NPCI Refuses To Ban Cryptocurrency Trades

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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