The word “Crypto” in cryptocurrency refers to the special system of encrypting and decrypting information which is popularly known as cryptography. Cryptocurrencies are digital representations of values that can be stored and transferred digitally to one another but in normal words, it is a type of digital currency unlike the India Rupee (INR), US Dollar, etc. Due to its decentralized and encrypted nature, it became very difficult for any central authority to regulate it. Although many people invest in cryptocurrencies as they would in other assets, like stocks or precious metals. While it is a novel and exciting asset class, purchasing it can be risky as one must conduct a fair amount of research to understand how cryptocurrencies work. These currencies are eliminators of third parties like banks making it much simpler and cheaper but despite these potential benefits, some drawbacks also come with it. They are more prone to hacking and other forms of cybercrime due to their decentralized nature. Besides that, they have opened a whole new world of investment opportunities for individuals and businesses. Though it is necessary to be aware of the potential volatility and lack of legal protection that comes with cryptocurrency investments.
Keywords
Cryptocurrency, RBI, Banking, Bitcoin, Money, Black Money, Decentralized, Blockchain
Introduction
Cryptocurrency is a decentralized digital money that is based on the blockchain technology. One of the most popular versions is Bitcoin and Ethereum, but there are more than 9.000 different cryptocurrencies in circulation. “There is no central authority that manages and maintains the value of cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s user via the internet.”1. They are decentralized in nature means they are neither issued nor governed by a central bank some of them are generated by their developers and others are generated by the network algorithms. Cryptocurrencies are digital assets and are immutable and secure from
1 What is Cryptocurrency, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/ (last visited Aug 18, 2024).
tampering, counterfeit and other forms of online fraud because it operates on a public ledger or blockchain technology. “Although cryptocurrency is defined as a form of “digital currency”— implying it is a kind of money—most businesses and consumers have not adopted it as a common medium of exchange. In other words, most stores will not accept crypto as a form of payment. Bitcoin may be an exception, as some businesses have accepted it as payment for goods and services.”2 Cryptocurrency regulations in India are still evolving, and there is no specific law under the Bharatiya Nyaya Sanhita, 2023 or Indian Penal Code, 1860 that directly addresses cryptocurrencies. Since these laws were enacted long before the invention of these technologies. However certain provisions could apply to crimes regarding the nature of the act. Not only this the cryptocurrencies have also challenged the traditional banking system by introducing new technologies, financial products, and consumer expectations. While these developments pose threats to traditional banking models, they also offer opportunities for innovation, collaboration, and growth in the evolving financial landscape. But it is Rightly said by Sir Edmund Burke “The greater the power, the more dangerous the abuse.”3 Cryptocurrency has provided us new ways of banking and new powers to revolutionize the traditional banking system but because of its nature it is more prone to its abuse through cyber-attacks and frauds.
Research Methodology
This research paper is primarily based on the research done from secondary sources of information such as Websites, Journals, Research Articles, Journal Articles and Case Laws. Being a relatively new research area, it needs sound depth elaboration, concept clarity and multiple dimensions from which cryptocurrencies and their impact have to be studied.
Review of Literature
Starting from the very beginning it was referred that a paper published by Satoshi Nakamoto in 2008, talks about the origin and development of a cryptocurrency named bitcoin and its operational blockchain technology. Bitcoin was the first cryptocurrency, first outlined by Nakamoto in his paper. According to him to transact with each other an electronic payment system on cryptographic proof instead of trust between the parties. Some early research on regulating cryptocurrencies and
2 Montevirgen, Karl. “What are cryptocurrencies and why is the world paying attention?.” Encyclopedia Britannica, https://www.britannica.com/money/what-is-cryptocurrency (last visited August 18, 2024).
3 Edmund Burke, speech on the Middlesex Election, 7 February 1771, in The Speeches (1854)
Bitcoin was conducted by Reuben Grinberg in their paper “Bitcoin: An Innovative Alternative Digital Currency” 4in 2011. This paper is a classic example because it is one of the first academic works that explored Bitcoin and showed us the regulatory implications of cryptocurrencies. According to this crypto might pose legal issues such as money laundering, tax evasions and its use in illegal activities. It also talks about the potential of Bitcoin and digital currencies to disrupt the traditional financial system and the regulatory challenges it presents as stated above.
