Cryptocurrencies are products of free markets.

Last month, the Government of El Salvador announced that it would start accepting Bitcoin as legal tender. This is the latest major development in the on-going debate around cryptocurrencies, and the road ahead.

Important facts :-

• El-Salvador Govt accepted Bitcoin as digital currency .in June,2021.

• Before June only 30% of El-salvador population had an account at a bank .

To promote the currency’s use, the El-Salvador government has created a cellphone application — Chivo Wallet — which allows citizens, including many who do not have bank accounts, to send and receive bitcoin-denominated claims, convert them to dollars and withdraw them from special ATMs. It also gave $30 in bitcoin to every Salvadoran who adopts the wallet.

Within a span of 3 Months , El-Salvador has more population holding Bitcoin wallet than bank account ever opened in last 100 years.

Blockchain truly have potential to bank the banked & its uses are far more impactful than otherwise.

The debate has gained volume in India too. While the Government of India and the Reserve Bank of India (RBI) measure the pros and cons of allowing a free play of cryptocurrencies, the emergence of cryptocurrency exchange apps indicates that the markets are running ahead of the regulation.

As we debate the scope and desirability of cryptocurrencies, here are some of the factors that should be weighed in.

Acceptance of innovation: The power to issue currency is one of the foundational pillars of a modern nation state. Any innovation that competes with this power is bound to be resisted. The GOI and the RBI should resist the temptation of viewing cryptocurrencies as an alternate to fiat currency. In the spirit of regulatory sandbox, it should allow private parties to use cryptocurrencies for mutual contracts. As its usage expands, we stand to learn at the cost of private capital.

Eradicate anonymity: Blockchains — the underlying technology on which cryptocurrencies are based — ride on the power of anonymous participants. If the asset class wants to be included in the formal financial system, the owners and holders of it cannot remain anonymous.

Our financial system is based on and strives to identify all participants under the KYC (know your customer) doctrine. Therefore, all cryptocurrency holders should disclose their identity, source of the funds they’ve deployed in it, and the end use of the currencies needs to be monitored.

The KYC disclosures will also bring usage of cryptocurrencies under the ambit of the existing anti-money laundering rules. Questions have also been raised on where do cryptocurrencies, a US dollar denominated asset, fall in the scope of the Foreign Exchange Management Act. The government should consider including cryptocurrency investments within the ambit of the Liberalised Remittance Scheme (LRS). These holdings can be clubbed investors global assets and attract current taxation regime applicable to global assets.

No backstop: The importance of stating that there is no backstop if cryptocurrencies fail cannot be understated. The government should clearly communicate that cryptocurrencies are not back stopped by the sovereign, they are not a part of any deposit guarantee programmes, there are no guarantees on investments made, and they will not be considered collateral for loans issued by any financial intermediary. Participants of the cryptocurrency exchange should be made aware that they are investing in an asset that has its unique risks vis-à-vis pricing and liquidity. Caveat Emptor.

Regulatory oversight: Treating cryptocurrencies as financial assets that operate under the paradigm of private party contracts, implies that they be regulated by capital markets regulator: Sebi. Sebi has extensive experience of regulating a gamut of financial products, and overseeing exchanges where these instruments trade. Sebi also has experience of developing and managing independent bodies-depository participants that provide transparency, and risk management frameworks for capital market products.

Educate and inform: As it does for financial products such as insurance and mutual funds, the government and the regulator should focus on informing and educating investors on the risks associated with cryptocurrencies.

Wider use of blockchain: Cryptocurrencies are based on the blockchain technology, which is a publicly recorded, verified, accessible, and immutable stack of information. For a country our size and one where the design and structure of the State make accessing information a humongous task, any innovation that helps accessing information more easily should be encouraged.

Blockchain could come handy for digitising and updating land records. The government can create a blockchain, and make information on land records more accessible. Thus, a blanket ban on the most popular product (cryptocurrency) in blockchain technology could deprive us of its other, possibly more impactful, uses.

Let the markets play: Cryptocurrencies are products of free markets. They are an example of voluntary participation by market players, and private capital testing the limits of a new technology. As long as we have ringfenced the stability of the financial system, and clearly communicated that all risk of innovation failing is on the participants, we should let the markets play.

The government and the RBI should focus on ensuring there are no spill overs from private contracts going bust on public markets, and restrict any regulation at this stage only on achieving that.