Cryptocurrency is a digital asset designed to work as a medium of exchange. It has been a growing matter of discussion among a section of people as there has been an opportunity of financial gain by trading it and using it as a medium of exchange around the world. National and international media have been discussing the virtual or digital currency, and its benefits and drawbacks. Its creation of units and transactions are done through cryptography, which involve knowledge of mathematics, physics, electronics and computer application. That is why it is secure and every transaction is recorded in the system. The entire operation is done through a blockchain technology. It is the master ledger that records and stores all prior transactions and activity, in blocks. As a result, it validates ownership of all units of the currency at any given point in time.
Nature of transaction by cryptocurrency
The first cryptocurrency, the bitcoin, emerged in 2009. After that a lot of cryptocurrency was created day after day. At present, more than 1500 cryptocurrencies around the world are in vogue. Any group of persons can create it provided a number of persons agree to transact with it. The idea is simple as one knows that acceptance of anything as a medium of exchange can be used as a currency. A cryptocurrency can be purchased through Initial Coins Offerings (ICOs), by any currency with high acceptability, like US Dollar, Euro, UK Pound, and Japanese Yen. The value of a cryptocurrency varies with time depending on the velocity of acceptability of it. One example will make the matter clear. The price of one unit of bitcoin, which is the oldest and most circulated cryptocurrency, rose as high as $ 21,000 last December. From that it has come down to $ 7,000 in February and it is close to $ 9,000 recently. So the purchase of cryptocurrency has two immediate purposes. One, it is electronically operated means of exchange around the world and second these are tokens of variable value whence one can have capital gains/losses from it.
Advantages of having cryptocurrencies
The transaction in cryptocurrency is safe and speedy as it is done by blockchain technology. It is also less costly. One important thing, particularly in the present situation is that there is no scope of creating black money. This is because at every step the ownership of money is identified. The emergence of black money arises due to anonymity of cash, that is, not strictly associated with owner. Any person that holds a unit of money is the owner of that. In ordinary way of exchange when one gets money from any source (whether earning through genuine income or bribing, snatching, extorting, etc.) the user only becomes the owner. This is not possible in a world with cryptocurrencies.
Black spots in the cryptocurrency
It is not at all regulated. The Economist (April 28, 2018) reports that on April 06, the Financial Conduct Authority in Britain warned firms offering services linked to crypto-derivatives. In the US also New York state’s attorney- general asked 13 crypto-exchanges for information about their operations, conflict of interest and safeguards for customers. In Taiwan also there have also been a similar move.
It is reported that about 81% of the ICOs has been cheated. That is, about 81% buyers of cryptocurrencies were unable to use them for transaction. That means they have been cheated. On the other hand, only about 8% of cryptocurrencies are being traded on exchanges. Recently an article by Nouriel Roubini, Professor of Economics at Stem School of Business, New York University, published in a national media has expressed his concern about this phenomenon and compared it with the conventional business. He mentioned that in a conventional business one can have a variety of legal rights to dividends to a shareholder, to interest if one is a lender, to a share of the entrepreneur’s assets if the business defaults or becomes insolvent. These rights are enforceable. In the case of good business, business plan, its future risks or financial information, etc. are disclosed to investors. There is a KYC norm, anti-money laundering norm, and restriction on tax evasion norms for business. But most of the ICOs deny investors any legal rights whatsoever. Their issuers are in most cases, anonymous and untraceable.
There are restrictions on purchasing goods in the case of ICOs. The ICOs customers have to convert the currency by buying into a limited pool of tokens in order to purchase a commodity. In normal business customers can buy goods and services with conventional currencies. Roubini points out an interesting example the way how the cryptocurrencies face restriction in buying goods and services. He mentions that a cryptocurrency named Dentacoin, which can be spent only on dental services. But the problem is almost none of the dentists accepts this.
If there are a large number of cryptocurrencies to buy goods it will be very difficulty to judge the relative prices of different or even similar goods and services and to have an idea of the real purchasing power of the currencies. Additionally, the rising value of cryptocurrency can have a limitation. When its value rises very high, above the market value of the goods and services then it will be difficult to sell the digital currency to others.
Can have any future of the digital currency?
Many economists feel there is an urgent need of an international money. But the idea or demand for it not a new. That was raised in the Bretton Woods Conference in the USA in 1944. The Conference was meant for stabilising exchange rates of different currencies and multilateral financial stability. After the outbreak of the Great Depression of the 1930s and World War II a lot of advanced economies and also underdeveloped countries were devastated. To get rid of the severe crisis situation proper institutions were needed to monitor the global economic situation. John Maynard Keynes of the British Treasury had a big role in that conference. Harry Dexter White of the United States Treasury Department also represented in the conference. They began to develop ideas about the financial order of the postwar world. The Conference resulted in the birth of the International Monetary Fund (IMF)
whose main purpose was to promote stability of exchange rates and financial flows.
Gradually, there came into being the Special Drawing Rights (SDR) to promote stability in exchange and control short time financial stress. But in due course the SDR failed to provide proper solution. It is claimed that the imposed laws and regulations of SDR itself was the main cause of this failure. Even the IMF also was unable to do a proper job. As a result US Dollar became the virtual reserve currency. In this system USA is the biggest gainer. But the international currency must not be backed by any currency or any commodity of the world. Then what may be the future of the international currency? Here the idea of something like cryptocurrency may come.
Anup Sinha, a former professor of IIM- Calcutta, thinks that something like cryptocurrency can be used as an international currency provided that can be made in a proper way. Actually that currency must be regulated and all the countries will democratically decide it. The original value of the currency is to be decided democrtically by all the countries. Then the exchange rates with all the currencies with it will be determined. In such a situation there may be a chance of having a really international currency. But the present scenario of cryptocurrency is extremely haphazard. Therefore, it may create a problem in the monetary policies of the central banks of different countries when it will grow bigger.