EXPLORING THE LEGAL CHALLENGES OF REGULATING DIGITAL CURRENCY AND DECENTRALIZATION

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This article is written by Anjali of Chaudhary Charan Singh University, Ghaziabad

Abstract

At present time digital currency become a hot topic of discussion related to its use, pros and cons which are associate with that. Apart from that this type of currency can also be centralized and decentralized. Bitcoin which is a part of cryptocurrency effect the economy is inadequate. Decentralization is a part of cryptocurrency which is usually issued by private institution. In this article we examine how digital currency different from physical currency, its benefit and legal challenges of issue and regulation of digital currency. It provides types of digital currency [1]and effect of these currency on bank. RBI provide notice for the issue of the CBDC[2] and restrict the virtual currency transaction.

Keywords

Digital currency, decentralization, legal challenges, advantages and disadvantages of digital currency, impact on bank, type of currency and CBDC v. cryptocurrency, conclusion.

Introduction

Digital money is a mechanism to make the wholesale and retail payments. Digital currency that can be centralized and decentralized. On the contrary, experts says that digital currency encourage cyberattack, unauthorized access to financial information, criminal activity.

Digital currency has power to control the financial system in the society. In many counties, digital currency replaces physical currency and digitally hold the economy of that country.

Decentralization of digital currency remove third party like bank and other financial institution for transfer of money and ownership of the commodity. Decentralized currency does not charge fees for providing the services unlike banks and other intermediaries. These currencies have transparency and speed while making the transaction.

Digital Currency

Digital currency is not a form of currency that is usually present in our hand to make payment of goods and services. It is easy to manage and reserve. Currency which is not present in physical but in digital form than can only be access especially through internet in computer system or mobile. While digital currency, like notes, coins, banknotes which have physical properties. It is intangible in nature.

In 2020, U.S. with 5% of adult don’t have bank account. In 2021, 7.3% population in India posses’ digital currency that will grow over time.

Advantages of digital currency

Advantage of digital currency are as follow:

No extra cost

Unlike physical currency, on manufacturing cost required for the digital currency. It could be process without the middlemen which make the transaction cost very low. It eliminates the cost charge by banks for making the transaction.

Decentralized

physical currency issued by central bank and financial institution to monitor the financial system and economy of the country whereas digital currency can be issued by them or by emerging technology.

For example – Digital rupee issued by the RBI is a form of centralized economy and cryptocurrency is a decentralized digital currency.

Cashless transaction

Transaction is made and accepted without the use of physical cash will be a cashless transaction. All debit, credit, mobile payment and online trading are digital cashless transaction. Transparency and accountability can be achieved through cashless transaction.

24/7 access

Physical transaction cannot be made during weekend. Payment through digital mode can be made any time without any delay. It works all the day even during weekend.

Disadvantages of digital currency

Some of the disadvantages of digital currency are as follow:

Security issues

cyber security breach and volition is quite possible during the period of digital world. If hacker get the access to the computer of another person, then it can be easily stolen. Traditional bank provides security and compensation for theft.

Scams and fraud

Making digital trading is not an easy task for the common person. Through fraud email Id, customer service, cashback links and screen mirroring any fraud can access to the account and trick person to make payment and transfer of security.

Lack of regulation

In case the currency is not issued by authorized bank or any other financial institution then it will be a decentralized currency. There is no specific regulation of such currency. It can be very from state to state which may prone to the investors.

Inconsistent value of currency

Because of improper regulation of decentralized currency, the value of currency can’t be stable which create inconsistency in the value of the currency. If the value of the digital currency drops then those whose invest may bear heavy losses.

Effect of digital currency on traditional banks

Where bank take few days or week to make the transaction, digital currencies can be processed 24/7 which allow fast and efficient transaction,
Digital currency is decentralized so it cannot be operated by central bank of any country and transaction made they’re under are record in system ledger,
Bank charge higher fees for their services like exchange of currency or trading in securities while digital currency charge according to priority of the transaction,
Traditional Banks who enjoy monopoly rights of issuing currencies like note and coin get effected after the entry of digital currencies in the market,
Physical currency may get torn or damage and it can be costly to produce and distribute while these kinds of problems are no associated with digital currencies,
digital transaction of currencies is more user friendly and easy to access which could lead to more customer that may directly influence on the revenue of the banks,
payment made in foreign countries is quite easy through blockchain which effect traditional bank that require weeks and lots of paper procedure to make payment,

bank can improve their performance by adopting blockchain and decentralized technology and provide transparency, reduce cost and enhance security to attract their customer.

Decentralization

In country like India with world’s largest democracy and diversity can be attained through decentralisation.

The term ‘Decentralisation’ refers to the transfer of powers and responsibilities from an authority to lower levels. The Decentralisation in Judiciary can be explained by the distribution of powers from centre to state with a certain degree of autonomy to the states.

“In a decentralised world, the most difficult challenge for lawmakers will be to decide what kind of regulations they should go for.”

