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conundrum around
cryptocurrency in India
Introduction
From the traditional barter system to gold coins, from paper currency to digital currency,
we’ve come a long way. ‘The future of currency’ as many people like to say, has had a rather
wobbly start. To decipher the longevity of cryptocurrency, let’s first understand the technology
driving it – Blockchain. Blockchain is a trusted distributed, replicated, ledger, which is shared
with entities in a business process and has smart contracts.
1. Shared/Distributed ledger: Each entity in a business process has a separate ledger. But
any information that is added to one ledger, gets reflected in all other ledgers. This
removes any scope for unethically altering records.
2. Smart contract: It contains the terms of business, which are stored in an encrypted form.
The contract gets enforced when business rules are met.
3. Privacy: Transactions are verifiable and immutable. As a result, there is pertinent visibility
over every transaction. Transactions are secure as it is encrypted. However,
confidentiality is provided between participants.
4. Trust: Participants know which business processes they share. They can approve
transactions from their end and an entire trail is left behind.
The idea was to create a system to transfer money from among peers instantly, without a
centralized regulator. Analogous to the idea of gold, which is limited in nature, bitcoins were
created such that there are only 21 million bitcoins in this world. Out of these, 18.5 million
have been already mined.
Mining bitcoins require computing power. The very first bitcoin mined was using a humble,
omnipresent laptop. But this mining process became more and more complex. Today, mining
bitcoins take up immense computing power which requires intricate data centers. Bitcoin
trading started on May 22, 2010, when Laszlo Hanyecz, a programmer, traded 10,000 Bitcoins
to buy two pizzas. Since then, there has been an exorbitant growth of 196.7% CAGR, in the last
10 years. Today the value of one bitcoin is $37,973.
Bitcoin Prices over the years
70,000
Bitcoin price index in U.S.
60,000
50,000
40,000
dollars
30,000
20,000
10,000
Jun 2019
Oct 2013
Feb 2014
Oct 2014
Feb 2015
Oct 2015
Feb 2016
Oct 2016
Feb 2017
Oct 2017
Feb 2018
Oct 2018
Feb 2019
Oct 2019
Feb 2020
Oct 2020
Feb 2021
Jun 2015
Jun 2016
Jun 2017
Jun 2018
Jun 2020
Jun 2021
Market Cap of Bitcoin from April 2013 to August 2021
1,200
Market cap in billion U.S.
1,000
800
600
dollars
400
200
0
Aug 2014
Aug 2015
Aug 2016
Aug 2017
Aug 2018
Aug 2019
Aug 2020
Apr 2013
Dec 2013
Apr 2014
Dec 2014
Apr 2015
Dec 2015
Apr 2016
Dec 2016
Apr 2017
Dec 2017
Apr 2018
Dec 2018
Apr 2019
Dec 2019
Apr 2020
Dec 2020
Apr 2021
Today more than 10,000 different cryptocurrencies are traded publicly. The market for digital
currencies is highly risky. Many investors see this volatility as opportunity to invest more.
Biggest cryptocurrencies in the world based on 24h volume on July 29, 2021 (in billion U.S.
dollars)
10 20 30 40 50 60
Tether (USDT) 56.83
33.95
Ethereum (ETH) 16.6
5.05
Binance USD (BUSD) 4.62
2.74
Bitcoin Cash (BCH) 1.99
1.88
Ethereum Classic (ETC) 1.87
1.72
Cardano (ADA) 1.63
1.56
Binance Coin (BNB) 1.47
1.12
EOS (EOS)
Average time taken to mine a bitcoin from Jan 2017 to Jul 2021(in mins)
100
90
Time in minutes
80
70
60
50
40
30
20
10
0
Jan 2018
Sep 2017
Sep 2018
Jul 2019
Sep 2019
Sep 2020
Nov 2020
Jan 2017
Mar 2017
May 2017
Nov 2017
Mar 2018
May 2018
Nov 2018
Jan 2019
Mar 2019
May 2019
Nov 2019
Jan 2020
Mar 2020
May 2020
Jan 2021
Mar 2021
May 2021
Jul 01, 2021
Jul 03, 2021
Jul 05, 2021
Jul 07, 2021
Jul 09, 2021
Jul 11, 2021
Jul 2017
Jul 2018
Jul 2020
Applications of Cryptocurrency
Bitcoin and other digital assets are being used by an increasing number of businesses
throughout the world for a host of investment, operational, and transactional purposes.
According to one estimate from 2020 highlights that over 2300 US firms accept payment via
bitcoin. Cryptocurrency has various uses like:
India has seen a lot of increase in investments in cryptocurrencies especially after the onset of
the pandemic. According to blockchain data company Chainalysis, total investments in
cryptocurrencies in India zoomed from $923 million in April 2020 to nearly $6.6 billion in May
2021, an over 600% jump. From Elon Musk’s tweet that shot up Dogecoin’s price, to various
companies accepting Bitcoin as a medium of transaction, cryptocurrency in India has been a
hot topic. There has been a lot of noise regarding the cryptocurrency in the country that needs
to be addressed.