Evolution of Cryptocurrencies in India
Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust”.5 These cryptocurrencies are digital assets that rely on an encrypted network to execute, verify, and record transactions, independent of a centralized authority such as a government or bank and cryptographic proof comes in the form of transactions that are verified and recorded on the blockchain. “Since 2012 there have been many Cryptocurrency exchanges operating in India, including the likes of Zebpay, CoinDCX or Unocoin amongst others”. The use of cryptocurrency in India is skyrocketed after the Demonetization of 500 and 1,000 Rupee notes in India on 8th November 2016. The decision of demonetization was taken by the Government of India to neutralize the black money and curb the existing corruption and terrorism in the country. Therefore, those who are holding “Black money” tried their level best to utilize their money. Some of the old notes were found floating in the river while others tried to buy gold out of the cash. But after being targeted by the authorities people saw Bitcoin and other cryptocurrencies as a safe haven. As a result, digital currency has become more prevalent in India.
4 Reuben Grinberg Bitcoin: An Innovative Alternative Digital Currency Hastings Science & Technology Law Journal,2011
5 What is Cryptocurrency, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/ (last visited Aug 18, 2024).
Regulation of Cryptocurrency
“A substantial global ecosystem of cryptocurrency trading markets has developed over the past decade, with commentators split over the utility of these new instruments and, hence, the proper level of government involvement. In designing a regulatory regime that balances the ability of new, innovative financial instruments to develop against the need to clamp down on illicit activity, a critical question is how markets will react to regulatory action. Despite growing scholarly and regulatory interest in cryptocurrency markets, surprisingly little is known about how markets respond to regulatory pronouncements”6.
As cryptocurrency has become a more significant factor in the global investment landscape, various countries have taken different approaches to regulating the asset class. “The European Union became the first to adopt measures to adopt measures requiring crypto service providers to detect and stop illegal cryptocurrency uses”7.
In the Indian scenario, the key regulators of cryptocurrency are the Reserve Bank of India and the Securities and Exchange Board of India. They have taken a hot and cold stand on imposing regulation on cryptocurrencies. India continues to be in a stalemate and is hesitant to ban crypto or regulate it. In an “RBI notification dated Apr 6, 2018”8 The Reserve Bank of India (RBI) prohibited banks from offering services to any crypto-related firms in 2018, but this ban was overturned by the Supreme Court in 2020 in the famous Cryptocurrency Case.9 observing that since Cryptocurrencies are not banned in India and pose no discernible risk, the deprivation of Cryptocurrency exchanges from accessing banking and payments channels would be disproportionate.
6 Feinstein, Brian D. and Werbach, Kevin, The Impact of Cryptocurrency Regulation on Trading Markets (2021). Journal of Financial Regulation, 7(1): 48-99,
https://ssrn.com/abstract=3649475 or http://dx.doi.org/10.2139/ssrn.3649475
7 Crypto-assets: green light to new rules for tracing transfers in the EU, https://www.europarl.europa.eu/news/en/press-room/20230414IPR80133/crypto-assets-green-light-to-new-rules-for- EU (last visited Aug 18, 2024)
8 Prohibition on dealing in Virtual Currencies (VCs), https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11243&fn=2&Mode=0 (last visited Aug 18, 2024) 9 Internet and Mobile Association of India v. Reserve Bank of India, AIR 2021 SUPREME COURT 2720
It is clearly visible from the decision of the Apex Court that the court does not want to impose a blanket ban on the usage of cryptocurrencies in India but to keep pace with the new technological advancement in the banking sector by introducing regulatory norms. Currently, cryptocurrencies such as Bitcoin, Ethereum and others are not illegal in India, but they lack clear regulatory guidelines. The Indian government has proposed a Cryptocurrency and Regulation of Digital Currency Bill,202110 in the Parliament but its fate remains uncertain. The Indian government is working on formulating a framework to regulate crypto in India which is also seen in the case of The United States of America as “The U.S. is slowly approaching regulation, but users, issuers, businesses, and regulators are busy battling it out in the court system”11.
The problem of tax evasion from cryptocurrency has also been solved up to a great extent by imposing a 30% tax on income from the transfer of any virtual digital asset, commonly known as cryptocurrency. The Central Board of Direct Taxes (CBDT) issued a notification in 2018, requiring individuals and businesses to disclose their cryptocurrency holdings and transactions in their annual income tax returns.
