In the last few months, we have heard that bitcoin has been banned by one country or another.

Reason?

Cryptocurrencies are not a legitimate source of finance.

In 2013, bitcoin was banned in Thailand. In 2017, it became sensational news when China put a blanket on ICOs.

Twist in the Tale

A twist came this week when an anonymous source in the government is rumored to have said that India is not going to put a ban on digital currencies, but rather, treat them as commodities.

Yes, you heard it right.

Also, a finance ministry panel has ordered a study on cryptocurrencies, which may suggest that the government would treat them as financial commodities.

What is the Reason?

Sources from the government state that their main concern is how effectively can trade be regulated and also, to identify the source of money.

Hence, the government wants to allow it as a commodity, which may let them regulate trade better.

Does the Government Have Ulterior Motives Behind Accepting Bitcoin as a Commodity?

1. Tracking Illegitimate Sources of Financing

The committee set by the government in this matter is mostly concerned about tracking investors and funds in order to fight money laundering and illegitimate financing.

2. Make Investors Believe They are not Real Currency

Treating them as commodities will also provide a clear signal to some investors that cryptocurrencies like bitcoins are not real currencies.

Though cryptocurrencies belong to a new class of financial assets, one can welcome them as commodities and not currencies because of their highly volatile prices.

What Happened Recently With Bitcoins?

The latest news carried out this year was a ban by the Reserve Bank of India on the use of bitcoins and cryptocurrency in our country. RBI News on Bitcoin: Banned (But 3 Months Window Given).

Only, the RBI has never used the word ban pertaining to bitcoins.

It has prevented any organization under its purview to deal with any business with regards to cryptocurrency.

Practically, this means banks have to stop deposits and withdrawals to and from Indian rupee on cryptocurrency exchanges.

Why Was RBI Against Cryptocurrency?

1.Risk

The RBI had issued several warnings about scams and risks related to cryptocurrencies. It had also said there would be a crackdown on the illegal use of such cryptocurrencies.

2. Less Intrinsic ValueI

The Indian Finance Ministry criticized Bitcoin and other digital currencies for their lack of intrinsic value.

The Indian Finance Ministry said there is “a real and heightened risk of investment bubble of the type seen in Ponzi schemes, which can result in sudden and prolonged crash exposing investors.”

This was accentuated in the February 2018  budget when Finance Minister Arun Jaitley’s speech caused havoc in the national press and resulted in bitcoin prices plummeting to $8,800, from an all-time high of $19,783 (on December 17, 2017).

Why Couldn’t the Government Ban Cryptocurrency Completely?

We need to understand that it is not possible to ban bitcoins because they are decentralized.

Meaning, they do not run on one server or URL or IP address. These virtual currencies run on multiple nodes that can be owned and run by anyone and are usually spread across the globe.

There is no strategic point from where the government can stop tracing.

The Way Forward

In order to address the government’s concerns around security, Indian cryptocurrency firms have already agreed to cooperate.

They claim that some checks such as robust KYC (know-your-customer) and anti-money laundering guidelines are already in place and they are willing to incorporate more control if found necessary by the government.

Given the developments and rhetoric that has happened this year, the government now has a tough job at hand to present its final draft regulation pertaining to the use of bitcoins in India.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww