Context: There has been growing interest in cryptocurrencies since Bitcoin captured the imagination of people. With Facebook in the process of creating its own cryptocurrency (Libra), governments are watching this development as it threatens their monopoly over issuing money.
- Cryptocurrencies are e-currencies that are based on decentralized technology and operate on a distributed public ledger called the blockchain.
- Blockchain records all transactions updated and held by currency holders. It is considered to be a part of the virtual currency group.
- It uses cryptography technology that keeps the transactions secure and authentic.
- Such cryptocurrencies exist and are transacted over dedicated blockchain-based networks that are open to the common public.
- The technology allows people to make payments and store money digitally without having to use their names or a financial intermediary such as banks.
- Cryptocurrency units such as Bitcoin are created through a ‘mining’ process which involves using a computer to solve numerical problems that generate coins.
- Bitcoin was one of the first cryptocurrencies to be launched and was created in 2009.
Benefits: It has been adopted by international trading firms for use in lending, raising funds for other cryptoprojects. It facilitates easier cross-border payments.
- Monopoly of govt.: Central banks on behalf of the government across the world issue paper notes and therefore create money and assign paper notes their value.
- It derives its value via government fiat, which is why the paper currency is also called fiat currency.
No monopoly: In the case of cryptocurrencies, the process of creating the currency is not monopolized as anyone can create it through the mining process.
- Value: Any currency has its value if it can be exchanged for goods or services and if it is a store of value (it can maintain purchasing power over time).
Cryptocurrencies, in contrast to fiat currencies, derive their value from exchanges.
The extent of involvement of the community in terms of demand and supply of cryptocurrencies helps determine their value.
Concerns with cryptocurrencies:
- Anonymity & Illegal activities: Regulators fear that they can be used to circumvent capital controls or launder money, for illegal purchases or other criminal activity. They are used in illicit transactions over the “dark web”.
- The highly speculative nature: The cryptocurrency traded at a peak of $20,000 in mid-2018 before crashing to $3,000 by the end of the year.
- It is not a stable currency that is not backed by any central institution.
- Systemic concerns: The present structure of the global financial system puts central banks at its center, making them an integral part of economies. This happens through the sovereign’s monopoly on issuing fiat currency.
- Cryptocurrencies could destabilize or undermine the control of central banks on their respective economies.
- The RBI circular of 2018 banned banks from dealing with virtual currency exchanges and individual holder. Later, the circular was later struck down by the Supreme Court.
A blanket ban on cryptocurrencies could push the entire system underground and will defeat the purpose. It is now imperative on authorities to find the right “regulatory balance” on cryptocurrencies.
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