Cryptocurrency and Bitcoin: All You Need to Know About the Digital Currency That's Making Headlines

A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.

A cryptocurrency is a digital or virtual currency that is secured by cryptography, making it nearly impossible to counterfeit or double-spend. Cryptocurrencies operate on decentralized networks and utilize blockchain technology, which is a distributed ledger that is maintained by a vast network of computers.

Bitcoin is the name of the most well-known cryptocurrency, and it is the one for which blockchain technology was initially created. Unlike traditional currencies, cryptocurrency is not backed by any intrinsic value and cannot be redeemed for another commodity, such as gold. It exists solely in the digital realm and has no physical form. The total supply of Bitcoin is determined by the protocol itself, rather than being controlled by a central bank.

While India is currently working on establishing a framework for cryptocurrencies, until this framework is enacted, cryptocurrencies are not considered illegal in the country. In 2022, the government announced a flat tax of 30% on any gains arising from cryptocurrency transactions. However, it is important to note that taxing income from cryptocurrencies does not explicitly legalize cryptocurrencies themselves.

The Reserve Bank of India (RBI) has expressed skepticism regarding the use of private crypto assets and views them as a major threat to the macroeconomic and financial stability of the country.

Finance Minister Nirmala Sitharaman has repeatedly emphasized that cryptocurrency issued by private entities cannot be considered currency. According to her statement, currency will only be recognized when the Reserve Bank of India issues a digital currency.]

Private digital currencies, virtual currencies, and crypto currencies have gained significant popularity over the past decade. However, regulators and governments have been skeptical about these currencies and are concerned about the associated risks.

On March 4, 2021, the Supreme Court set aside an RBI circular dated April 6, 2018, which prohibited banks and entities regulated by the RBI from providing services related to virtual currencies. This decision allowed banks and other regulated entities to once again engage with cryptocurrency exchanges and other businesses.

Currently, crypto assets are largely unregulated in India. However, they are regulated to some extent from the perspective of anti-money laundering law. Additionally, income tax and TDS are levied on earnings from trading in such virtual digital assets, and GST is levied on cryptocurrency exchanges.

In July 2023, Finance Minister Nirmala Sitharaman stated that any effective regulation or ban on cryptocurrency would require "international collaboration."

Earlier, the Reserve Bank of India (RBI) had proposed a ban on cryptocurrency, but this was set aside by a court order. The RBI considers cryptocurrencies to be a huge risk to financial stability and monetary stability. Last month, RBI Governor Shaktikanta Das expressed concern that such virtual assets may lead to a situation where the central bank loses control of the money supply in the economy.

The RBI has recommended that crypto assets should be prohibited. According to the RBI, crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation for regulation or for banning can be effective only with significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.

Currently, an inter-ministerial group (IMG), comprising officials from the RBI, Sebi, and the Finance Ministry, is looking into a wider policy for cryptocurrencies. A discussion paper from the IMG is awaited, which will give the stakeholders an opportunity to give their views before India decides on its policy stance on cryptocurrencies.