The Indian Penal Code 1860 or Bharatiya Nyaya Sanhita, 2023 itself does not provide any specific address for the cryptocurrencies or digital assets, as these laws are majorly derived from the ancient laws which are not sufficient to solve these modern-day problems.
- Fraud (Section 318(4) of BNS): – If someone uses cryptocurrency to deceive another person or entity to gain wrongfully and incur wrongful loss to another person, then he/she could be charged under this section.
- Criminal Breach of Trust (Section 318(1) of BNS): – If a person who is entrusted with cryptocurrency misappropriates it or converts it to their use, it could amount to a criminal breach of trust under the section.
- Forgery (Section 336-340 of BNS); – If someone creates a false document or electronic record related to cryptocurrency with the intent to commit fraud, they could be charged with forgery under these sections.
10 CRYPTOCURRENCY, No. 60/ RN/Ref/November/2021
11 White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets, https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first- ever-comprehensive-framework-for-responsible-development-of-digital-assets/ (last visited Aug 18, 2024)
- Money Laundering: – Although money laundering is primarily dealt with under the Prevention of Money Laundering Act (PMLA) if cryptocurrency is used in activities like concealment, possession, acquisition, or use of proceeds of crime, BNS provisions related to the underlying criminal activity could also apply.
- Extortion (Section 308 BNS): – If someone demands cryptocurrency by threatening another person with harm, it could be treated as extortion under the section.
- Hacking and Data Theft (Section 303 of BNS & Section 66 IT Act): – If someone illegally accesses cryptocurrency wallets or exchanges to steal cryptocurrency, they could face charges under the BNS for theft and under the Information Technology Act, 2000 for hacking
Cryptocurrencies have been there in the financial system for more than a decade now, but nowadays efforts have been made to regulate them because it is a time when cryptocurrencies have gained more transactions and importance. Applying existing regulatory laws to the currency or developing new laws for the same is a difficult task. Regulating the currency will also stimulate the activity by providing clarity to the market participants. As in today’s scenario, there is a lot of uncertainty in India regarding cryptocurrencies in India.
Impact of Cryptocurrencies on Traditional Banking System
Cryptocurrencies have come into existence as a disruptive and transformative force in the global banking systems. The increase in the trading of cryptocurrencies, indicating an increase in the acceptance by various stakeholders led to the emergence of this new currency. Nevertheless, the volatile nature of the currency poses a systemic risk. Therefore, to maintain an equilibrium between the innovation and its proper regulation. The key ways in which cryptocurrency has influenced traditional banking systems are:
- Decentralization: – It is decentralized in nature and is different from traditional banking’s centralized control system which minimizes the risks of centralized data breaches and complete system failures. This is not only an advantage, but it also helps innovation by challenging traditional banks to explore this technology.
- Efficient in Nature: – These currencies are known for their cost efficiency and transaction speed. In the traditional banking system, there is significant involvement of numerous intermediaries as well as regulatory checkups which results in high transaction expenses and slow transaction speeds. On the other hand, cryptocurrency transactions take place without any intermediaries which results in a drastic reduction of transaction fees and processing time.
Because of this, some traditional banks like HSBC, Citibank, and BNY Mellon have also invested in blockchain and other fintech innovations to keep pace with the growing technological advancements.
- Privacy and Security: – Cryptocurrency are an example of an example of a double-edged sword but it is rightly said by the Roman Philosopher Seneca that “A sword never kills anybody; it is a tool in the killer’s hand.”12. As it is upon the user to use something for one’s benefit or another’s harm. Like these cryptocurrencies offer personal information protection, control and security through cryptographic techniques. However, this level of anonymity can foster illegal activities if not regulated properly.
- Challenges in Regulation: – Many significant regulatory challenges have also emerged for the regulatory bodies in regulating the operation of cryptocurrencies in the market. The decentralized nature of the currency makes it difficult to impose existing financial regulations, such as the Money Laundering Act and Know Your Customer (KYC) requirements. Therefore, the ambiguity in the regulatory norms led to the cautious approach of different financial institutions toward their investments in cryptocurrencies. In order to solve this problem worldwide regulators are working toward developing new frameworks that can regulate it which would result in sustainable technological development.
- Increased Competition and Innovation: – To keep pace with the new technological development in the digital currency there is an urgent need to develop according to the changing scenario. This acceleration fosters an industry that is more agile, customer-focused, and technologically advanced in financial services which will consequently be benefiting both consumers and businesses.
