News Highlight
On November 11, FTX filed for bankruptcy protection. FTX is one of the world’s biggest cryptocurrency exchanges.
Key Takeaway
- Investors continue to pull funds from digital-asset exchanges despite the FTX’s efforts to reassure markets about their stability.
Cryptocurrency
- A cryptocurrency is a form of digital or virtual currency based on a network that is distributed across a large number of computers.
- It is supported by a decentralised peer-to-peer network called the blockchain.
- Cryptocurrencies don’t have a central issuing or regulating authority.
- Examples: Bitcoin, Ethereum, Ripple
Cryptocurrency and Status in India
- RBI’s Stand
- The Reserve Bank of India (RBI) had earlier banned banks from supporting crypto transactions; however, the RBI order was reversed by the Supreme Court order of March 2020.
- The RBI has repeatedly underlined its strong view against cryptocurrencies.
- Government’s Stand on Crypto
- The Government of India is working on legislation to regulate this sector.
- At the moment, no legislature covers cryptocurrencies in India; however, owning cryptocurrencies are still not illegal.
Advantages of Adopting Cryptocurrencies as a Legal Tender
- Financial Inclusion
- Cryptocurrency and its underlying blockchain technology offer unique benefits, facilitating alternative financial infrastructures for those without access to banking services.
- For example, Nandan Nilekani has also opined that cryptocurrency can be used for financial inclusion if appropriately regulated.
- Easy Fund Transfer
- Fund transfers between two parties will be accessible without needing a third party like credit/debit cards or banks.
- Women Empowerment
- Cryptocurrency can help women retain their earnings in a patriarchal society.
- For example: In countries like Afghanistan, many women are prohibited from working outside the home by male family members and earnings are confiscated. Roya Mahboob, an Afghan entrepreneur and philanthropist, solved this specific problem by paying female contributors to her website with bitcoin. Not only were the women paid, but they could also retain control of their earnings.
- Banking Sector
- Adopting cryptocurrencies and blockchain technology can streamline processes and take banking into the next generation of efficiency and innovation.
- Investment Destination
- There is a limited supply of cryptocurrency – like gold. Moreover, the last few years have seen the price of cryptocurrencies rising faster than other financial instruments.
- Due to this, cryptocurrencies can become a preferred investment destination.
Disadvantages of Adopting Cryptocurrencies as a Legal Tender
- Terror Financing
- Cryptocurrencies have emerged as the most advanced methods of terror financing.
- Macroeconomic Stability
- The increased acceptance of cryptocurrencies would result in effective ‘Dollarization’ of our economy, which would undermine the ability of authorities to control money supply or interest rates, as monetary policy would not have any impact.
- Environmental impact
- Crypto assets are digital assets that are implemented using cryptographic techniques.
- Crypto assets can require considerable electricity usage, which can result in greenhouse gas emissions and additional pollution, noise, and other local impacts on communities living near mining facilities.
- Volatile
- Cryptocurrencies are highly volatile assets and have acquired a popularity for their unregulated nature, and the risk of volatility has established concerns over the potential impact on a country’s macroeconomic stability, especially those with weak socio-economic fundamentals.
Way Forward
- Regulation
- Regulation is needed to prevent serious problems, ensure that cryptocurrencies are not misused, and protect unsuspecting investors from excessive market volatility and possible scams.
- KYC Norms
- By including stringent KYC norms, reporting and taxability, the government can regulate the trading of cryptocurrencies instead of a complete ban on cryptocurrencies.
- Suggestions by IMF
- According to the IMF, if cryptocurrencies are only used for niche purposes, that is, narrow cross-country transfers and remittances that are then rapidly converted back into local fiat currencies, the implications for monetary policy can be contained.
- Awareness Generation
- The general public should be made aware of the potential and drawbacks of cryptocurrency. In addition, they must be educated about scams and fraud so that they are able to make informed decisions.
Content Source: The Hindu