Cryptocurrency: a regulatory framework by Somesh Vaidya @LexCliq

Introduction

Cryptocurrency is a decentralized mechanism involving transactions between two persons with no centralized authority interference. It is said to be a virtual (currency) asset that is protected with encryption. It is very difficult to counterfeit the fact that it is secured through cryptography. It’s a money system that’s open source.

The transaction should be completed in a peer-to-peer lending system and recorded in a blockchain network-secured ledger. Separate wallets are used to store the cryptocurrency. There are two kinds of wallets: offline wallets and online wallets.

The market capitalization of cryptocurrency has surpassed $2 trillion. Many investment firms from all over the world have made cryptocurrency investments. They particularly pique the interest of international financial organizations such as the IMF and FATF. The Indian government has prohibited dealing in cryptocurrency, but enforcing this order is difficult.

The banning of cryptocurrency

Many governments have prohibited the use of bitcoin. A ban of bitcoin has been advocated for a variety of grounds, including a clash with domestic laws, a lack of control, and restricted authority. To specifically comprehend the reasons why some governments have banned money from a technological, legal, and economic standpoint, the following considerations are to be referred to:

The cryptocurrency is a peer-to-peer lending system in which no intermediary will intervene or exert control. Because there is no role for middlemen, many governments are concerned and have prohibited cryptocurrencies without trustworthy intermediaries.
The government or an intermediary entity, such as the central bank, controls the circulation of fiat currency. These assists governments in controlling recessions and inflation in the economy, as well as improving market conditions and creating more jobs. A specific authority has no control over or stoppage of cryptocurrency circulation.

The new cryptocurrency enters the market only when miners are rewarded in the form of cryptocurrency for performing their obligations. To solve complex mathematical problems for authentication, the miner has a whole crypto transaction. The major reason governments seek to outlaw cryptocurrencies is the lack of authority or control in circulation.

The country’s money is issued in the form of coins, notes for exchange, and trading. They have complete control over its circulation or production (the generation and circulation of new currency in the market), which is decided by authority based on economic influence. The tracing of currency transactions assists the authorities in detecting money laundering, tax evasion, and other illicit conduct. The function of cryptocurrencies lacks the essence of economic running.
Another downside of cryptocurrencies is that financial transactions are untraceable. Terrorism, prostitution, drug trafficking, and tax evasion are all examples of how these are employed.
Because the price of bitcoin varies, several investors advise, “only invest in cryptocurrencies when you can afford to lose that money.”

International organizations on the regulation of cryptocurrency

In comparison to any other financial product gaining popularity and adoption by the general public, the influence of cryptocurrencies in this area has been rapid. It should be studied by international organizations since it has an impact on global economic activity. The International Monetary Fund (IMF), World, and Financial Action Task Force (FATF) have taken a step-by-step approach to cryptocurrency and its regulation.

The FATF has released its report on bitcoin, which includes a discussion of the key points. This is significant because it determines the global future of cryptocurrency. There have been references to cryptocurrencies as a low-cost payment, better efficiency, and an alternative for persons with limited access to banking services.

The threat of bitcoin is also discussed, as are regulatory recommendations to avoid anti-money laundering through cryptocurrencies. They have also produced a paper on cryptocurrency in which they discuss the definition of virtual money, miners, and potential risks.

The regulation of cryptocurrency and its advantage

Experts have proposed that bitcoin not be banned, but rather regulated and made mandatory compliance for all stakeholders. The danger of several countries outlawing cryptocurrencies has little effect on its valuation or attractiveness to investors. According to one report, about 40% of bitcoin purchases are made by new investors.

In India, for example, the cryptocurrency sector is thriving despite the prospect of prohibition and an uncertain regulatory climate. The government has introduced a new bill in parliament called the “cryptocurrency and official digital currency bill, 2020,” which directs the government to ban all private cryptocurrency and the RBI to issue new official virtual currency, but it does allow, with certain exceptions, to promote the underlying technology of cryptocurrency.

This bill is essential since it affects the primary benefit of cryptocurrency while also promoting technology. The cryptocurrency part implies that you want to help the economy but do not like money.

According to Section 3 of the Information Technology Act of 2000, authentication of electronic records, cryptocurrencies means that a person authenticates an electronic document using a digital signature. Section 3(2) Electronic records must be authenticated using an asymmetric cryptosystem and hash function that may be paired and transformed from one electronic record to another. They also discuss the use of public and private keys for each subscriber in order to validate electronic transactions.

When you receive a message in cryptocurrency or bitcoin, give each person who owns cryptocurrencies a private key and use cryptography to protect the system. The transaction is completed once minors answer tough math questions and are paired with each hash. As a result, the Information Technology Act of 2000 will govern bitcoin.

Many investors and financial organizations will be attracted to cryptocurrency. They acquire and invest in cryptocurrency-related companies. Because cryptocurrency has high price volatility, it is akin to a “high risk and high return” formula basis, which is one of the reasons the government forbade it.

In India, bitcoin holders have invested up to 60 lakh to 1 crore rupees in cryptocurrency, withholding more than 10000 crore rupees. Because of the loss of numerous investment options in India, the government has controlled cryptocurrencies through the IT act rather than outright prohibiting it.

The Solution of cryptocurrency and its downside

One of the most notable challenges to cryptocurrencies is price volatility and uncertainty, but effective and thoughtful regulation design, as well as government authority actions such as providing constant guidance, can mitigate these risks. In Japan, the government recognizes bitcoin to be a currency, while in the United States, the CETD declares cryptocurrency to be a commodity, which helps to primarily overcome or address this confusion. That is why efficient regulation minimizes cryptocurrency’s uncertain valuation.

Most investors should take cryptocurrencies seriously and not use it solely to avoid government scanners or for illegal activity purposes. The government regulates cryptocurrencies through KYC (Know Your Customer) guidelines and issues compliance to curb AML (Anti Money Laundering) activity for all cryptocurrency stakeholders.

A good regulatory framework or a welcoming attitude toward cryptocurrencies will assist India or any other country in taking the lead in the field of creative technology and investment.

Conclusion

Cryptocurrency is also an innovative technology that provides alternatives to banking system flaws. One of the government’s key concerns is that ambiguity or price volatility will harm investors’ interests, thus cryptocurrencies, as proposed by many experts, will provide sufficient regulation and clarity. The prohibition of bitcoin is not a long-term solution; rather, it encourages unscrupulous activities and unlawful transactions.

Article by Somesh Vaidya