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[op-ed snap] Should the RBI issue a digital currency?

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Blockchain technology(read the attached story).

Mains level: Need of a government backed cryptocurrency in India.


News

Context

  1. The Reserve Bank of India (RBI), like many of its global peers, has decided to look into the possibility of issuing a central bank digital currency (CBDC)
  2. However, it It is not obvious yet why the government would launch digital currencies that would make online transactions untrackable

What is a digital currency?

  1. Currency is a subset of a broader economic concept of money
  2. Currency is the “token” which facilitates movement of money, shifting its purchasing power from the current holder to its future holder
  3. Currency has evolved into several forms; from good old cash/coins, to electronic money and, more recently, cryptocurrency
  4. Electronic money represents electronic payments facilitated by banks and payment networks
  5. It lacks physical existence and peer-to-peer exchange being trackable by authorities, thus not being anonymous

Edge over other payment methods

  1. Cryptocurrency addresses the need to enable peer-to-peer anonymous transactions on the lines of cash
  2. However, cryptocurrency provides this anonymity in online/electronic transactions which credit card/debit card/internet banking-based payments cannot

Why do we need a cryptocurrency backed by the government?

  1. Cryptocurrencies have limited social acceptance since they are neither issued by central banks nor are they a liability for anyone—even private entities, forget governments
  2. And thus comes the demand for digital currency which is expected to have the anonymity feature of cash but can be used in electronic transactions, while being backed by government

What societal need will digital currency solve?

  1. Modern fiat money, and by extension currency, is a social contract as much as a legal contract
  2. The success of any mode of payment, or a new currency, depends on wider acceptance by citizens and governments
  3. If society is comfortable with the idea that all electronic payments are trackable by authorities, prima facie, there will be limited demand for cryptocurrencies (this is different from the demand for “investment” purposes)
  4. The limited anonymous peer-to-peer transaction can be done with cash. It is not yet clear how society sees this issue

The way forward

  1. It is reasonable to expect that the technology will evolve to address the operational inefficiencies in the long term
  2. Societies and governments must decide if they should be adopting digital currency or central bank cryptocurrency just because technology can enable it

RBI bars banks from dealing with virtual currencies

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: RBI, virtual currencies

Mains level: Surge in virtual currencies and their effects on economy


News

Stopping virtual currency trading

  1. The Reserve Bank of India (RBI) has asked banks to stop providing service to any entity dealing with virtual currencies, with immediate effect
  2. Regulated entities that are already providing such services should exit the relationship within three months

Introducing its own digital currency

  1. RBI said that it would explore introducing digital currency
  2. RBI has formed an interdepartmental group to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency
  3. The report will be submitted by end-June 2018

[op-ed snap] Bitcoin’s rally may be over

Image Source

Note4students

Mains Paper 3: Economy | Investment model

From UPSC perspective, the following things are important:

Prelims level: Read the attached story

Mains level: This newscard talks about the declining value of the bitcoins, which was expected by many experts. We have written many newscards on bitcoins, recently. Complement this newscard with them.


News

Declining value of bitcoins

  1. Bitcoin has lost almost half its market value in just the last month
  2. The price of bitcoin dropped from its lifetime high of over $19,300 to $9,300

Is there any chance of regaining its earlier value?

  1. Some bitcoin enthusiasts still believe that the currency may only be consolidating to regain
  2. But a look at the price chart of bitcoin, suggests that there could be some valid reasons to get worried about the strength of bitcoin’s price rally
  3. Each time it has tried to rally upwards, the price has failed to go past its previous high

Cautious time for investers

  1. A good time to buy bitcoin was when its price action showed a clear uptrend in price, which was over most of last year
  2. Now, when its price is showing clear signs of reversal, a prudent speculator is likely to keep away if not go short on the digital currency
  3. But this is not to completely rule out the possibility that bitcoin might stage a surprise comeback, as it has in the past after severe price corrections

What can we learn from these trends?

  1. Bitcoin’s present crash should come as no surprise to its sceptics
  2. First, the digital currency, has had negligible acceptance in the real world of commerce
  3. Second, it has always seemed foolish to think that governments,  would be ready to allow private currencies to compete against national currencies
    (Governments want monopoly power over the issuance of currency)

[op-ed snap] The age of crypto-economics

Image Source

Note4studfents

Mains Paper 3: Science & Technology | Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology

From UPSC perspective, the following things are important:

Prelims level: Attached newcards

Mains level: We have done many newscards on the bitcoins and blockchaing technology. But this newscard is somewhat different, as it discusses some unknown facts(both positive and negative) about the technology.


News

What is the issue?