Government plans to come up with a Crypto bill called Cryptocurrency and Regulation of
Official Digital Currency Bill, 2021. According to the bulletin relating to Parliamentary affairs
issued by the Lok Sabha, the key purposes of the bill are:
1. To create a facilitative framework for the creation of the official digital currency to
be issued by the Reserve Bank of India.
2. To prohibit all private cryptocurrencies in India
3. Allow for certain exceptions to promote the underlying technology of cryptocurrency
and its uses.
We can infer from the bulletin that the Government plans to create an official digital currency
that can be regulated by RBI, unlike any cryptocurrency. The bulletin also suggests that all
private cryptocurrencies may be banned in India, but a leeway will be addressed.
The bill was supposed to be presented this monsoon season in the parliament, but it is
postponed. The Finance Minister, Nirmala Sitharaman had hinted that the bill is awaiting
confirmation from the cabinet.
The government has taken actions against cryptocurrencies in the past as well. In 2017, Inter-
Ministerial Committee (IMC) was constituted to study the issues relating to virtual currencies
in India and to propose specific actions to be taken in relation thereto. Based on the
comprehensive analysis, the IMC recommended a law to ban cryptocurrencies in India. This
led to the formation of a bill in 2019, banning cryptocurrency in India. Although this news
shook the market, the bill never materialized into law.
On March 2021, the Ministry of Corporate Affairs released a notification (MCA Notification)
mandating companies to make certain disclosures with respect to the virtual
currency/cryptocurrency transactions undertaken by them during a financial year. The
disclosures are as follows:
1. The profit earned/loss incurred during a financial year on transactions involving virtual
currencies/ cryptocurrencies;
2. The amount of virtual currency/cryptocurrency held as on the reporting date;
3. The deposits or advances received by companies from any person for the purpose of
trading or investing in virtual currencies/cryptocurrencies.
We can safely conclude that government is anti-crypto due to certain reasons and the Indian
investors are worried.
Shortcomings of Cryptocurrency
Cryptocurrencies suffer from several shortcomings that have led to many including famed
investors like Warren Buffet referring it to as the next “bubble”. It is quite crucial to identify
and understand the drawbacks and the hindrances that may refrain from the adoption of
these technologies as mainstream.
1. Risk of Loss: In case of a hard drive or a virus breakout on the wallet, the
cryptocurrencies are completely lost without any method to recover them back and it
will just take a couple of seconds to make a wealthy investor go bankrupt.
2. Price Volatility: Tied to a lack of inherent value, price volatility is a major concern that
arises due to the lack of any regulatory body to place checks and restrictions.
3. Regulation: What may be considered a boon for some is a bane for many because, till
the time the blockchain technology is adopted by a federal governing body, public
confidence can’t be gained as it will be a risky asset class.
4. Environmental Degradation: Due to the heavy carbon footprint and more than
11.5 kilotons of e-waste generated due to the usage of heavy computation required
24/7 to mine the cryptocurrency, the environment is facing a serious threat which is a
cause of major concern.
Can cryptocurrency replace traditional currency in India?
The legalisation of crypto no longer remains a thing of the unforeseen future but instead is
going to be the next disruption in this segment. With the process set in motion for the
introduction of e-coin or CBDC (Central Bank Digital Currency), cryptocurrency can be seen
securing a spot amongst the various currencies. However, its recognition as a legal tender and
a replacement of fiat currency is still a topic of debate. The major hindrance towards this is the
volatility, lack of proper knowledge amongst the masses in this regard and hence, the
unwillingness to adapt or shift to a completely new paradigm is inevitable. The concerns of
deregulated currency being used for terror funding and promoting corruption are a big threat
to the financial standing of the country. It may give rise to a parallel economy and integration
of the two would be a Herculean task and improper implementation would possess a major
threat.
Bitcoin was declared to be a legal tender last month by El Salvador, the only country in the
world to do so. However, several researchers and experts are of the impression that in the
Indian scenario, it may not be realistic to duplicate and emulate El Salvador’s example.
Several experts are of the opinion that India should view and regulate crypto as merely an asset
class and not a currency in order to regulate the money supply in the economy and ensure
government intervention if the need ever arises.
Reference Links:
1. https://www.firstpost.com/india/as-centre-readies-cryptocurrency-bill-for-
parliaments-monsoon-session-heres-what-you-need-to-know-9799951.html
2. https://www2.deloitte.com/us/en/pages/audit/articles/corporates-using-
crypto.html
3. https://groww.in/p/cryptocurrency/
4. https://bravenewcoin.com/insights/10-awesome-uses-of-cryptocurrency
5. https://www.goodreturns.in/classroom/pros-and-cons-of-investing-in-bitcoin-
advantages-and-disadvantages-of-bitcoin-cryptocurrency/articlecontent-
pf19271-1209500.html
6. https://www.prescouter.com/2019/11/disadvantages-of-cryptocurrencies/
7. CoinMarketCap.com, market research website.
8. Statista Database
9. https://cointelegraph.com/news/bitcoin-s-compound-annual-growth-is-an-
unheard-of-200-cagr