Saturday

30


October , 2021
Is Crypto an alternative to existing currency
14:24 pm

Rajiv Khosla


Buzz words like crypto, bitcoin, digital currency etc. have revolutionised the financial sector - but in the absence of knowledge either we ignore these words or do not discuss them at all. Besides, governments, financial institutions, broadcast media and financial experts also do not bring them into routine discussions due to which the general public knows very little about them.

What is crypto?

Crypto payment is a new way of producing goods and services through tokens (new technology). In fact, unlike the current buying and selling where people make payments through cash, debit and credit card, Paytm, Google Pay and Phone Pe etc., here payments are made through tokens issued to owners of crypto currency. These tokens are not issued physically but are generated and controlled with block-chain technology and transferred to the crypto buyer’s account. Payments made are then monitored with the help of technology and this information is not shared with anyone. Thus, crypto users succeed in saving tax and the possibility of illegal payments rise manifold. However, the acceptance of crypto depends entirely on the partners who recognise it. There are currently around 5000 cryptocurrencies in circulation around the world, the most prominent being Bitcoin, Dogecoin, Polcadot, Internet Computer, Ethereum and Tether etc.

Is crypto a currency or a medium of investment?

The big question today is whether crypto’s recognition is being established as a currency that can emerge as an alternative to current currency in future or as a medium of investment. Fundamentals of financial/monetary economics reveal that for being accepted as a medium of exchange, a currency needs to be widely accepted and its sovereignty should also be established. Gold, silver, dollar, euro, shares, bonds etc. are recognised everywhere on this basis. Also, they do not carry any apprehensions that they won’t be recognised in future. In contrast, the recognition of crypto currency is under suspicion. In the last decade, since crypto currency was introduced, only one country i.e. El Salvador has recognised Bitcoin as a means of payment and that too in the year 2021. China, Russia, Vietnam, Iran, Bolivia, Colombia and Ecuador have outlawed any transactions in crypto currency. In fact, China has now declared that all transactions of crypto-currencies are illegal, effectively banning digital tokens. The United States, Canada, Australia and few other European countries have taken a softer stance on crypto currencies, but they are also against the non-translucent conduct of transactions through it.

These countries are now in a league to formulate acceptable and legitimate policies to make payments through crypto currency transparent.

In March this year, bitcoin was sailing at as high as $58734 per bitcoin which plunged to $35945 per bitcoin in June 2021. This means that the price of bitcoin has fallen by nearly 35% in just three months. Now it is again thriving and on October 21st it was at its lifetime high at $65972. Had the sovereign currency of a country declined or fluctuated this much, then that country would have gone bankrupt. This shows that crypto currency is incapable of replacing the sovereign currency.  

Some countries consider crypto to be an asset in which investments are made for profits. However, this notion also suffered a major setback when developed countries owing to their massive financial packages, extended as a means to safeguard their economies against the pandemic recession, started witnessing an increase in inflation, once the lockdown got lifted. It prompted the investors to withdraw their investments made in the constricting crypto currencies. Financially literate investors started channelising their withdrawn funds from crypto currencies to other financial instruments that offered either higher interest rates or better income opportunities. This indicates that crypto is not even an effective hedge against inflation. To sum up, crypto has proved incapable of either being proved as a sovereign currency or an effective means of investment. It is nothing more than a model of irregular and unregulated financial services that some countries are planning to make operational with a caveat, while others are not.

Digital Currency - A New Dimension

Worldwide, the central banks are now stepping up their efforts to test the digital currency against private digital currency. Central Bank Digital Currency (CBDC) will be an electronic form of currency currently in circulation by the government, the intrinsic value of which will depend on the strength of any country’s economy. Since betting on crypto and other personal payment sources, money laundering by hawala, virus attacks, etc. cannot be ruled out, the digital currency issued by the central bank is considered to be safer than all crypto currencies. It may be mentioned that digital currency cannot be converted into cash from any bank or ATM.

In developed countries, people’s attraction towards mobile money transfers, credit, debit and prepaid card payments, internet payments besides crypto currencies etc. have forced governments and the central bank to bring CBDC. Research on digital currency is in an advanced stage in some economies such as China, Russia, England, USA and South Korea, but no country has so far been able to implement it successfully. China has dubbed it the “Digital Yuan” and is at the forefront of efforts to change its financial systems vis-à-vis all other countries. An announcement issued by the Central Bank of India on July 22, 2021 stated that the Central Bank Digital Currency is being worked on, and part of it is expected to be operational by the end of this year.

India’s stance on crypto currency

The Indian government has long been confused about crypto currency. In April 2018, the RBI had issued a notice to banks not to trade in crypto currencies. The Internet and Mobile Association of India (IMAI) knocked the Supreme Court’s doors against the notice. The apex court said that while the Indian Parliament had not passed any rules on crypto, the RBI had no legal basis to ban crypto. Accordingly, on March 4, 2020, the Supreme Court lifted the ban on crypto. Statistics show that about 1.5 crore small and large investors in India have invested more than Rs.10,000 crore in crypto.

In March this year, Finance Minister Nirmala Sitharaman issued a statement saying that the use of crypto currency would not be completely banned in the country. The RBI, in its order dated May 31, 2021, strongly directed the banks to take action against the corrupt crypto traders under the anti-money laundering and anti-terrorism regulations. Amid all these developments, the Union Finance Minister has now said that a committee headed by the Secretary of Economic Affairs has submitted its report on crypto currency and the crypto currency bill has been submitted to the Union Cabinet for approval. Financial experts believe that large-scale governments around the world and their central banks do not want their monopoly power over the currency to weaken, so they are imposing restrictions on crypto currencies. On the contrary, due to the sluggish attitude of the Indian government, either this irregular and secret payment currency will now be accepted or those who have invested in it due to the negligence of the government as ordered by the Supreme Court will have to bear the loss of the amount invested. 

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