SYLLABUS: GS MAINS PAPER 3
The past few years have witnessed a dramatic rise in the popularity of crypto currencies around the world, with some boosting them to be the ‘digital currency of the future’.
In 2018, Christine Lagarde, the Managing Director of the IMF at the time, compared its disruptive potential to the internet itself.
● While such proclamations might be premature, it is important to acknowledge their growing importance and ability to reshape global finance and banking and therefore, assess its full impact and potential on the Indian digital economy.
●Over the past year, the price of Bitcoin has multiplied more than six times, and despite its volatile nature it is widely being viewed as an investment “asset” by business as well as retail investors.
●Its growing popularity has been powered by cryptocurrencies’ main value proposition of a decentralised platform which ensures transactions with transparency and strong privacy enabled by blockchain technology.
●This year, overall market value of cryptocurrency exceeding $2 trillion, with estimates suggesting that seven million Indians invest and trade in crypto assets valued at over $1 billion.
●Cryptocurrency is a medium of exchange, created and stored electronically in the blockchain using encryption techniques to control the creation of monetary units and to verify the transfer of funds.
●It is a virtual currency used for financial transactions. It uses blockchain technology for various transactions.
●It has no physical form and exists only in the network.
●Its supply is not determined by a central bank and the network is completely decentralised.
●Bitcoin, Ethereum, Ripple are few examples of cryptocurrencies.
Note- Bitcoin is the oldest and most popular cryptocurrency in the world.
i) Cryptocurrencies can help save money and substantial time for the remitter and the receiver, as it is conducted entirely on the internet, runs on a mechanism that involves very less transaction fees. It is almost instantaneous.
ii) As block run on a peer-to-peer network, it also helps keep corruption in check by accurate tracking the flow of transactions and funds.
● Its exponential growth has resulted in the focus turning to some of the perceived deficiencies in this developing technology.
●One major concern revolves around the volatile nature of encrypto, exacerbated with the rise of ‘alt coins’ which critics point out can often resembles ponzi schemes.
●Cryptocurrencies are also being looked at as a source of money laundering and its inherently decentralised nature making it far harder for authorities to regulate.
●The viability of cryptocurrencies point towards the security risk they entail, as well as the current lack of a solution when it comes to ensuring its effective inheritance.
REGULATION OF CRYPTOCURRENCIES IN INDIA
●When it comes to India, it is important for policymakers to acknowledge the challenges discussed while simultaneously adopting a solution-based approach to any regulatory framework.
● In 2018, the first formal restriction on cryptocurrency transactions was put forward. This circular prevented banks and financial institutions from enabling transaction with virtual currencies and crypto currency platforms.
●In 2019, a parliamentary committee formally recommended against regulating cryptocurrency and pushed it to be banned.
●However, a supreme court decision on this matter in 2020 gave crypto traders and investors great relief, while another encouraging sign was when finance minister acknowledge its growing potential and the need for a ‘calibrated approach’ towards its regulation.
●Despite these positive signs, there has also been recent disruption in the services of cryptocurrency exchanges in India with several banks disabling payment gateways from processing transaction towards cryptocurrency platforms in the country.
●The growth in investment and interest in cryptocurrency has also been reflected in the rise of multiple Indian cryptocurrency trading platforms, led by the likes of CoinDCX and WazirX.
It is advisable for the government to take advantage of the opportunity presented and acknowledge the important role that cryptocurrency is going to play in the future. The NITI Aayog and Centre must get into the act quickly to develop an enabling framework that involves a steady process of in-depth research and stakeholder consultation for regulation of cryptocurrency.