Context:
The Standing Committee on Finance in its first meeting on cryptocurrency met stakeholders who argued that the crypto market must be regulated.
Relevance:
GS-III: Indian Economy (Banking, Money, Monetary Policy), GS-III: Science and Technology (Developments in Science and Technology, Application of Technology in Daily life, Blockchain technology)
Dimensions of the Article:
- What are cryptocurrencies?
- How are they different from actual currency?
- How do cryptocurrencies derive their value?
- Reasons For Adoption of Crypto in India
- RBI’s views on Cryptocurrency
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.
Reasons For Adoption of Crypto in India
- Establishing India as an Integral Part of the New Financial Ecosystem: Large global financial institutions and investors are adding crypto assets to their portfolios. Finance firms, banks, fintech and crypto startups can tap into the huge growth of the industry. Software technology parks (STPs) and special economic zones (SEZs) enabled the IT services boom. Creative ‘crypto export zone’ schemes can incubate clusters of excellence and create world-class financial services firms and unicorns.
- Capitalizing on New Technology and Services Opportunities: Blockchain application development, its scalability, security and analytics are their next growth opportunities. To cater to this demand, there is a need for a large talent pool with expertise in the crypto tech stacks.
- Scope of Financial Innovation: There is a burst of technology innovation and business models around blockchains. There are several interesting applications, but new killer apps will emerge. The impact of new technologies is overestimated in the short term, but underestimated in the long term.
RBI’s views on Cryptocurrency
- The Reserve Bank of India (RBI) informed the Supreme Court that dealing in cryptocurrency will encourage illegal transactions.
- According to the RBI, Cryptocurrencies are “a stateless digital currency” in which encryption techniques are used for trading and these ‘currencies’ operate independently of a Central bank, rendering it immune from government interference.
- An interdisciplinary committee headed by secretary of economic affairs Subhash Garg was set-up in 2017 to examine virtual currencies and recommend the regulatory framework for crypto currencies.
- The RBI had already issued a circular prohibiting use of these virtual currencies.
-Source: The Hindu
