UPSC PRELIMS 2020 : Ban Crypto Currency?

Ban Crypto Currency

Topic: Ban Crypto Currency?

Topic in Syllabus: Indian Economy

 

Context

Ban Crypto Currency

  • An inter-ministerial committee (IMC) that was set up to assess the viability of virtual currencies has recommended that India should ban private crypto currencies such as Bitcoin.

 

Concerns:

  • Finance Minister Arun Jaitley said the government doesn’t consider them legal tender.
  • The Reserve Bank of India has repeatedly warned the public of the risks associated with dealing with cryptocurrencies.
  • There have been cases of consumers being defrauded, including in India.

 

What are virtual currencies?

  • A virtual currency is a digital representation of value that can be digitally traded and functions as
    • a medium of exchange, and/ or
    • a unit of account, and/or
    • a store of value,
  • But, unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government.
  • A cryptocurrency is a subset of virtual currencies, and is decentralised, and protected by cryptography.
  • There are block chains which are online registers and through these online registers, people can actually buy these currencies and mine the currencies and use them as instrument of exchange. There are about 9-10 crypto currencies in the world right now.
  • Bitcoins is the largest cryptocurrency in the world because they are computer generated currencies and the codes are completely secret, so nobody masters it.
  • Bitcoin, Litecoin, Ripple, Ethereum, PPcoin, Dogecoin, Coinye, Namecoin etc. are some of the examples of cryptocurrencies.

 

Important terms related to cryptocurrency:

Distributed Ledger Technologies

  • DLT refers to technologies that involve the use of independent computers (also referred to as nodes) to record, share, and synchronise transactions in their respective electronic ledgers. All virtual currencies use DLT.

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

Transactions

  • A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation.

Mining

  • In simple terms, mining is the process of confirming transactions and adding them to a public ledger. In order to add a transaction to the ledger, the “miner” must solve an increasingly-complex computational problem (like a mathematical puzzle).

 

Benefits of cryptocurrencies

  • Ownership:Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties in a transaction, without the need for a trusted third party such as a bank or credit card company
  • Low transaction fee: Fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
  • Identity Protection:Paying with credit/debit cards requires submitting sensitive banking information that could be stolen or compromised. Cryptocurrency can be sent directly to a recipient without any information other than total amount you want to send.
  • Risk-free for sellers: Payments using Cryptocurrency can’t be reversed, which means merchants don’t have to worry about stopped payments. The blockchain makes it difficult for you to be defrauded.

 

Demerits of Cryptocurrency

  • Accessibility:Since cryptocurrency mining and transactions can only happen on network, illiterate people will find it difficult to understand the working mechanism. Also rural areas that do not have access to internet will not be able to perform cryptocurrency transactions.
  • Threat of hacking: using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software
  • Volatility:Cryptocurrency exchange rates can vary greatly, which means the amount you pay or receive one day could be wildly different next day.

 

IMC’s view on DLT and cryptocurrencies?

The first thing to understand is that the IMC recognises the potential of DLT and Blockchain.

  • The IMC accepts that internationally, the application of DLT is being explored in the areas of trade finance, mortgage loan applications, digital identity management or KYC requirements, cross-border fund transfers and clearing and settlement systems.
  • To that extent, it recommends the Department of Economic Affairs (within the Finance Ministry) to take necessary measures to facilitate the use of DLT in the entire financial field after identifying its uses.
  • The IMC also recommends that regulators — RBI, SEBI, IRDA, PFRDA, and IBBI — explore evolving appropriate regulations for development of DLT in their respective areas.
  • The IMC’s view is that it “would be advisable to have an open mind regarding the introduction of an official digital currency in India”.
  • It noted that the RBI Act has the enabling provisions to permit the central government to approve a “Central Bank Digital Currency” (CBDC) as legal tender in India.

Second, scaling up such a currency system over a large population would require crippling levels of energy resources. Currencies such as Bitcoin require humongous processing power.

  • According to a report by the Bank of International Settlement, Bitcoin processing already uses as much energy as is used by Switzerland; it called this an environmental disaster.

Third, the IMC is worried that if private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over the monetary policy and financial stability, as it would not be able to keep a tab on the money supply in the economy

Fourth, the anonymity of private digital currencies make them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult.

Fifth, there is no grievance redressal mechanism in such a system, as all transactions are irreversible.

The inter-ministerial committee believes it is, going so far as to draft a law that mandates a fine and imprisonment of up to 10 years for the offences of mining, generating, holding, selling, dealing in, transferring, disposing of, or issuing cryptocurrencies.

 

Conclusion:

  • An outright ban on cryptocurrency may not be a good idea. If new currency is popular, it would be wise to take note of it, accept the advent of technology, recognize the rise in popularity of cryptocurrency and then introduce safeguard, measures and regulatory structure by which people do not feel that they should have something to fall back on.
  • The government will see opportunities for revenues as large number of people have made gains through cryptocurrency.

 

Sample Question:

Consider the following statements regarding cryptocurrencies.

  1. Crypto Currency is an encrypted centralized digital currency.
  2. These currencies are regulated by central monetary authority.

Which of the statement(s) given above is/are correct ?

a) 1 only

b) 2 only

c) 1 and 2 both

d) Neither 1 nor 2

Answer: d