WHY SHOULDN'T YOU INVEST ALL YOUR MONEY IN CRYPTO & IS DIGITAL RUPEE A CRYPTO?

-Ritika Arora (Editor) , Keerthana G (Editor),Anita George (Senior Columnist)

One always looks for sources to get rich quickly and lesser physical toil. This desire can be driven by herd mentality, bullish market trends, fear of missing out, or generally being engrossed in market trends. Investment seems to be a fair option in this regard, but millennials and Gen Z have taken a leap forward in the trade of currency which is digitalized, entering in the world of crypto. Crypto market although being very popular for its quick returns, is currently subjected to drastic market trends. This generation is keen on sociological thinking of revolutionizing the current monetary system with much greater returns, risk and market exposure. Taking the scenario, it is possible to earn good returns in a short period of time, but the market being largely unregulated comes with the price of huge risk and instability of trends. This article will be discussing whether you should utilize crypto as an investment asset or not, seeing the latest surge in popularity of crypto.

Crypto market started off as a virtual exchange system where individuals can trade their digital or traditional currencies to convert them into cryptocurrencies. Some of the largest crypto exchange websites being Bitfinex, Kraken, Poloniex and GDAX. These exchanges are also regulated by government with investor protection in several countries. With the evolution of this market, peer-to-peer transactions also came into picture where traders can directly trade without involving exchanges as intermediaries. This process brings the investor in direct exposure to the crypto market which comes with more risk driven endeavors but with perks to greater market knowledge and returns. Taking the trend of bitcoin introduced in 2009, as an example the feasibility of virtual currency was proved to be feasible paving the way for speculations and investing in a decentralized currency in a market existing in the virtual space. Since then, more than 6000 crypto assets have been introduced with a splurging number of market participants. Although, volatility in the prices of currencies was observed during the pandemic, unlike the stock market, crypto market (specially Bitcoin) was able to make a quick comeback in the coming months giving a vast amount of potential.

Currently Crypto comprises of young investors who are motivated to earn faster to make an impact. While older investors would hesitate to choose crypto as their portfolio element because of greater risks to online frauds, hacking and lack of physical presence of stocks and the market. Seeing this investor trend, fast growing crypto currencies like bitcoins and Ethereum advertise along with expected time period and the amount of the return to attract investors. This medium has also attracted large number of trend related discussions on reddit and telegram groups influencing more people to invest. You may also spot market aggressive soliciting on social media like initial coin offerings (ICO) to fund a project proposed. Spotting a major difference between an IPO of the stock market and ICO of crypto market is important. IPOs are backed by a large number of legal norms and regulations while ICOs may or may not be backed by commodities or may not be registered or come with investor protection guidelines.

Coming to the core of the discussion, crypto might be a good investing option if you are looking for quicker and greater options but it has long way to go for being an investment asset. While, the market is largely unregulated and full of privacy and security related loopholes, investors might get scammed in fake digital wallets losing their private keys and vital information. Since, crypto has been a popular trend among Gen Z population, its demand and supply can be manipulated by third parties doing large scale promotion of the currency thus, having a major influence on its price, which is bound to affect the value of other currencies as well. Moreover, crypto is not exactly an investment which serves the purpose of long-term savings as markets are

highly volatile with a large amount of risk. Scams and frauds of big returns have been increasing significantly with the increasing amount of crypto popularity.

Another aspect of criticism towards crypto comes from the lack of regulation of the markets, there are still no proper guidelines to protect investors from cyber crime and frauds. Investment in cryptocurrencies comes with a host of risks. Since now, users can exchange currencies keeping their identity hidden, making it very difficult to trace the user. Thus, investors aspiring to invest in crypto should start with only 10-15% of the portfolio initially along with keeping a regular track of the market, ready to speculate returns and losses. You might classify your crypto investment as an alternative investment to balance the risk of your portfolio.

Existence of the currency only in virtual space also poses the risk of device memory being lost making users severely vulnerable to the capacity of their systems. It is important that investors along with acquiring greater exposure to the market, learn the importance of ‘Blockchain Projects’ which are legitimate and promise real returns. Since, the blockchain projects crossed around $700 billion in crypto markets, growth opportunities are tremendous. In the era of digital currency evolution, crypto coins apart from just being collector’s assets have a booming demand with more and more numbers of investors getting involved in the speculative bubble. The profits from the currencies in recent years have undoubtedly proved to be a feasible investing option but in order to turn into an investment asset, the market needs to be regulated along with improved investor protection norms.

The Digital Rupee Manifesto

India had finally opened up to cryptocurrency trading after the end of a long-drawn ban in 2020. This surely led to a drastic surge in the userbase of cryptocurrency in India and took the investors by storm. Of course, we know that crypto also came with its own share of problems, leaving us wondering if there were any safe investments to make. But what if we told you, you could have the benefits of crypto with the stability of fiat? How aware are we about “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” and its implications on the economy?

