Context:
The Reserve Bank of India (RBI) has recommended a ban on cryptocurrencies citing ‘destabilising effects’ for the country’s monetary and fiscal health.
- China has declared all cryptocurrency transactions illegal, effectively imposing a complete ban, whereas El Salvador has permitted Bitcoin as legal tender.
Relevance:
GS III- Indian Economy
Dimensions of the Article:
- What is the state of cryptocurrency right now?
- What are the RBIs Concerns?
- What are cryptocurrencies?
- How are they different from actual currency?
- How do cryptocurrencies derive their value?
What is the state of cryptocurrency right now?
- In India, there is currently no legislation that addresses cryptocurrency. Owning cryptocurrencies is still legal in India. The Reserve Bank of India’s restriction on the trade of cryptocurrency in India was overturned by the Supreme Court in 2020.
- Since as early as 2013, the central bank has issued warnings against the use of virtual currencies.
What are the RBIs Concerns?
- Because every modern money must be issued by the government or the central bank, cryptocurrencies are not considered to be legal tender.
- While monetary policy and their status as legal tender serve as the foundation for the value of fiat currencies, the value of cryptocurrencies is solely based on speculation and unfounded expectations of high returns, which will have a destabilising effect on a nation’s monetary and fiscal stability.
What are cryptocurrencies?
- Cryptocurrencies are e-currencies that are based on decentralized technology and operate on a distributed public ledger called the blockchain.
- Blockchain records all transactions updated and held by currency holders.
- The technology allows people to make payments and store money digitally without having to use their names or a financial intermediary such as banks.
- Cryptocurrency units such as Bitcoin are created through a ‘mining’ process which involves using a computer to solve numerical problems that generate coins.
- Bitcoin was one of the first cryptocurrencies to be launched and was created in 2009.
How are they different from actual currency?
- The Main difference is that unlike actual currencies cryptocurrencies are not issued by Governments.
- Actual money is created or printed by the government which has a monopoly in terms of issuing currency. Central banks across the world issue paper notes and therefore create money and assign paper notes their value.
- Money created through this process derives its value via government fiat, which is why the paper currency is also called fiat currency.
- In the case of cryptocurrencies, the process of creating the currency is not monopolized as anyone can create it through the mining process.
How do cryptocurrencies derive their value?
- Any currency has its value if it can be exchanged for goods or services and if it is a store of value (it can maintain purchasing power over time).
- Cryptocurrencies, in contrast to fiat currencies, derive their value from exchanges.
- The extent of involvement of the community in terms of demand and supply of cryptocurrencies helps determine their value.
