Virtual Currencies- Including Bitcoins

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TOPIC: General Studies 3

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Virtual currency or crypto currency is gaining prominence in world. Lot of people are investing more into bitcoins but there is an advisory from the government as well as RBI that people should not put money in bitcoin as it is not a legal currency.

What is virtual currency?

Etymologically, cryptocurrency is a currency that operates through codes using computer technology as its basic platform. There are blockchains 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 cryptocurrencies 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. Since it is computer coded and secure, the dangers of computer currencies credibility being undermined is little. At the same time, it doesn’t come out in open about who has transacted what.

Right now, there are 16 million currencies in operation. But it has the capacity of mining 21 million currencies. Each currency has a value and currently, each bitcoin is around 15000 dollars. The current valuation of bitcoin is around 250 billion dollars which makes it world’s 6^th largest currency in world.

Nobody knows who created it. But a large number of people are using it as currency as well as current asset. The advantage- if one wants to make transaction through cryptocurrency, it wont be easily clear through what transaction it was used. There is no central bank controlling it. Even though its is like a fiat currency, as it is not government’s legal tender, it doesn’t have supervision of a central bank or central government in any part of the world. Thus, there is attraction towards cryptocurrency.

Rise in value- As they are limited in nature- only 21 million cryptocurrency that can be mined. So there is a demand-supply issue and thus the prices are going up.

Government’s response

It has clearly stated that it is not a currency. If it is to be treated as a currency, it has to come under foreign exchange management act. Hence, it can be a capital asset which is prone to bubbles.
The intrinsic value is not backed by any assets. The value seen today- 15000 USD or 20000 USD, it is purely speculative, and not backed by any asset.
Unlike fiat currency, the cryptocurrency is not backed by asset but it is operated on a principle that there is a finite supply. Fiat currency which is issued by the governments, there is no assurance that there will be a finite supply. The government decides how much currency it wants to print according to the need of economy. Thus there is a sharp escalation and deceleration in value of cryptocurrency.

Use in India

There about 6 lakh people in India that are reported to have done dealings in cryptocurrency, mostly in bitcoins. There are 9 exchanges for it and thus it is not something new for the country. However, it is soon expected that the transactions under cryptocurrency will come under close scrutiny from tax law authorities.

Bitcoins are used in transactions which the users don’t want to bring out in open. At present, Bitcoins are used for illicit trafficking purchase of drugs, terrorist activity funding, and also used by some rogue governments for some activities which they don’t want to be formalized. Therefore bitcoins also have nefarious roles to play.

If goods are declared illegal, there is a danger of treating large number of people criminals. How to make sure that there is no smuggling by ensuring that the borders are safe and properly monitoring. At the same time, it will increase the incentive for smuggling by various fiscal and monitory policies. Similarly, bitcoins be looked in a matter that instead of completely debarring it as an activity that is not to acknowledge its presence, it will be better to have better system in place so that bitcoins do not become completely illegal activity but an activity that can be monitored under close supervision and under regulatory structure.

Limitation- There is fear of password hack as bitcoin is stored digitally. The dangers of losing bitcoin is as large as in any other digital transaction.

Way forward

To regulate the bitcoin transaction. There should be a framework which regulates cryptocurrencies and widely publicized so that people know the features of virtual currencies.
If the government believes that the Indian regulators have no clue about what is happening to bitcoin, there is low level of awareness, the government is justified in cautioning the people about to not rush into investing in bitcoin.
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.

Connecting the dots:

Cryptocurrencies are bound to fail as a medium of exchange for its speculative nature and digital existence. Comment.