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Cryptocurrency: A bright future or a just a past picture for India

When we talk about cryptocurrency, we recall the word bitcoin. This connection is way too similar with the idea of recognizing photocopy with the word xerox. However, there are many other cryptocurrencies available today known as Ethereal or Ripple, etc. if we skip the entire mathematical and scientific understanding of the evolution of cryptocurrencies and take up a simple understanding, we can clearly comprehend the basics of cryptocurrency. All we need to understand is that cryptocurrencies are those which do not require a financial institution as a medium and they operate as direct transactions between two entities.

The basic intention of Satoshi Nakamoto, the inventor of cryptocurrency, was to ensure that there is minimal interference of government and financial institutions in making transactions. There is a process known as mining which deals with the generating of cryptocurrencies. In this process, a complicated mathematical equation is solved in order to generate a Bitcoin and every transaction of bitcoins is connected in the form of a chain which is known as a blockchain. Blockchain, altogether, is a completely different concept and cryptocurrency is just a part of the entire iceberg-like idea of blockchain.

If we look at the complete picture, cryptocurrencies do seem to be a convenient method of digital transactions and a good way of investment as well because of the exponential rise in the value of bitcoins within a few years. This investment works on similar lines as the investment in gold where we wait for its value to inflate. On parallel lines, there is also a negative side to cryptocurrencies.

The fact that there is no control of the Government or any agency, it can be conveniently used in making illegal transactions as well. Additionally, this lack of governmental control also resulted in making cryptocurrencies a threat to banks and financial institutions.

After analysing the basic features of cryptocurrency, it is now pertinent to evaluate India's reaction towards cryptocurrencies. In the year 2018, RBI passed certain regulations prohibiting banks from dealing with cryptocurrency exchanges. After a span of two years, Supreme Court of India over-ruled this regulation and lifted ban from cryptocurrency exchanges.

In the case of Internet and Mobile Association of India v. Reserve Bank of India[1], the Apex Court made a detailed analysis of the history of the RBI and laid down as follows:
´┐ŻAs the Preamble of the RBI Act suggests, the object of constitution of RBI was threefold namely:
  1. regulating the issue of bank notes
  2. keeping of reserves with a view to securing monetary stability in the country and
  3. operating the currency and credit system of the country to its advantage.
However, after the 2016 Amendment Act, it was observed that RBI was also entrusted with the task of bringing out a modern monetary policy framework into operation. On a whole, it was held that prohibition of a certain economic exchange is outside the statutory scope of RBI and on the basis of this contention, the circular passed by RBI was held arbitrary in nature.

This judgment was a big relief for cryptocurrency users and turned out to be beneficial for a making of modern monetary policy. But, recently, the Indian Government has decided to make its own official virtual currency and ban the use of all other private cryptocurrencies which are existing at the present.

Involvement of the Central Bank in issuing of the official virtual currency will defeat the entire motive of Satoshi Nakamoto who intended to establish a peer-to-peer transaction model. Involvement of a financial institution will defy this objective. On the other hand, it is still essential to have a legal framework at place so that the transactions of cryptocurrencies are adequately regulated and illegal transaction are avoided.

Written By: Dr Farrukh Khan is an Advocate and Managing Partner of Law Firm- Diwan Advocates. Somya Mishra is an Advocate, working with Diwan Advocates.

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