Union finance minister Arun Jaitley while presenting Union Budget 2018 pricked the balloon of boom that was driving the investment in cryptocurrencies, especially the Bitcoin, in India. He was blunt to officially declare this virtual currency not a legal tender in the country. The finance minister, in fact, bowled a reverse swing when he said that the government would make use of same blockchain technology – the underlying technology driving cryptocurrency – to curb the use of cryptocurrencies and encourage digital payments in the country.
So, it’s crystal clear that all crypto-assets in the shape of virtual currencies suspected to be a source of financing illegitimate activities would be eliminated and stopped to be part of any payment system in the country. Interestingly, the government would be capitalizing on the magic of blockchain technology by allowing organizations to record and authenticate transactions without the need of intermediaries. This move, of course, would be a major cushion to pursue digital economy.
Even as cryptocurrencies like Bitcoin witnessed boom, the fact remains that a very few understand the investment mechanism driving these virtual currencies. Here it makes a sense to know the blockchain technology that has remained underlying technology for cryptocurrencies. Blockchain technology allows for instant recognition of the exact size of the block by all transacting parties in the chain since the block is simultaneously updated on all their databases. The movement of blocks, which carries with it the digital imprint of all its locations, is verified by those connected to the chain. It has unique security features that do not allow tampering and makes it more trustworthy.
In cryptocurrency, the investors use this blockchain technology, to create a set of virtual currency like shares in a trading entity that have an initial set value and fixed number. This currency becomes the medium of exchange through which people trade goods and services. Since the number of such currencies is fixed, demand for them goes up over a period of time as more and more people use it to settle their transactions. Since the availability of the currency, for example bitcoin, is limited, its value goes up in a stratospheric way.
As already stated above, cryptocurrency is considered as one of the channels for money laundering and terror funding. Now lacking a legal backing, the use of cryptocurrency in the country is a violation of foreign-exchange rules. In this backdrop, the income tax department recently sent notices to thousands of people dealing in cryptocurrency after a nationwide survey showed more than $3.5 billion worth of transactions have been conducted over a 17-month period.
It’s worth mentioning that Japan and China have cracked down on cryptocurrencies. South Korea has indicated to shut down domestic bitcoin exchanges. Germany and Singapore are wary since there was no regulatory protection for investors.
Notably, soon after the clampdown on cryptocurrency announced by the finance minister, Bitcoin slumped to its low for the year after seeing more than $44 billion in market value lost during this January. After reaching a record high of $19,511 on 18 December, Bitcoin has lost more half its value. On Thursday, when the union finance minister announced crackdown on the virtual country in the country, bitcoin declined as much as 8.7% to $9,100, the lowest since November. The $44.2 billion in market value lost last month is by far a record for the digital currency. It’s notable that the dangers associated with it forced Facebook to impose a ban on cryptocurrency ads.
Remarkably, some four months back I had warned about the dangers in investment in cryptocurrencies like Bitcoin as these virtual currencies were not recognized by the Reserve Bank of India (RBI) or any other authority in India, as a ‘currency’. The RBI had recently stated that investors dealing with virtual/digital currencies will be doing so at their own risk.
A network of over 2000 local investors in Jammu & Kashmir stand invested in cryptocurrencies. Most of them have taken this route of investment after demonetization of high value currency notes of 500 and 1000 rupees. It was interesting to note that these local investors under the influence of some share market investment agents had parked their money in cryptocurrencies for ‘amazing returns’.
The kind of appetite which our local investors have been showing toward cryptocurrency that too without knowing the full characteristic features of such investment, demands awareness sessions at regular intervals. The main problem with cryptocurrencies like Bitcoin, as pointed out by experts, is the misuse of the underlying technology – the blockchain technology.
(The views are of the author & not the institution he works for)