Types of digital currency

CBDC[3]

It is a centralized currency issued by central bank of the country. The value of currency is equivalent to the fait money [4]that is fixed by the central bank.

A CBDC also provides a country’s central bank with the means to implement monetary policies to ensure stability, control growth, and influence inflation.

Central bank issue two type of CBDC currency that are:

Wholesale CBDCs like a reserve in the central bank which grants to the institution to hold in the form of reserve or interest.

Retail CBDCs are used by the consumer and business man for their daily use.

CBDCs aim to provide access to the general public and to make it user friendly. Through centralised digital currency it provides stability in the financial system. CBDC help central bank to implement monetary policy for interest rate, investment, lending and spending.

Cryptocurrency

it is a decentralized form of system which remove the traditional bank who work as an intermediary to make transaction between two individuals or entities.

First decentralized cryptocurrency was issued in the form of bitcoin in 2009 as open-source software.

It does not require central authority to regulate and to decide the value of the currency.

Cryptocurrency effect the economy in following ways:

The price of cryptocurrency is volatility in nature. Unlike stock market it based on market sentiments, economic condition which effect the value of such currency.
It is quite possible that Difference in price of cryptocurrency in market effect the trading between cryptocurrency and other fiat money.
Transaction fees can be differed according to the reference choice by the trader to make any transaction. For example – if investor give priority to make transaction in less time, then transaction fees may be high.

Legal challenges face in the digital currency and decentralization

RBI issue press release from time to time related to security concern. Back in 2017 a committee was constituted under the chairmanship of Shri Subhash Chandra Garg to examine the virtual currency and its legal issues.

In 2019 Indian government pass the bill which prohibited the use of cryptocurrency and use of such money will be punishable with imprisonment for a period of ten years. This step was taken by government to launch his own digital rupees.

In January 2021, Indian government issue new bill which provide the framework of the digital currency issued by the RBI and it prohibit the transaction related to private cryptocurrency. The name of the bill was The Cryptocurrency and Regulation of Official Digital Currency Bill 2021.

If the digital currency used within the legal boundaries, then it will be very useful for the common man.

Legal challenges associated with digital currency are as follow:

Tax evasion

Decentralized currency provides different ways to investor to protect their income from IRS[5] by way of transaction in bitcoin and other virtual currency.

“No one has put out clear rules on it, so there’s a lot of non-reporting going on,” according to Jon Feld hammer, a partner at law firm baker botts and a former IRS senior litigator.

No law for regulation

Indian government prohibit the regulation of private digital currency which does not provide any law to investor for their protection. In the absence of law by SEBI[6] any investment advisor or fund manager provide service regarding the investment in digital currency in their personal capacity.

Transaction parties are faceless

Without registration in any bank account or tradition financial institution, an investor can make trading in cryptocurrency. Users by blockchain[7] can make investment namelessly.

Example of making anonymous cryptocurrency payments:

Use Bitcoin ATMs
Purchase crypto with cash
Money laundering

Cryptocurrency is highly encrypted and cannot be traced easily. Digital currency can be purchased against the cash and other fiat money through which money laundering take place.

It cannot be authorized by any government and it allow all to make transaction without any registration.

Insecurity of trading

Retail banking is more secure than digital trading platform. If the data is not encrypted then it can be easily stolen by the hacker. The investor has no recourse whether their cryptocurrency stolen or lost.

Case laws

There are few case laws which may influence the regulation of decentralized digital currency in country like India and rest of the world as well,

Internet and mobile Association of India V. Reserve Bank of India

Bench – Rohinton Fali Nariman, Aniruddha Bose, V. Rama Subramanian

Details of the case

On 6^th April 2018, RBI issue a circular which prohibits the banks and other entity for trading in virtual currency. This circular also prohibits the banks to provide services thereof which effect on Indian economy in a negative way.

Petitioner contentions

The petitioner claim that RBI don’t have jurisdiction to prohibit the bank and other entity for dealing and providing services digital currency

Cryptocurrency and other virtual currency are not any kind of currency but it is a medium to make transaction and store value

Respondent contentions

RBI respond to the petitioner that RBI have jurisdiction to prohibit the bank and other entity

Cryptocurrency is used for trading and operate independently which require interference of the government.

Judgement

On 4^th march 2020, in the judgement of supreme court, it was held that court overturned the circular of RBI and give direction to the RBI to notice central bank not to freeze bank account of customer who are dealing in the cryptocurrency and also provide interest thereon.

Conclusion

Digital currency making the significant impact on the users. It gives freedom because of its convenient nature. Investment in decentralized digital currency could be a risky for the potential investors. Trading in securities through digital platform could be done at investor’s own risk.

In decentralized market, buyer or seller are not require to be present at the same place for trading securities. In the union budget of 2022, the Indian finance minister levy 30% tax on the income generated from the transaction of any virtual digital assets. Without government approval investor need to twice before making any transaction in digital virtual assets.

References