  1. The Finance Ministry recently issued a statement warning against investing in bitcoin and other cryptocurrencies (CCs)
  2. [op-ed snap] The money trail: on the need for investor awarenesss on cryptocurrencies

What are Central Bank Digital Currency (CBDCs)?
Why are they becoming famous?

  1. The world’s top central bankers have finally realised the futility of trying to control CCs
  2. They are preparing to join them, by issuing their own Central Bank Digital Currency (CBDCs)
  3. A CBDC is a complex tool whose functionality is still being researched
  4. Main issue with CBDCs: There is one flaw endemic to any CBDC: the contradiction between the centralising tendency of a CBDC and the decentralising technology that underpins cryptocurrencies

Problem of double spending

  1. In order to be functional, a virtual currency must solve the problem of double spending
  2. Given that anything digital can be copied, how do you prevent someone from spending the same unit of currency twice?
  3. Solution: The creator of the bitcoins has solved the double spending problem by designing a decentralised ledger that bundles data about transactions into blocks, timestamps them
  4. And links each new block of transactions with the previous one in an immutable chain of blocks that are copied, authenticated, and updated continuously, and publicly
  5. This is done on thousands of computers — the blockchain

Bitcoins are inflation proof(for now)

  1. A major reason for which people find bitcoins attractive is its deflationary nature, which makes it inflation-proof
  2. Since there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation

How are cryptocurrencies different from fiat currencies?

  1. The blockchain uses economic incentives (payment in the form of bitcoins or other CCs) to motivate members of the network to do the work of validating every transaction
  2. It does away with the bank’s role as an intermediary, and this is what differentiates CCs from (the digital version of) fiat currencies

Importance of Artificial Intelligence and Internet of Things (IoT) for cryptocurrencies

  1. Two domains that would gain immensely from blockchain applications and CCs are Artificial Intelligence and Internet of Things (IoT)
  2. Since in an IoT world, thousands of devices would need to rapidly and seamlessly transact with each other in real time

The way forward

  1. Of course, as happened in the early days of the Internet, some of the claims being made about blockchain are plain silly
  2. It is true that the technology’s peer-to-peer orientation renders it more democratic
  3. Even the World Wide Web was supposed to be a decentralised, democratic space where everyone was equal.
  4. We all know how that turned out (Net Neutrality Debate in India)

[op-ed snap] The money trail: on the need for investor awarenesss on cryptocurrencies

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: B2B

Mains level: The newscard briefly discusses the concerns of the Indian Government, related to the cryptocurrencies. It also talks about positive side of this technology.


News

Context

  1. The Finance Ministry’s warning to potential investors in bitcoin and other cryptocurrencies

Why has the bitcoin became popular?

  1. The price of bitcoin, the most popular of all cryptocurrencies, not only shot up by well over 1000% over the course of the last year
  2. But the price also fluctuated wildly
  3. One of the main reasons for this volatility is speculation and the entry into the market of a large number of people lured by the prospect of quick and easy profit

Why is government so serious?

  1. Most new users(of the technology) know close to nothing of the technology, or how to verify the genuineness of a particular cryptocurrency
  2. A number of investors, daunted by the high price of bitcoin, have put their money into less well-established and often spurious cryptocurrencies, only to lose it all
  3. Even some private cryptocurrency operators in India have gone on record saying that as many as 90% of the currencies are scams
  4. The use value of cryptocurrencies, both as a medium of exchange and as a store of value, is still being explored

View of other countries on this

  1. Countries like South Korea and the U.S. are intensifying regulatory scrutiny of the market
  2. South Korea, where bitcoin became something of a craze, recently proposed legislation to either heavily regulate exchanges or ban them
  3. Recently in the U.S., a court ordered a popular cryptocurrency platform to hand over information related to 14,000 accounts to the Internal Revenue Service, undermining the anonymity the digital currencies offer

India should be cautious

  1. India must be careful to differentiate between cryptocurrencies and the blockchain technology they are based on
  2. Cryptocurrencies may or may not emerge as a useful tool, especially since the government may not want to encourage the proliferation of anonymous, non-fiat currencies as its anti-black money fight intensifies

Positive side of the technology

  1. But blockchains, basically digital ledgers of financial transactions that are immutable and instantly updated across the world, are worth looking at as aids to ease doing business
  2. They have the potential to greatly streamline payment mechanisms and make them transparent
  3. Also, the Chairman of the Securities and Exchange Board of India, said, blockchain technology is useful and should not as yet have regulatory oversight

Back2basics

Block Chain Technology and Bitcoins

Govt rules out any immediate action against cryptocurrencies

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Cryptocurrencies, bitcoin, Ponzi schemes

Mains level: Rising usage of cryptocurrencies and its effects on economy


News

Not taking any knee-jerk action

  1. Finance minister ruled out any immediate action against cryptocurrencies
  2. The finance ministry is awaiting the report of a panel constituted to deal with cryptocurrencies

