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Bitcoin price hits all time high – Elon Musk’s Tesla invests $1.5 billion in digital currency

Bitcoin price hits all time high – Elon Musk’s Tesla invests $1.5 billion in digital currency

Relevance:

  • GS 3 || Science & Technology || Fourth Industrial Revolution || Cryptocurrency

Why in the news?

  • The price of the cryptocurrency hit new all-time highs taking it above $47,000 for the first time in its history.
  • Bitcoin’s price was boosted by Tesla’s announcement that it had invested $1.5 billion in the cryptocurrency and would begin accepting it as payment for its electric vehicles in the future.

What is cryptocurrency?

  • A cryptocurrency is a digital currency that can be used to buy goods and services.
  • It uses an online ledger with strong cryptography to secure online transactions.
  • Bitcoin, Cardeno, etc. are just a few examples of Cryptocurrency. More than 6,700 different cryptocurrencies are traded publicly.
  • Satoshi NIkamito, an anonymous online user is said to be the inventor of Bitcoin.

Features of Cryptocurrency:

  • Elimination of a Central Party: Unlike traditional currencies, which are backed by governments and mediated by central financial agencies, Cryptocurrencies are peer-to-peer. Its creation is regulated by the blockchain and eliminates control by a central party.
  • Virtual: Cryptocurrencies only exist online. This means that unlike fiat, it does not have paper or coins.
  • Avoid duplication: It’s not possible to spend one unit of cryptocurrency twice or thrice with various users in an attempt to purchase an item. Cryptocurrencies are thus impossible to be counterfeited.
  • Immutable: Cryptocurrency transactions cannot be reversed. When a transaction occurs on the cryptocurrency network, it is recorded on the blockchain.
  • Secure: Transactions are done anonymously on the blockchain. This means that senders and receivers have a unique set of characters (public key) which they use to send or receive money without the sender or receiver knowing who owns the public key.
  • Near Instant Transaction: Cryptocurrency transactions are processed quickly irrespective of the receiver’s or sender’s location.

Drawbacks of cryptocurrency:

  • Scalability : While the number of digital coins and adoption is increasing rapidly, it is still dwarfed by the number of transactions that traditional payment giants such as VISA and Mastercard processes each day.
  • Slower speed: the speed of a transaction is another important metric that cryptocurrencies cannot compete with traditional payment players until the infrastructure delivering these technologies is massively scaled.
  • Cybersecurity issues: Since these are virtual, cryptocurrencies will be subject to cybersecurity breaches, and may fall into the hands of hackers.
  • Price volatility and lack of inherent value: Price volatility due to speculation, tied to a lack in inherent value, is a major problem, in cryptocurrencies.
  • Lack of regulation: Even if we perfect the technology and get rid of all the problems listed above, until the technology is adopted by governments and regulated, there will be increased risk in investing in this technology.

Regulatory framework of cryptocurrency in India:

  • India doesn’t have a regulatory framework for cryptocurrency at present.
  • In 2018, the RBI had effectively banned crypto transactions after a string of frauds in the months following the demonetisation.
  • The RBI had issued an order asking all regulated entities, such as banks, to stop any dealings related to private cryptocurrencies.
  • Cryptocurrency exchanges responded with a lawsuit in the Supreme Court in September and won respite in March 2020.
  • The government had set up a committee in 2017 led by the then Economic Affairs Secretary Subhash Chandra Garg to study the issues related to virtual currencies.
  • The committee, in its final report made public in 2019, had drafted a Bill to impose a complete ban on private cryptocurrency.

Supreme Court on ban of Cryptocurrency:

  • The Supreme Court had struck down a circular of RBI, which bans financial institutions from enabling deals in digital or cryptocurrencies on a petition filed by the Internet & Mobile Association of India (IAMA)
  • Rationale behind SC’s judgement:
    • Excessive jurisdiction of RBI: The judgement held that while RBI had the power to take note of and deal with virtual currencies, the prohibition was excessive since it cut off the lifeline of otherwise legitimate trade
    • Administratively Imprudent : The Supreme Court held that an outright ban on virtual currencies would be a disproportionate measure by the government since ma­ny less intrusive measures are available.
    • Unconstitutional: The Supreme Court also held that the ban was unconstitutional. It is in violation of the freedom to carry on trade guaranteed by Article 19(1)(g) of the Indian Constitution.

New developments in regulatory regime:

  • The latest stance of India on digital currencies is that it will go ahead with a complete ban on investment in cryptocurrencies, while providing existing investors a transition period to exit their holdings.
  • The government has listed the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, for introduction in the ongoing Budget session of Parliament.
  • The Bill has proposed to create a facilitative framework for creation of the official digital currency to be issued by the RBI.
  • 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.
  • The Ministerial speech of the Finance minister suggested that the government would take a decision based on the recommendations of the 2019 inter-ministerial group report.

Comparison with China:

  • The new proposed Bill is said to be modelled on China’s regulatory regime, which has effectively banned the trading and usage of cryptocurrency, while the government is working on issuing its own virtual currency.
  • China imposed a ban on initial coin offerings in 2017 and asked crypto exchanges to shut down.
  • Since then, the Chinese central bank has also blocked all access to all domestic and foreign cryptocurrency

Way Ahead:

As global companies such as Tesla, and many others are backing digital currencies, there is a need to look at these with renewed view. The regulatory aspects need to be strengthened so that the larger interests of investors and users can be taken care of in case the digital currencies are adopted worldwide.

Model mains Question:

  1. What do you understand by ‘Cryptocurrency’? Discuss the evolution of regulatory framework of digital currencies in India.