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Why in news?
- FTX founder Sam Bankman-Fried was found guilty of stealing from customers of his now-bankrupt cryptocurrency exchange in one of the biggest financial frauds on record.
- The prosecutors made the case that he looted $8 billion from the exchange’s users out of sheer greed.
What’s in today’s article?
- Cryptocurrencies – about, opportunities, challenges
- Use of cryptocurrencies in India: Statistics
- Crypto regulation in India
- FTX Scandal
Cryptocurrency
- Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds.
- These currencies operate independently of a central bank.
Growth of crypto ecosystem presents new opportunities
- Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible.
- It allows these services to flow across borders swiftly.
- Bank deposits can be transformed to stable coins that allow instant access to a vast array of financial products and allow instant currency conversion.
- Decentralised finance could become a platform for more innovative, inclusive, and transparent financial services.
Challenges posed by crypto assets
- The rapid growth and increasing adoption of crypto assets also pose financial stability challenges as these are extremely volatile.
- These are much more volatile than equities or commodities or even exchange rates.This volatility is introducing instability in the ecosystem.
- Challenges posed by the crypto ecosystem include
- operational and financial integrity risks from crypto asset providers,
- investor protection risks for crypto-assets,
- inadequate reserves and disclosure for some stable coins.
Use of cryptocurrencies in India: Statistics
- The number of blockchain start-ups surpassed 300 in 2021, with the daily crypto trading volume peaking between $300 -$500 million.
- As per Global Consumer Survey in 2020, India ranks higher than China, United States, Germany and Japan in crypto adoption.
Crypto regulation in India
- India’s stand in initial years of crypto
- India’s stance on cryptocurrency has evolved.
- In 2013, the RBI cautioned users, holders, and traders of virtual currencies, including cryptocurrencies, about the potential risks associated with their use.
- In 2017, the RBI prohibited banks and other regulated entities from providing services to individuals or businesses dealing in cryptocurrencies.
- The circular effectively made it illegal for Indian residents to buy or sell cryptocurrencies.
- However, in March 2020, the Supreme Court of India overturned the RBI’s ban on cryptocurrencies.
- Since then, the Indian government has considered a regulatory framework for cryptocurrencies.
- Focus shifted from banning to regulating
- In 2022, the Ministry of Finance released a report proposing the creation of a digital rupee, a state-backed digital currency, as well as a framework for regulating private cryptocurrencies.
- The report also recommended the establishment of a Digital Currency Regulatory Authority (DCRA) to oversee the use of cryptocurrencies in India.
- Tax on cryptos
- In the 2022 Union budget, Finance Minister announced significant changes to the treatment of virtual assets, including cryptocurrency.
- For the first time, the government officially classified digital assets, including cryptocurrency, as “virtual digital assets.”
- In the proposed tax regime, the government has announced a flat 30-percent income tax on “crypto-assets”.
- Leveraging the G20 for greater regulation
- In February 2023, India announced that it is collaborating with the International Monetary Fund (IMF) and the Group of Twenty (G20) nations to create a regulatory framework for cryptocurrencies.
- G20 Roadmap on Crypto Assets:
- In October 2023, Finance ministers and central bank governors (FMCBG) from G20 nations adopted a roadmap for regulating crypto assets at their meeting at Marrakesh, Morocco.
- The G20 Roadmap on Crypto Assets is a comprehensive strategy for addressing the challenges posed by cryptocurrencies.
- It focuses on regulations rather than an outright ban to prevent crypto assets from destabilising the world economy.
- It has been formulated with inputs from the International Monetary Fund (IMF) and the Financial Stability Board (FSB), both influential bodies in global finance.
FTX scandal
- Recently, the cryptocurrency exchange FTX filed for bankruptcy and its chief executive, Sam Bankman-Fried, resigned.
- As a result, the savings of hundreds of thousands of customers who deposited their holdings on the FTX platform are in jeopardy.
About FTX
- FTX is a cryptocurrency exchange based in the Bahamas.
- The company built its business on risky trading options that are not legal in the United States.
- It was founded by Sam Bankman-Fried in 2019 and lets users buy, sell, hold, and trade cryptocurrency.
- It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT.
Why did FTX run into trouble?
- FTX has a native cryptocurrency token called FTT, which traders use for operations like paying transaction fees.
- In November 2022, a report, based on leaked documents, appeared to show that Alameda Research held an unusually large amount of FTT tokens.
- Alameda Research is a hedge fund run by Bankman-Fried.
- FTX and Alameda are meant to be separate businesses, but the report claimed that they had close financial ties.
- With this revelation, FTT’s price plummeted and traders rushed to pull out of FTX, fearful that it would be yet another fallen crypto company.
- This resulted into liquidity crunch.
Impact on cryptocurrency market
- The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy.
- The fall of FTX, which seemed more stable than other companies, and the pull-out by Binance have jolted the market.
- Binance is also a cryptocurrency exchange.