Tesla in the year 2021 released a statement that it would accept “Bitcoin” as a form of payment in exchange for their electric cars. The brain behind Tesla, Elon Musk showed his belief in the potential of cryptocurrency as a medium of exchange even after knowing about the price volatility of cryptocurrency.
The firm, led by Elon Musk, invested $1.5 billion in “Bitcoin” in February 2021, reportedly accumulating around 43,000 tokens. Such incidents mark the rising potential of cryptocurrency at a global level.
Over the last few years, cryptocurrency has become popular and as of 2023, there are over 10,000 cryptocurrencies in the market that have evolved. Cryptocurrency, also called Crypto is often seen as an asset for investment, whose value increases when compared with the currency of a country. It is based on blockchain technology, an advanced database mechanism that allows transparent information sharing within a business network.
Blockchain technology is gradually penetrating world economies through cryptocurrency and has been proven to have the potential for rapid growth. However, in India, this technology remains largely untouched and unregulated. This article highlights how the Indian legal system faces a void in governing and regulating blockchain technology.
So let’s first talk about blockchain.
What is Blockchain?
Blockchain is a shared, immutable ledger that helps in the process of recording transactions and tracking assets in a business network. It is a database or a list of every transaction that has ever taken place on the network.
This decentralized ledger, known as a blockchain, is maintained by a network of computers, or nodes, who work together to verify and record transactions but without any centralized regulation system. Even though Blockchain technology is not limited by the territorial boundaries of a country, it still plays a major role in the economy of every country.
In India, apart from being used in cryptocurrency, blockchain technology is used in areas like trade finance, KYC, and international money transfers, all of which are regulated in some or another way by an authorized entity. But when Blockchain is expressly used in cryptocurrency, the Indian legal system fails to regulate it and there can be seen a significant void in Indian laws.
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How Cryptocurrency is traded in India?
Cryptocurrency is traded with the help of a legally void account in India, called CFD Account that enables one to speculate on cryptocurrency price movements without taking ownership of the underlying coins. It is a complex and price-sensitive ecosystem with a high risk of losing money without any specific legal remedy.
Unlike traditional currencies, cryptocurrency exists only as a shared digital record of ownership, stored on a blockchain. This means neither there exists any physical form nor any single sole owner of a particular cryptocurrency, adding to the vulnerability of cryptocurrency.
Users transfer cryptocurrency units to another user’s digital wallet. Until the transaction has been validated and added to the blockchain through a procedure known as mining, it is not regarded as final. However, all these transactions are not backed up by any government or institutions. Due to this, such transactions are at threat of manipulation of price and are subject to user’s loss of money and fraud.
Price of Cryptocurrency
Cryptocurrency, while offering various profitable opportunities, is not without its challenges. Participants in the crypto space encounter a range of issues that impact their trading and investing experiences. Market price volatility, regulatory uncertainties, security concerns, and liquidity fluctuations are among the prominent challenges.
But in this article, we will be dealing with the concern of the price of cryptocurrency and subsequent challenges that occur due to non-regulation and fluctuations.
The value of cryptocurrency is decided by the demand and supply of that particular cryptocurrency. Even though the number of cryptocurrencies is finite, the estimation of an exact number of cryptocurrencies currently in the market cannot be predicted, which leads to the threat of black marketing.
As the crypto market continues to mature, 2 factors need to be considered while formulating appropriate legislation:
1. Price volatility
In India, since the crypto market and all its attributes remain unregulated, the market of Cryptocurrency is confined to a limited group of people who intend to assume crypto as a form of investment. Thus the majority of crypto transactions in India, are done as a form of investment and less for transaction purposes.
Price volatility is one of the major factors that contribute to investor’s concerns while investing in cryptocurrency. For instance, the oldest and most well-known cryptocurrency in the world, Bitcoin, reached record highs at the start of 2021 before collapsing and losing a significant portion of its value.
The reason for such a burst in the price remains unknown due to the absence of authorized information on these digital assets and the technological complexity involved.
Those investors who invested the money before the collapse suffered huge losses and were ambiguous about how to track down the money that they had invested. It seemed as if the money had vanished into thin air. Such incidents are a burning example of how unregulated markets can lead to large capital losses.
2. Demand and Supply of Cryptocurrency
When miners use specialized software to solve arithmetic problems and mine currency, new coins are created. This process is called “crypto mining”. There will be a greater demand for cryptocurrency if more individuals wish to utilize it as a payment method.
Because of this, it is more difficult to produce new coins because mining has to speed up to meet the demand. On the other side, the value of the same cryptocurrency will drastically decrease if there is little interest in it. The point of concern is the absence of any bar on the production of the currencies.
It completely depends on the miners, how much they wish to produce. This advantage entitles them to have an upper hand and monopoly over the crypto market. As a result of which the market is heavily dependent on and manipulated by the miners.
On loss of capital by a concerned individual, even if the miner is blamed for the loss, the government and the courts have less jurisdiction over such cases. This creates an urgent need to have legislation to regulate the price-fluctuating and price-sensitive market.
Laws proposed to regulate Cryptocurrency
Since most nations have not yet passed legislation about cryptocurrencies, it is still uncertain if mining cryptocurrencies is lawful in most of them. In India, government officials have declared cryptocurrencies as not to be legal tender money and have cautioned their citizens against using them for transactions.
Following the surge in cryptocurrency prices in India, the government has also established a committee to investigate the usage of virtual currency in the nation and assess any possible loss of revenue. The committee report recommended a blanket ban on all private cryptocurrency ownership in India.
But no active steps have been taken with respect to the findings of the report. So far as the government is concerned, constant negligence has been observed with respect to legislation in cryptocurrency. “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” was proposed in the Parliament, but did not yield any enactment.
New and effective legislation for cryptocurrency is the need of the hour. Forums and committees need to be established which would dive deeper into the phenomenon that affects the price sensitivity of the market. In order to stabilize the price fluctuation, India should limit the influx of new and under-established currencies that possess a high risk of money loss.
A calculated bar should be determined and imposed on crypto mining. Appropriate authority should be established to check the hoarding and black selling of stocks. For the traders in the crypto market, detailed tax laws should be formulated. As how the capital gains at the stock market are taxed, similar acts should also be passed to regulate the crypto market. Imposing a tax slab is another method in which the crypto market can also be regulated.
Conclusion
In conclusion, the evolving world of cryptocurrency, fueled by the revolutionary blockchain technology, presents a challenge for the Indian legal system. The absence of comprehensive regulations has led to issues like price volatility and the uncontrolled demand and supply dynamics within the cryptocurrency market.
The absence of proper regulations has put investors at risk due to the unpredictable fluctuations in cryptocurrency values, as seen with Bitcoin in 2021. This lack of oversight also opens the door to potential manipulation by miners, making the market even more vulnerable.
India faces a crucial decision in the fast-changing world of digital currencies. To balance the benefits of blockchain technology and manage the risks, it is essential to take proactive legal steps. Implementing strong laws will safeguard investors and promote a secure and lasting environment for the expanding cryptocurrency industry in India.
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Authored by Roshan K Behera, a 1st year Law Student at National Law University Odisha.