Before we dive deeper, let us first understand what Digital currency is. Digital currency is a form of currency that exists only in the electronic form – managed, stored or exchanged over the internet. Cryptocurrency, virtual currency, and central bank digital currency (CBDC) are the types of digital currencies. CBDC is the digital form of fiat money issued and controlled by the central bank. Several countries in the world are in the process of designing or already have their central bank digital currencies established. Some of which are Ecuador’s Dinero Electronico, the Swedish eKrona and the Chinese eYuan.

Meanwhile in India, amidst the uncertainty concerning the legality of private cryptocurrencies and also the increasing electronic transactions, the government has been working towards launching a digital currency – Digital Rupee. Among the published list of 20 bills to be introduced during this budget session, “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” is one such bill. The aim of this bill is to provide for the establishment of an official digital currency to be issued by the Reserve Bank of India and to ban all other private cryptocurrencies in India. If this bill becomes a law, India would be the first country to ban all private cryptocurrencies.

The government had authorised an Inter-ministerial Committee (IMC) in November 2017 headed by former Secretary, Department of Economic Affairs Subhash Garg to study the problems associated with virtual currencies and recommend an action plan. In February 2019, the committee advised banning private cryptocurrencies like Bitcoin. The RBI similarly, on various occasions had warned investors against the monetary, legal and security-related risks in virtual currencies. Cryptos were virtually banned in April 2018 until the Supreme Court lifted the ban in 2020.

While the introduction of the Crypto Bill, 2021 in the Parliament is yet to happen, the committee (IMC) and RBI are assessing the financial stability implications and the legal framework for the regulation and issuance of the Digital Rupee or CBDC. Unlike other cryptocurrencies like Bitcoin and Ethereum, the Digital Rupee will be monitored under a framework devised by the Reserve Bank of India. Cryptocurrencies have no intrinsic value and have a decentralised network which means that its value is determined by the market. Considering that, the Digital Rupee that is to be introduced, will not only have an intrinsic value since it is issued and controlled by RBI but also will face reduced volatility. The bill also proposes to make the possession and transaction of crypto illegal. In the meantime, cryptocurrency industry in India has solicited the government to bring forward regulatory code instead of banning crypto since such restrictions may prove detrimental in the long run. The government has remarked that it would take a ‘calibrated’ perspective towards cryptocurrencies.

Infosys Co-founder Nandan Nilekani is of the opinion that ‘digital rupee’ might be launched in India in the next 2-3 years. The governor, Shaktikanta Das has mentioned that the digital rupee remains a work in progress and the central bank is ways to develop a clear, safe, and legal environment using the latest technology, which is vital for a secure and efficient payment system.

The rationale behind why Digital Rupee is not a bad idea

Cryptocurrency surely is a lucrative investment but as mentioned, they come with their own flaws – deregulated, potential risk of security impeachment and high volatility. These issues might have serious repercussions on the economy such as scandals, funding illegal or terrorist groups or sudden crash in the value of the currency. Therefore, this led to the government planning to ban all other form of private crypto currency and introducing and regulated digital currency in India.

The Digital rupees is aimed at reducing the fraudulent activities that crop up in case of private cryptocurrency usage. It also comes in as a planned effort to increase financial inclusion in the country and also ensure that everyone experiences a better payment mechanism while executing transactions. This also is an added benefit to the regulator as they are able to directly implement, supervise and control the monetary policies in line with other policies implemented by the government, as against relying on commercial banks to execute the same. With rise in the number of scandals and NPA’s in banks, the RBI would now be able to track and monitor the various transactions and credit flows across the country, thus being able to curb fraudulent activities at the grassroot level. This also paves way to more cashless transactions, thus enabling the government to maintain a database and help avoid tax evasions.

Issues that leave citizens bewildered

One of the main things to be considered would be the ease of use. It is crucial to ensure that every citizen in the country regardless of geographical location or access to the internet, is able to use the digital rupees for transaction. This means that the digital rupees should support offline transactions and must facilitate multi-medium usage like smartphones, wearable devices, smart cards and so on. Privacy concern stands out as the next issue to tackle. Since the system is regulated and under surveillance by the RBI, it raises a doubt of privacy. But as far as the issue is concerned, the government can regulate what type of data that can be accessed by them and what type of data can be kept private. It is important to strike the right balance and ensure that only required and essential data can be accessed by the government to ensure user privacy. Another issue of concern would be the lack of technological infrastructure to accommodate digital rupee transactions and the costs that need to be incurred to solve this problem. The government is therefore required to work on a solid action plan to tackle these issues before introducing digital rupee in India.

Uncertainty in store for the future?

The exact provisions of the Cryptocurrency Bill 2021 are yet to be announced but it surely has left the current cryptocurrency holders in a state of indignation. With an estimated 1.7 million cryptocurrency users in India, it is unsure if the bill might sanction a complete ban on all private cryptocurrencies or might retain them with restrictions. If they are banned, then what about the investments of the users? Will they be pushed into incurring huge losses and give up their holdings or retain their possessions only at huge penalties imposed by the government? Well, we would have to leave it to the Government to answer these questions for us.