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Governance & Social Justice
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Defence & Security
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Science & Technology
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- GS 3 || Economy || Banking & Financial Sector || Money
Why in news?
- Bitcoin`s price tumbled after Elon Musk said his electric car maker Tesla Inc would no longer accept the cryptocurrency for purchases, citing environmental concerns for the reversal.
- A payment method that exists only in electronic form and is not tangible.
- It can be transferred between entities or users with the help of technology like computers, smartphones, and the internet.
- Although it is similar to physical currencies, digital money allows borderless transfer of ownership as well as instantaneous transactions.
- Also known as digital money and cybercash.
What is Cryptocurrency?
- A cryptocurrency, also known as crypto, is a digital currency that is protected by cryptography. Individual ownership records are maintained in a computerized database, and it is intended to function as a medium of exchange.
- They run on a distributed public ledger called block-chain, which is a record of all transactions updated and held by currency holders.
- The most common cryptocurrencies are Bitcoin, Libra, Ethereum, Ripple, and Litecoin.
- Facebook has announced a digital currency called Libra that will roll out for use in 2020 and allow the platform’s billions of users across the globe to make financial transactions online.
- Works on the concept of Blockchain technology.
- It is a specific kind of DLT that came to prominence after Bitcoin, a cryptocurrency that used it, became popular.
- Cryptocurrencies such as Bitcoin use codes to encrypt transactions and stack them up in blocks, creating Blockchains. It is the use of codes that differentiates cryptocurrencies from other virtual currencies.
Crypto-currencies act as alternative investments
- As it did during the financial crisis of 2012-13, these currencies could enable savvy traders to hedge global volatility.
- A global proposal for central-bank digital currencies has been made, which could enable money to be exchanged between users without the use of a third-party (commercial bank).
- By allowing cryptocurrency, India will be able to participate in this global agreement.
- India must embrace new technologies such as cryptocurrency and blockchain if it is to become a digital economy powerhouse.
Drawbacks of Crypto-currencies
- No backing
- There is concern that cryptocurrencies such as Bitcoin are not backed by any tangible assets. According to some studies, the cost of generating a Bitcoin, which consumes a growing amount of energy, is directly related to its market price.
- Payments aren’t made in a way where they can’t be reversed.
- Cryptocurrencies are not widely known and have limited value in other places.
- Market volatility
- Because of their speculative existence, they are also extremely unpredictable.
- Bitcoin, for example, has dropped in value from USD 20,000 in December 2017 to USD 3,800 in November 2018.
- Sovereign guarantee
- A currency that is not based on any real economic activity, unlike a sovereign currency whose value is based on the relative value of a tradeable basket of goods and services, cannot prima facie inspire much comfort.
- Money laundering
- Crypto-currencies are more susceptible to illegal activity and money laundering than traditional currencies.
- Since the public keys involved in a transaction cannot be explicitly linked to a person, they provide greater privacy than other payment methods.
- Virtual currency is being traded anonymously over the Internet and used for a host of anti-national and illegal activities, from terror funding to the illicit trade of arms and drugs and so on.
Supreme court on Cryptocurrency
- RBI has not come out with a stand that any of the entities regulated by it namely, nationalized banks/scheduled commercial banks/cooperative banks/NBFCs, have suffered any loss or adverse effect directly or indirectly, on account of virtual currencies (VCs)
- Hence, the RBI circular is “disproportionate” with an otherwise consistent stand taken by the central bank that VCs were not prohibited in the country.
- Besides, the court found that the RBI did not consider the availability of alternatives before issuing the circular.
- Besides, the court referred to the Centre’s failure to introduce an official digital rupee despite two draft Bills and several committees.
Bill on Cryptocurrency
- An earlier government bill on cryptocurrency in 2019 reportedly sought to ban cryptocurrency and criminalise its possession in India. However, it was not introduced in Parliament.
- The Bill bans the use of cryptocurrency as legal tender or currency.
- It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency.
India’s Stand on Digital Currency
- The Reserve Bank of India (RBI) had banned cryptocurrencies in 2018.
- Fluctuation in value–Cryptocurrencies are a poor unit of account, as demonstrated by their frequent and high fluctuation in value.
- Terrorism financing-They poses several risks, including anti-money laundering and terrorism financingconcerns (AML/CFT) for the state and liquidity, credit, and operational risks for users.
- From the perspective of consumers, issues linked to cryptocurrencies are heightened by the striking paucity of information on their design, use, and operation, and indications of market manipulation.
- The business models of commercial banks may be seriously disrupted.
- Instead of imposing bans, it would be more practical to launch public awareness campaigns to alert investors to particular risks and to track trades for fraud and scams.
- The RBI must develop a comprehensive regulatory structure to license virtual currency intermediaries such as exchanges.
- India’s financial sector could profit from a thriving cryptocurrency sector.
- As a result, in the face of increasing technological progress in the financial sector, it is important to reinforce India’s supporting regulatory mechanisms, which apply regardless of the type of instrument.
Mains model question
- India’s financial sector could profit from a thriving crypto-currency sector. Talk about it.