Decoding Legality and Security Concerns of Virtual Currencies

Cryptocurrency is similar to a fiat currency (or "money" as commonly referred to). As in the case of fiat money, cryptocurrency can serve as a medium of exchange, a store of value, a unit of account, or towards the final discharge of debt. However, compared to fiat currency, cryptocurrency does not have a legal tender status in any state or country.

While there are many countries that have banned cryptocurrency, the Reserve Bank of India (RBI), India's central bank and money regulator, issued a circular in 2018, that prohibited banks as well as financial institutions from dealing in virtual currencies as well as providing any services to facilitate them. However, this circular was struck down by the Supreme Court of India on 4 th March 2020. This verdict is considered a historic verdict especially for start-ups in the virtual currency industry. The Supreme Court of India, in its verdict, also stated cryptocurrency is not banned in India and there was very little evidence of threats to the Indian banking system due to cryptocurrency. 

Digital currency which is issued by a central bank is referred to as central bank digital currency or CBDC. For example, digital renminbi or digital RNB is a CBDC issued by the People's Bank of China and is the first digital currency to be issued by a major economy. All other digital currencies other than CBDCs are termed as non-CBDC.

Along with legality concerns, those related to fraud and security have been hurdles in the acceptance of non-CBDCs. Several cryptocurrency-related frauds including initial coin offerings, pump and dump schemes, or Ponzi schemes have resulted in governments delaying acceptance of non-CBDCs. Security concerns arising due to vulnerable wallets, potential hacking and cyber-attacks, selfish mining, double spending as well as 51 per cent attacks have also resulted in non-CBDCs being viewed suspiciously. However, most of the security concerns are related to cryptocurrencies and not the underlying blockchain technology. Appropriate measures could be taken to mitigate these risks.

RBI has started exploring ways to address these concerns and look at adopting the use of digital currency. The Cryptocurrency and Regulation of official Digital currency Bill 2021, which has been introduced during the budget session, looks at defining a regulatory framework for launching an official digital currency while prohibiting all private cryptocurrencies. Currently, the Indian government is in consultation with all key stakeholders. With cryptocurrencies gaining prominence across the world, an increasing number of investors, and the Indian government due to this upcoming industry, it would be interesting to watch this space on how digital currency would be brought into the mainstream.    

The author is  Associate Professor – Information Systems & Technology, Chairperson (ARC and IT), Co-Chair (PGDM), T A Pai Management Institute

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