04 Feb 2018 16:26 IST

Not legal tender. What next?

Cryptocurrencies are not an asset either as regulatory nod is still awaited

The Finance Minister made the first official pronouncement about cryptocurrencies in this Budget, stating clearly that the ‘‘Government does not consider cryptocurrencies as legal tender or coin.” He also stated that the Centre will take all the necessary measures to ensure that cryptocurrencies are not used in financing illegal activities. In the same breath, he has stated that the block chain technology on which cryptocurrencies are built, will be used to develop the digital economy further.

Before we try to decipher what this means for you, a little background first.

Not a currency

Cryptocurrencies are virtual currencies mined by people across the world by solving algorithmic equations. Those mining the currencies also help maintain an open ledger called blockchain, in which all the cryptocurrency transactions are recorded.

These currencies can be purchased by anyone though cryptocurrency exchanges across the world. The currencies purchased are stored in digital wallets on mobiles or computers and used for further trading or for buying goods and services.

Initially, cryptocurrencies, including bitcoins, were looked upon as an alternative to conventional currencies such as rupee, dollar, euro etc. Many had expressed an opinion that given the debasement of the value of conventional currencies due to continued monetary easing, crypto currencies could emerge as a viable alternative. Greater transparency, lack of government control and the digital base were said to favour this shift.

But the fact that cryptocurrencies can be used to buy goods or services across the globe, with no regulatory oversight has led to their misuse in financing drug trafficking and terrorist activities. The volatility in prices of these currencies has also made them useless as legal tender.

In India, there are almost no retail outlets that accept bitcoin or any other virtual currency in lieu of cash. While websites such as Dell, Expedia and Microsoft were taking bitcoins as payment, their usage as currency, is otherwise quite limited. The FM’s statement that cryptocurrencies can not be used as legal tender means that these can not be used to buy any goods and services in India. So don’t continue to harbour the hope that the bitcoins you have been holding can be used to buy a swanky home some time in future. This might never happen, at least in India.

Is it an asset?

Supporters of cryptocurrencies have however been trying to sell the idea that while it is not a currency, it is an asset akin to other assets such as stocks, mutual funds or gold.

When the price of bitcoin, the primary cryptocurrency that accounts for almost 50 per cent of the global traded volume and market cap, hit $10,000 in early December, 2017, interest in this currency surged.

In the next couple of weeks, price hit $19,200 with a speculative frenzy gripping this segment. Prices have since crashed to $9000 over the next one month.

But the soaring value of bitcoin has attracted many naïve investors, with many investing small sums, up to ₹5,000 in to it.

Many exchanges that enable trading in bitcoin and other cypto currencies such as litecoin, etherium and bitcoin cash have cropped up in India in recent times such as Zebpay, Unocoin, and so on.

These exchanges were also doing brisk volumes of ₹50 to ₹100 crore every day. According to the exchanges, those trading on these exchanges come from all parts of the country, including Tier II and Tier III cities.

They are mostly in the age bracket 25 and 40 years in age. Eighty per cent investors are male and 20 per cent, female.

The trouble is that if cryptocurrency trading has to become legal, then these have to be recognised as security or commodity by SEBI. Derivatives on cryptocurrencies can also be allowed only after SEBI gives permission. Further, these cryptocurrency exchanges have to register with SEBI and adhere to the networth, margin and surveillance norms.

As of now, the cryptocurrency exchanges are not governed by either SEBI or RBI. So the gains made in these exchanges are also illegal. It is therefore not possible to set off losses made in these exchanges against capital gains or other speculative income. There were also reports of some banks in India recently disallowing transfer of funds to trading account of cryptocurrency exchanges.

Against this background, it will be better to stay off cryptocurrency trading until SEBI or RBI give the green signal to trade on these exchanges. If these is no regulatory backing, you will have no recourse, if any exchange defaults on payment or shuts down suddenly. Late last year, China ordered shutting down of all cryptocurrency exchanges and initial coin offerings.

It would, therefore, be best to wait for a regulatory nod before investing or trading in cryptocurrencies. These are currently too risky to be treated as even alternative investments.

(The article first appeared in The Hindu BusinessLine.)