Suggestions
In the dynamic landscape of the Indian banking sector amidst the ongoing digital revolution, a regulatory framework for cryptocurrencies is much needed to curb the hesitancy of various people and financial institutions to invest in cryptocurrencies. It is not necessary to put a complete ban on these currencies but a proper regulatory system would be very helpful to keep in
12 Quote by Seneca, Quemadmodum gladius neminem occidit, occidentis telum est.Latin: A sword never kills anybody; it – Seneca (Seneca the Elder), Lette | Quotation.io
pace with technological advancements. Not only this the steps should also be taken to integrate these new blockchain technologies with the existing traditional banking system. Enhancement of security protocols and consumer protection must be given more priority by strengthening Anti- Money Laundering and Know Your Customer regulations to protect consumers from frauds, scams and loss of funds. The government should also take steps to educate the public and financial institutions through campaigns about the risks and benefits of cryptocurrencies. Last but not least the government can promote the development of Central Bank Digital Currencies which are centralized in nature and pose less risk to the investor. These currencies can help the role of central banks by offering a stable and safe digital alternative.
Conclusion
In conclusion, the nexus of existing banking systems and cryptocurrency regulations signifies a dynamic and revolutionary shift in the global financial environment. Regulations pertaining to cryptocurrencies are evolving to address potential concerns as well as opportunities as they become increasingly important to the financial system. The action is a preemptive step toward integrating these digital assets into the larger financial system while maintaining stability, transparency, and consumer protection rather than merely a reactionary one.
Cryptocurrencies have led to significant changes in financial transactions, investment trends, and monetary policy. The decentralized nature of cryptocurrencies can disrupt traditional banking systems by providing alternatives to conventional financial services. These virtual currencies challenge traditional banks by providing peer-to-peer transaction capabilities that come with lower transaction fees as well as greater accessibility to finance particularly among unbanked populations.
The use of cryptocurrencies has significantly altered monetary policy, investment trends, and financial activities. Because cryptocurrencies are decentralized, they can upend established banking systems by offering substitutes for traditional financial services. By offering peer-to-peer transaction capabilities with cheaper transaction fees and more accessibility to finance, especially for the unbanked population, these virtual currencies provide a challenge to established banks. However, the expansion of cryptocurrencies has also come with many risks and regulatory difficulties. The properties of anonymity and decentralization are characteristic of most digital
currencies have raised concerns about their potential use for criminal activities like money laundering or terrorism financing. This has forced governments around the world to develop frameworks that mitigate these risks but at the same time foster innovation. Regulations like Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements are becoming standard practices to ensure that cryptocurrency transactions adhere to the same legal standards as traditional financial transactions.
These measures have heavily affected the traditional banking systems. On the one hand, explicit regulations related to cryptocurrencies offer some certainty and legitimacy in a market for digital currency. This can result in increased institutional investments as well as cooperation between the stakeholders. For instance, several lenders are examining different ways they can forge alliances with cryptocurrency exchanges and blockchain technology providers so that they can improve their product mix while also tapping new streams of revenue. These alliances may lead to the creation of innovative financial products that bridge both conventional finance and digital finance.
On the contrary, traditional banks may encounter problems due to the merging of cryptocurrency laws. The compliance-related regulatory burdens can be significant and necessitate retooling for crypto transactions in the technology systems of banks and alignment with regulation. On top of this is the decentralization of finance (DeFi) platforms alongside other blockchain-based revolutions that might impact negatively on their market share and profitability.
Also, different regions are still evolving their regulatory framework towards cryptocurrencies. This uniformity can be complicated for worldwide financial institutions that cross borders as they must deal with a mixed patchwork of regulations while adapting to rapidly changing legal environments.
In general, managing cryptocurrencies and their effects on conventional banking is a complex matter that calls for caution and well-thought-out strategic decisions. Regulations, however, are vital to control risks and protect the integrity of the markets while giving established institutions excellent opportunities to innovate. In the upcoming years, there might be a mutually dependent relationship between traditional banking institutions and the emerging cryptocurrency sector. Banks can best prepare themselves in anticipation of a more digitalized global financial environment by utilizing these legislative developments along with emerging technologies.
Archit Singh
Teerthanker Mahaveer University, Moradabad