Government action

  1. At present, both the government and the Reserve Bank of India (RBI) do not regulate virtual currencies
  2. Last week, the finance ministry warned against investments in virtual currencies, including bitcoin
  3. It likened them to Ponzi schemes as they are not backed by any assets and do not have any intrinsic value
  4. The warning followed a surge of investments in bitcoin because of a spurt in its price
  5. Last month, the income tax department conducted a survey of bitcoin exchanges across India to secure information about transactions, parties involved and bank accounts used

Expert committee to give report on cryptocurrencies

  1. The government constituted the committee, comprising officials of the finance ministry, home ministry and RBI, among others, last year
  2. It is tasked with finding ways to deal with virtual currencies and address issues relating to money-laundering and consumer protection

West Bengal govt mulling ‘blockchain’ to protect records stored online

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Blockchain technology, Wannacry virus, Shadow Brokers

Mains level: Use of emerging technology in improving governance


News

Blockchain technology to protect documents from cyber attacks

  1. The West Bengal government is planning to introduce the blockchain technology to protect its documents from cyber attacks
  2. Earlier this year, computers at some offices of the West Bengal State Electricity Distribution Company Limited were crippled by ‘WannaCry’ virus, a global ransomware
  3. Ransomware is a type of malicious software designed to block access to a computer system until a sum of money is paid

Wannacry Ransomware attack

  1. It infected hundreds of thousands of computers worldwide in May and crippled parts of Britain’s National Health Service
  2. The WannaCry attack struck more than 150 nations in May, locking up digital documents, databases and other files and demanding a ransom for their release
  3. The WannaCry ransomware exploited a vulnerability in mostly older versions of Microsoft’s Windows operating system
  4. Security experts traced the exploitation of that weakness back to the U.S. National Security Agency; it was part of a cache of stolen NSA cyberweapons publicly released by a group of hackers known as the Shadow Brokers

Blockchain technology

  1. Blockchain is an online ledger of digitally recorded transactions which is encrypted in the form of blocks, each of which is connected by a network of computers
  2. We had covered an op-ed related to the potential of blockchain technology previously. You can read it here

A similar news related to Wannacry ransomware has been published in The Hindu with the title ‘US blames North Korea for worldwide WannaCry ransomware attack’. Important points from that news have been included above.

[op-ed snap] Going beyond the problems of bitcoin

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Bitcoin, blockchain, smart contracts,

Mains level: Usage of blockchain technology in various government processes


Context

Bitcoin demand increasing

  1. Bitcoin has dominated headlines in the financial world in recent months with a return of over 1,700% so far this year
  2. Rising prices are attracting more investors

Problems for the formal financial system

  1. If the prices of bitcoin and other such currencies keep going up for a considerable period, the fall could be painful
  • Rising prices will attract more people to start such currencies and invest in them
  • This will increase the contact of virtual currencies with formal finance, and developments in this market would affect the financial system

2. If adoption of bitcoin or other such instruments actually increases significantly, it will make things difficult for central banks

  • A central bank manages the supply and cost of money in the system to attain maximum growth with price stability
  • But in the world of unregulated cryptocurrencies, central banks may find it difficult to manage the level of economic activity
  • Bitcoin, for example, is deflationary by design
  • Greater adoption could also alter the dynamics of capital control, especially in developing economies

3. An increase in the use of such instruments could also affect financial intermediation, investment, and growth

Technology on which bitcoin works has a much wider appeal

  1. Bitcoin is an unregulated cryptocurrency which is administered by a network of users through an open and distributed ledger known as blockchain
  2. Each transaction is verified by the network
  3. Since it is a distributed ledger and no one person or organization controls it, technically, chances of someone manipulating the system are very low

Potential of blockchain technology

  1. Blockchain has the potential to end property-related litigation in a country like India
  2. The government can have a blockchain where ownership and transactions can be tracked easily
  3. Blockchain can make government spending more efficient in areas such as the social sector, as it will increase transparency
  4. The technology is also being tested in the financial sector to settle transactions
  5. This could help reduce costs for financial institutions and the working capital requirement for other firms
  6. The distributed ledger can have other usages such as smart contracts

Challenges posed by blockchain technology

  1. If automated risk management, smart contracts, and similar tools are deployed across a network, cascades of rapid and hard-to-control obligations and liquidity flows could propagate across a network
  2. This interdependence will likely call for creative organizational thinking to address the need for governance and strong risk management

Way forward

  1. The idea of blockchain deserves more attention, as it could potentially transform the way transactions are settled
  2. Blockchain be used to reduce costs and increase efficiency


:( We are working on most probable questions. Do check back this section.







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