Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about important economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss Cryptocurrency Risks and Regulations. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.
Cryptocurrencies: Creating Digital Anarchy
Context: We must monitor the cryptosphere closely to mitigate the security risks of borderless digital tokens being weaponized sneakily. Pakistan’s recent embrace of cryptocurrencies should make us particularly wary.
Link to the Article: Mint
The world has seen the undeniable rise of cryptocurrencies, a new class of digital instruments that challenge the traditional monopoly of fiat currencies. These virtual assets, born with Bitcoin in 2009, operate on blockchain technology and have since proliferated into thousands of forms, including stablecoins. Their decentralized and borderless nature, while attractive to many, has also made them a new frontier for crime, fraud, and money laundering. As global adoption appears inevitable, countries like the EU and US have moved to regulate these tokens, while India has taken a cautious approach, imposing taxes and a legal framework that treats virtual asset service providers (VASPs) as designated non-financial businesses and professions (DNFBPs).
Cryptocurrencies:
A cryptocurrency is a digital or virtual currency secured by cryptography, making it nearly impossible to counterfeit or double-spend. They made their debut in 2009 with the invention of Bitcoin. Bitcoin, the first of its kind, introduced the world to blockchain technology, an unchangeable internet ledger that tracks and verifies all transfers. This innovation challenged the monopoly of fiat currencies by creating a decentralized system for transactions and a new form of money that could serve as a unit of account, medium of exchange, and store of value.
- Broad Categories:
- Usual Coins: This includes cryptocurrencies like Bitcoin, Ethereum, and Altcoin, along with Utility and Governance tokens. These are typically highly volatile and their value is determined by market demand and supply.
- Stablecoins: These are a class of cryptocurrencies that are typically pegged to a fiat currency (like the US dollar) or a basket of other assets. They are designed to minimize price volatility, but they still pose risks, as the FATF has cautioned about their use by illicit actors.
- Working Methodology: Cryptocurrencies operate on a blockchain, a decentralized, distributed public ledger that records all transactions. Transactions are verified by a network of computers through a process called cryptography. Once verified, a transaction is added to a block, which is then added to the chain of previous blocks, creating a permanent and unchangeable record. This decentralized governance allows for borderless transactions without the need for a central authority like a bank or a government.
- Regulation (Globally and in India):
- Globally: Regulation is evolving. The EU’s Markets in Crypto-Assets (MiCA) Regulation (2023) and the US’s recently enacted GENIUS Act of 2025 are key examples. These regulations aim to provide legal certainty, protect consumers and investors, and prevent money laundering and terror financing. MiCA and GENIUS Act define crypto service providers as financial institutions and subject them to prudential requirements, supervision, and Anti-Money Laundering (AML)/Counter-Financing of Terrorism (CFT) obligations.
- In India: The response has been cautious but progressive.
- RBI’s Ban: In April 2018, the RBI banned banks from providing services to crypto exchanges, citing risks of money laundering and terror financing.
- Supreme Court’s Verdict: In March 2020, the Supreme Court declared the ban unconstitutional, stating the RBI failed to provide evidence of actual harm.
- Taxation: India has a 30% tax on gains from any transfer of virtual digital assets, along with a 1% tax deduction at source (TDS) on crypto transactions.
- Legal Framework: India’s legal framework treats virtual asset service providers (VASPs) as designated non-financial businesses and professions (DNFBPs), requiring them to register with the Financial Intelligence Unit (FIU) and comply with KYC, customer due diligence, and suspicious transaction reporting norms.
- Central Bank Digital Currency (CBDC): The RBI has launched a digital rupee to provide a central bank-issued alternative to private cryptocurrencies.
Concerns Around Crypto:
- Fraud and Theft: The FATF reported a $1.46 billion theft by North Korea. Other major scams like Africrypt, One Coin, Bitconnect, Plus Token Scam, and FTX have caused significant financial losses and undermined trust in the financial system.
- Money Laundering and Terror Financing: Cryptos’ decentralized nature makes them attractive to illicit actors for money laundering and terror financing. The FATF has highlighted the use of stablecoins for these purposes, as well as for drug trafficking, gambling, and layering of funds.
- No Underlying Asset: The key global concern is that cryptos are “not backed by an underlying asset or currency”, making them vulnerable to price manipulation and systemic collapse. Stablecoins, despite their design, also pose similar risks.
- Impact on Monetary Policy: The potential proliferation of crypto use could challenge central banks’ ability to control the money supply and set monetary policy.
- Pakistan’s Crypto Stance: A Reuters report mentioned that Pakistan, a country with a history of being on the FATF watch-list, was planning to mine Bitcoin and integrate it into its financial system. This raises security concerns for India, given Pakistan’s history of “stoking terror in India”.
- Inability to Ban: The FATF has cautioned that banning cryptos does not insulate a country from risks, given the interconnected global nature of the industry and the challenges in monitoring decentralized finance (DeFi) arrangements.
Analysis of the Article: Decoding the Crypto Issue
The article decodes the crypto issue by framing it as a new reality that poses significant challenges, particularly for financial security and stability, and argues that a proactive, well-regulated approach is necessary for India.
1. The Inevitable Rise of Cryptos and the Proliferation of Crime:
- Growth of the Market: The global crypto market is growing fast, with its value expected to reach $1.8 trillion in 2025 and grow at an annual 11.7% through 2030. The number of users is anticipated to grow from 617 million in 2024 to 992.5 million by 2028.
- New Frontier for Crime: With this proliferation, cryptocurrencies have “unmistakably arrived on the crime scene,” as evidenced by the $1.46 billion theft by North Korea and other major scams.
- Banking and Government Integration: The use market is dominated by trading (32%) and retail/e-commerce (27%), but the banking industry and governments also account for significant shares of 18% and 11%, respectively, suggesting banking systems are already integrating cryptos as modes of payment.
2. The Indian Response and Global Best Practices:
- India’s Cautious Approach: India’s response has been one of careful calibration. After the Supreme Court overturned the RBI’s ban, India moved to a regulatory framework that imposes a high tax on gains and requires VASPs to comply with AML/KYC norms.
- FATF’s Positive Evaluation: India was rated as “largely compliant” with technical requirements for virtual assets in its 2023 FATF Mutual Evaluation.
- Learning from Global Regulations: The article references EU’s MiCA and US’s GENIUS Act as examples of regulations that aim to provide legal certainty and mitigate risks. These regulations define crypto service providers as financial institutions and subject them to prudential requirements and supervision.
3. The Path Forward for India: Monitoring and Ring-Fencing:
- Ban is Not Feasible: The FATF has cautioned that a ban is not a foolproof solution given the interlinked global nature of the crypto world. Therefore, a crypto ban is “no longer feasible” for India.
- Key to Security: For India, the key to security lies in “being ahead of the curve on mitigating the risks of emerging technologies in general and ring-fencing our financial system in particular”.
- Trojan Horse Risk: India must closely monitor the crypto space to “prevent digital tokens from being deployed against India as a Trojan Horse”. This is particularly relevant in light of Pakistan’s plans to mine Bitcoin, given its history of stoking terror in India.
- Need for Proactive Supervision: The article warns that merely establishing a regulatory framework may not be enough without “supervisory and enforcement action”.
In conclusion, the article argues that the global proliferation of cryptocurrencies is an irreversible trend, and India’s cautious but progressive approach to regulation is a prudent strategy. The key challenge for India is to move beyond a piecemeal response to a proactive, comprehensive strategy that can effectively ring-fence its financial system from the significant risks of fraud, money laundering, and terror financing, particularly as crypto becomes a new tool for state and non-state actors.