CAA’s Articulate – Cryptocurrency poses a threat to govt’s monopoly


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.

About cryptocurrencies

  • 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.

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.

Conclusion:

  • 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.

Difference between Actual  currency & Cryptocurrency

Actual currency

  • 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.
  • 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).

Cryptocurrency

  • 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.
  • 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.