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NPCI Refuses To Ban Cryptocurrency Trades

Posted on May 7, 2021 by admin1  34

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National Payments Corporation of India (NPCI) has refused to ban cryptocurrency transactions and has instead put an onus on banking institutions whether to ban crypto trades or not.

  • The NPCI runs Unified Payments Interface (UPI) system (instant real-time payment system) in India.

About

  • The NPCI told banks that they must make the decision based on the advice provided by their own legal and compliance departments.
  • NCPI’s decision comes at a time when banks are refusing to accept payments for cryptocurrency deals.
    • As close to half a dozen banks have given directions to payment gateways to blacklist merchants who actively trade cryptocurrencies
  • The National Payments Corporation of India’s decision is based on the ruling passed by the Supreme Court in March 2020.

Cryptocurrency

  • It is a digital currency that can be used in place of conventional money.
  • In cryptocurrencies, cryptography is used to secure and verify transactions. It is also used to control the supply of cryptocurrencies.
    • It is supported by a decentralized peer-to-peer network called the blockchain.
  • First cryptocurrency: Bitcoin, launched in 2009 by Satoshi Nakamoto.

 

Present Status in India

  • 2018: RBI banned banks and other regulated entities from supporting crypto transactions.
  • 2019: Inter-ministerial committee recommended ban all private cryptocurrencies.
  • 2020: Supreme Court struck down the ban as unconstitutional.
    • Court’s observation: RBI has not come out with a stand that any of the entities regulated by it namely, nationalised banks/scheduled commercial banks/cooperative banks/NBFCs, have suffered any loss or adverse effect directly or indirectly, on account of virtual currencies (VCs).
      • Hence, the RBI circular is “disproportionate” with an otherwise consistent stand taken by the central bank that VCs were not prohibited in the country.
      • The court found that the RBI did not consider the availability of alternatives before issuing the circular.
      • The court referred to the Centre’s failure to introduce an official digital rupee despite two draft Bills and several committees.
  • 2021: Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 introduced.
    • Under this plan to ban private digital currencies, favour RBI backed currency.
    • A 3-6 month exit period prior to banning the trading, mining and issuing of cryptos.
  • Finally, Cryptocurrencies, though unregulated, are not illegal in India.

RBI and Digital Currency

  • Exploring DLT (Distributed Ledger Technology) based Central Bank Digital Currency. 
    • Under DLT, details are recorded in multiple places at the same time.
  • Central Bank Digital Currency (CBDC): It will be a legal tender.
    • Can be converted/exchanged at par with similarly denominated cash.
  • Need for Central Bank Digital Currency (CBDC): Need-Innovations are changing the payments space rapidly. 
    • This has made central banks around the world examine whether they could leverage technology and issue fiat money in digital form.

Benefits of Cryptocurrency

  • Inherent security:  Use of pseudonyms and ledger system conceals the identities.
    • And, a transaction done by cryptocurrency is irreversible and cannot be reversed.
  • Low transaction cost: Very low fees and charges for transactions.
  • Lack of interference from the banking system: Outside ambit of banking systems.
  • Lower Entry Barriers: No entry barriers, unlike conventional banking systems.
  • Universal recognition: Lots of cryptocurrencies and acceptable in many nations.
    • The transaction is instantaneous and the transaction can be done across the globe without restrictions.

Concerns/Challenges

  • Security risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
  • Shield to Crime: Used for Illicit Trading, Criminal Activities, & organised crimes. 
  • Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
  • Price Volatility:  Prone to price fluctuations & waste of computing power.
  • Lack Consumer Protection: No Dispute Settlement Mechanisms.

Way forward

  • Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology. 
  • Take a cue from developed countries, have a safeguard, measures and regulatory.

National Payments Corporation of India (NPCI)

  • It is an umbrella organisation for operating retail payments and settlement systems in India.
  • It is an initiative of RBI and the Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007.
  • It has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013).
  • Aims
    • To create a robust payment and settlement infrastructure in India.
    • To provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems.
    • To bring innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.
  • Ten Core Promoter Banks: State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N A and HSBC.

Source: ET

 
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