Introducing India's own cryptocurrency

Why in news?

The government is considering the possibility of introducing India's own cryptocurrency, code-named “Lakshmi”.

What is the need?

• Crypto-currency is a digital currency that allows transacting parties to remain anonymous while confirming the transaction is valid.
• The provision of anonymity is widely misused especially in making cross-border transactions.
• They are widely used as a means for money-laundering, terror funding and drug trafficking, and other illegal activities.
• The increasing share and presence of bitcoins due to speculative trading for return on investments is getting to be a cause of concern.

How can legalising help address this?

• India's attempt to legalise and introduce its own cryptocurrency would give it the status of a fiat currency.
• This formal government authorization could prove to be an alternative to popular non-fiat cryptocurrencies such as bitcoin and ethereum.
• “Lakshmi” would adopt a variation of the blockchain technology employed by bitcoin.
• The technology would help verify every trade and rule out the possibility of dual transactions employing the same coin.
• Also, the new currency would be subject to the same capital account controls as the rupee, in terms of cross-border transactions.
• The money supply at every instant is known and cannot be manipulated, unlike with normal fiat currencies.
• Besides, users would have to submit to the usual know-your-customer norms.

What are the challenges?

• The introduction of such a new cryptocurrency, would make it a legal tender alongside the rupee.
• This requires legislative action of making amendments to the Currency Act.
• Pegging it to rupee would  have an impact on the rupee exchange rate along with the risk of fluctuations.

What is the way forward?

• India can consider legalising and regulating the existing popular bitcoin instead of introducing a new crypto-currency.
• Ex: Japan has recognised bitcoin as a legal currency, with anti-money laundering rules and capital requirements.
• Also, India can use GST as a tool to curb the frenzy over bitcoins by taxing their supply.
• Capital requirements, levy of GST on supply of bitcoins and income tax on the profits made are certain to reduce the speculative effect.
• It is for the RBI, CBDT and GST Council to discuss and formulate and roll out a  policy to deal with bitcoins effectively.

Source: BusinessLine