In November 2021, the Indian government announced plans to ban most cryptocurrencies in the country under the Cryptocurrency and Regulation of Official Digital Currency Bill 2021. The new legislation pledges to ‘prohibit all private cryptocurrencies in India’ and instead ‘create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India’.
The announcement triggered a significant decline in investor confidence in the country’s digital markets, with the value of the Bitcoin and Dogecoin cryptocurrencies declining by 13% and 15% respectively.
Prior to the announcement, India was one of the fastest-growing cryptocurrency markets globally, with an estimated fifteen to twenty million investors in the country and total cryptocurrency holdings of $5.4bn. Coupled with the global interconnectedness of cryptocurrency platforms, due to its digital nature, tightened regulation in some of the largest global markets will undoubtedly generate shocks across the entire crypto system.
In September 2020, the Central Bank of China announced that it would be making all cryptocurrency transactions in the country illegal, followed by a warning in May 2021 that the state would not protect buyers engaged in the trade of Bitcoin and other cryptocurrencies online.
If other countries follow suit, this presents a significant barrier to cryptocurrency’s mainstream economic success.
There are a range of concerns surrounding cryptocurrencies
The growing uptake of cryptocurrency has been met with significant skepticism. On the one hand, currencies like Bitcoin have been criticized for their ‘bubble behavior’, as the decentralized and deregulated nature of such transactions is conducive to a high degree of volatility.
Moreover, a lack of regulation thus far has led to a high degree of financial crime. According to a report conducted by Action Fraud, £63m ($80.9m) was stolen through fake online investments in 2020, 44.7% of which was related to cryptocurrency investments. This is likely to threaten the mainstream adoption of cryptocurrency going forwards.
The cryptocurrency market has grown exponentially in recent years
Cryptocurrency is a form of digital currency in which transactions are encrypted and conducted via a decentralized system using cryptography, as opposed to a centralized authority.
The concept first originated in the late 1990s and has since gained popularity on an unprecedented scale against a wider backdrop of a financial technology revolution. Today, it is estimated that the cryptocurrency market has a value of $1.7tn, with around 106 million users worldwide, reflecting its potential as a disruptive global economic force.
Bitcoin is by far the largest and most well-known cryptocurrency, with a market capitalization of approximately $1.2tn, as of October 2020. However, over 800 alternative cryptocurrencies currently exist, including Etherum, Ripple, and Litecoin.
The value of the market has been driven by the increased diversification of different cryptocurrency formats, as well as the interest of large financial and investment corporations. For instance, in March 2021, US-based financial institution Morgan Stanley launched three bitcoin investment funds for wealthy customers willing to engage in high-risk activity.
As the market has grown, cryptocurrency is increasingly being adopted as a form of legitimate tender. In November 2021, El Salvador’s government announced plans to build a ‘Bitcoin City’ funded entirely by cryptocurrency, and other Latin American countries such as Venezuela and Paraguay are expected to follow suit.