Thursday, Dec 01, 2022

Private Cryptocurrencies: Why Bitcoin, Ethereum Investors Need Not Panic

Private Cryptocurrencies: Why Bitcoin, Ethereum Investors Need Not Panic

According to some definitions, most of the larger cryptocurrencies, including Bitcoin and Ethereum, may not come under the ambit. However, there are indications that all cryptos not issued by the government may be banned.

With the government issuing a notification regarding the introduction of a new cryptocurrency bill in the Winter Session of Parliament and making it clear that The Cryptocurrency and Regulation of official Digital Currency Bill, 2021, may ban all private cryptocurrencies, existing investors are a worried lot.

Giving details of the bill, the notification said, “To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”

While more clarity is awaited from the government on what this means for investors, Outlook Money spoke to a few experts to understand the difference between private and public cryptocurrencies and what should investors do in the current situation.

Private Vs Public Cryptocurrencies

Whatever cryptocurrency is not issued by the government, can be considered private, though there is no clear definition of private cryptocurrency, says Sathvik Vishwanath, co-fouder, CEO, Unocoin, a cryptocurrency exchange.

The ministry of finance in its 2019 report, Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies, recommended that “all private cryptocurrencies, except any cryptocurrency which may be issued by the government, be banned in India”. If the recommendation has to be extrapolated, the government may categorise any cryptocurrency that is not issued by the government as a private cryptocurrency. Building its argument against private cryptocurrencies, the report added, “The private cryptocurrencies are inconsistent with the essential functions of money/currency, hence private cryptocurrencies cannot replace fiat currencies.”

The analysis of Sharat Chandra, a blockchain and emerging tech evangelist, is somewhat similar. “Digital currencies like Central Bank Digital Currencies (CBDCs) issued by central banks and backed by the sovereign are most likely to be termed as ‘public’ crypto coins,” he says. Any digital currency which is not backed by government can be loosely termed as private coins, he adds.

However, according to some definitions, the bigger cryptocurrencies that operate on a public ledger may not come under the ambit. The transactions on the blockchain are traceable in cryptocurrencies with a public ledger. For example, the biggest coins by market value, Bitcoin and Ethereum, transact on a public ledger, which means the transactions can be traced, though the identity of the users remains anonymous. However, some other cryptocurrencies such as Monero and Dash could be referred to as private cryptocurrencies as transactions on these is not traceable.

Sidharth Sogani, founder and CEO of CREBACO, a cryptocurrency research and analysis firm, explains further, “Private crypto means owned and operated by an individual or entity. Bitcoin is not private, it’s decentralised and is available on a public ledger. Private currencies are anyway banned in India, so private cryptocurrencies will also be banned in India. But crypto will be regulated mostly as an asset or a commodity, it won’t be considered as a currency.”

The industry is awaiting clarity on the classification of various types of tokens or coins based on the purpose they serve.

What Should Cryptocurrency Investors Do?

It is still unclear about what will happen to existing cryptocurrency investors, but experts advise against any knee-jerk reaction. Moreover, if the bigger cryptocurrencies, including Bitcoin and Ethereum, are not classified as ‘private’, most investors may be safeguarded.

In fact, Sogani says that there is nothing to panic as the statement is taken from the February 2021 bulletin put out by the government. “I don’t think there will be an outright ban. Even if there is anything, the government will give enough time to the investors,” he adds.

Chandra advises investors to wait for further clarity and not panic and liquidate their holdings. “Investors should wait until the contents of the bill are out in the public. It will be irresponsible to take any action merely on speculation of an impending ban. The bill, once tabled on the floor of Parliament, will go through the established protocols of discussion. There is no point jumping the gun,” says Chandra.

Ajeet Khurana, a crypto advisor, former CEO of Zebpay and former head of Blockchain and Crypto Assets Council (BACC), India, says since cryptocurrencies are digital assets, they can’t really be wiped out. “Cryptocurrency is a digital asset. It is not a physical asset such as gold, which could be confiscated by a government. In fact, even digital assets such as a file or a document or an image might be located on the device of the owner. Unlike that, ownership of cryptocurrency is recorded on the blockchain, and has innumerable copies distributed on computers around the world. So it is not merely a matter of copying or deleting a file,” says Khurana.

The cryptocurrency landscape is mired with risks and volatility. With lack of clarity on the impending regulation and the way forward in India, retail investors, who are not invested already, should stay away, at least for now.