymously via the Internet and is utilised for a variety of anti-national and illegal activities, including terror financing, illicit arms and drug trafficking, and so on.
  • This is a serious concern to India, as there have been reports of drug trafficking utilising bitcoins on the dark web in Punjab.
  • The online use of this currency was without any geographical or border limits, putting the nation's integrity and sovereignty in jeopardy.
  • It has the potential to drastically alter global monetary policymaking. People will trade their national currencies for the new digital coin, which will be used to buy and sell the various things that will be valued in it. This will have a negative impact on bank profits and put stress on their balance sheets.
  • The ability of governments and policymakers to manage inflation will be harmed. When inflation rises, central banks usually take actions to limit it by adjusting monetary rates. Because cryptocurrency will be independent of the central bank, liquidity will be a problem.

 

  • Regulation of digital currencies is urgently required:

 

  • A prohibition on something based on distributed ledger technology cannot be applied for all practical purposes, hence smart regulation is preferable.
  • Even in China, where cryptocurrencies are banned and the Internet is censored, cryptocurrency trade is minimal but not non-existent, according to a report by an India inter-ministerial committee. Japan, for example, has regulated the usage of bitcoin.
  • The SC Garg committee advocated for the creation of an official digital currency as well as the promotion of the blockchain technology that underpins it. Other cryptocurrencies, on the other hand, were not banned.
  • Regulation must take place at the point of exchange, where it is most easily observed.
  • The Supreme Court ruled that the government's outright prohibition on virtual currency would be unfair when there are several less intrusive options.
  • It's important to note that virtual currency transactions aren't completely unregulated.
  • Several current laws, including the Consumer Protection Act, the Information Technology Act, the Foreign Exchange Management Act, and the PMLA, as well as tax, deposit-related, and criminal regulations, apply to virtual currencies in the same way that they do to any other economic activity.
  • In fact, errant persons and businesses operating in the virtual currency sphere have already been prosecuted in India under many of these laws.
  • The government should reject the notion of a ban and instead advocate for reasonable regulation.

 

  • Conclusion:

 

  • Instead of imposing bans, it would be more practical to launch public awareness campaigns to alert investors to specific risks and to monitor trades for fraud and scams. The fintech industry and the RBI must collaborate to develop a positive policy framework for cryptocurrencies in India.
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