Cryptocurrency Regulations in times of COVID-19: A boon or bane to India?

Launched soon after the 2008 financial crisis, the first ever cryptocurrency that took the world by storm was the “bitcoin.”

Since then, over 3,000 cryptocurrencies have been mined and traded with a market capitalization of over $221 billion as per a report by Yahoo Finance. Fundamentally speaking, cryptocurrency is a digital or virtual currency designed to serve as a medium of exchange, which is aimed at decentralization and transparent financial transactions.  

The ongoing COVID-19 crisis resulting in plummeting investment values in terms of equity, bonds and commodities have led to investors looking for assets that could withstand the slowdown triggered by lockdown and give them a run for their monies. While some hinge on the safety of government bonds, others are buying gold. Some investors in India have found Bitcoin attractive as a means to hedge the risks, diversify their portfolio and perhaps make a profit. Further, market experts believe that cryptocurrencies could remain untouched by the slowdown started by COVID-19 and may outperform other asset classes. One of the reasons is the non-correlated nature of cryptocurrency, which indicates that it is not directly impacted by the economic, geopolitical and pandemic like situations due to its decentralized nature.

Cryptocurrency Legislation in India

The Reserve Bank of India (RBI) took an over-protectionist stance and imposed a total ban in April 2018, which restrained cryptocurrency based activity in India in its entirety. This year, however, the Supreme Court quashed the RBI’s ban on cryptocurrency transactions. Further, the court opined that in the absence of any legislative prohibition, the business of dealing in virtual currencies should be treated as a legitimate trade protected under Article 19(1)(g) of the Constitution, which affords a fundamental right to carry on any occupation, trade or business. However, as is often misconstrued by laymen, the Supreme Court’s ruling should not be construed as one legalizing the trade of cryptocurrencies in India, as many laymen as have understood, rather the RBI’s ban was smacked down due to its failure to pass the test of proportionality.

However, since the judgment, cryptocurrency-based activity on exchanges immediately shot up. In fact, Cashaa India, a crypto banking services platform, observed an increase of 800% in trading volumes in 2 days following the decision. Investment bankers at Goldman Sachs claim cryptocurrency as – modern digital gold. Both gold and bitcoins are designed to be rare and difficult to acquire but the latter’s historical volatility makes it a risky investment option for many trader joes.

What other countries are doing?

At the outset, it is important to initiate a dialogue with Indian legislators and regulatory bodies and work towards creating a crypto-regulatory framework in India. In the recent past, the Greeks and Venezuelans were flocked to cryptocurrencies to protect their investment value from hyperinflation. Moreover, cryptocurrencies were recently legalized in South Korea and Japan., and many countries like Australia have a positive viewpoint. Moreso, countries like the UAE, Sweden, Ecuador also introduced state-backed cryptocurrencies to help them evade sanctions, ease accounting and reduce the cost for the nations.

Therefore, experts believe that taking a similar trajectory is likely to benefit India with a rise in blockchain-focused startups, more employment opportunities, and added avenues for tax collection. Having said that, price predictions have failed miserably and as much as it appears to be the ideal disaster asset, there isn’t sufficient empirical evidence to reach a definite conclusion. The saying, "What goes up, must come down" as is applicable to stocks, bonds and commodities also applies to cryptocurrencies at large and regulation of this asset class will keep a check on underground trading in this regard.

In the current government’s pursuit of a cashless economy backed by the Supreme Court’s judgment setting aside RBI’s ban on cryptocurrency trading implicitly supports innovation and is a major step in the right direction. Having said that, the industry is in its nascent stages and is wise for RBI to wait and watch how the crypto market handles its first financial crisis before incentivizing or disincentivizing cryptocurrency based activities, which could potentially impact financial advancement of the nation. Thus, meticulous implementation and regulation of the crypto market may be a boon to the India economy, but any oversight could have disastrous consequences on the economy starved for revenues in times of crisis.

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