Cryptocurrency has increased in size and investor appeal to support financial activities including buying, selling, and trading both in India and internationally. 7.3% of Indians owned cryptocurrencies in 2021, according to the United Nations Conference on Trade and Development Report 2021. As much as it is commendable that India is quickly embracing digitalization in nearly every aspect of life, a fundamental worry that need immediate attention is the fact that India now lacks any legal framework to oversee the market for crypto assets.

Absence of a regulatory framework exposes investors to avoidable frauds as well as uncertainty for enterprises trying to enter this market. Money laundering, fraud, and the funding of terrorism can all be made easier in an unregulated environment.

Where does India Stand in terms of Regulating Cryptocurrency?

• Cryptocurrency trading, mining, holding, transferring, and use are punishable in India with a monetary fine or/and a term of imprisonment up to 10 years, according to a 2019 RBI statement. Additionally, the RBI stated that it may eventually introduce the digital rupee as legal money in India.

• In 2020, the Indian Supreme Court lifted the RBI’s ban on cryptocurrency.

• In the Union Budget for 2022–2023, the Government of India stated unequivocally that any transfer of virtual currency or cryptocurrency assets will be subject to a 30% tax deduction. Virtual goods and cryptocurrencies used as gifts will be taxed in the recipient’s hands.

The Reserve Bank of India (RBI) suggested a ban on cryptocurrencies in July 2022, citing their “destabilising consequences” on the nation’s monetary and financial systems.

What are the uncertainties of cryptocurrencies?

• Cryptocurrency has a volatile nature and is speculative, high investment quantities cause market volatility, which causes price fluctuations and the potential for significant losses for investors.

• Reliability and Security: Because cryptocurrency is a digital method of exchange, it has become a popular platform for hackers, financing terrorism, and drug trade. Because it leads to a decreased sense of security and a lack of dependability, this has increased peoples’ fatigue to a greater degree. For instance, thieves utilised the Wannacry virus to demand Bitcoin ransom payments.

• Absence of a regulatory framework, the Indian government’s approach to cryptocurrencies is one of wait and see. Lack of regulatory authority has raised the likelihood of fraud, endangering investor protection and the flow of money throughout the economy.

• Issues with the Stock Market, according to the Securities and Exchange Board of India (SEBI), it has no authority over cryptocurrencies “clearing and settlement” and is unable to offer counterparty guarantees like it can for stocks. Furthermore, neither a money, a commodity, nor a security have been used to characterise cryptocurrencies. Rising crypto currency markets have the potential to tip the Indian economy’s circular flow of money out of balance. The process of creating cryptocurrencies differs greatly from the way the economy produces regular money.

For instance, only the RBI is allowed to create cash in India, and only if the Minimum Reserve System is up and running. As a result, supply and demand are in balance Cryptocurrency, on the other hand, is encrypted and secured rather than dependent on the rules of financial institutions, which makes it challenging to raise the money supply above a set algorithmic pace.

What should the next step be?

• Cryptocurrency Definition: According to the pertinent national laws, cryptocurrencies should be specifically defined as securities or other financial instruments.

• Linking the Startup Ecosystem to Crypto: Blockchain and cryptocurrency technology have the potential to revitalise India’s startup scene and provide up employment opportunities for everyone from blockchain developers to designers, project managers and business analysts to marketers and promoters.

The establishment of a Central Bank Digital Currency (CBDC) for India in the form of the Digital Rupee was announced by the Indian Finance Minister. It will significantly strengthen India’s digital economy. The use of digital currency will also result in a more effective and affordable system for managing currencies. To fully capitalise on Blockchain technology, CBDC should coexist peacefully with other cryptocurrencies.