1. Define cryptocurrency. Giving examples of Bitcoin and Libra recently
2. List the economic, security, governance and technological benefits offered by cryptocurrencies
3. Mention the challenges posed by mainstreaming them – governance, security and crime-related
4. Provide suggestions to gain from them while not succumbing to the side effects
A cryptocurrency is a digital or virtual currency that uses cryptography for security. Many cryptocurrencies are decentralized systems based on blockchain technology. The most common cryptocurrencies are Bitcoin, Ethereum, etc.
However, The Inter-Ministerial Committee on Virtual Currency constituted under the Chairmanship of Subhash Chandra Garg has recommended that cryptocurrency cannot be used as legal tender or currency at any place in India.
The Cryptocurrencies are gaining popularity due to benefits it provides which are as follows-
1. Privacy Protection: The use of pseudonyms conceals the identities, information and details of the parties to the transaction – perquisites for privacy enthusiasts.
2. Cost-effectiveness: They have single valuation globally, and the transaction fee is extremely low, being as low as 1% of the transaction amount. Cryptocurrencies eliminate third party clearinghouses or gateways, cutting down the costs and time delay. All the transactions over cryptocurrency platforms, whether domestic or international, are equal.
3. Lower Entry Barriers: Cryptocurrencies lowers entry barriers, they are free to join, high on usability and the users do not require any disclosure or proof for income, address or identity.
4. Alternative to Banking Systems and Fiat Currencies: Cryptocurrencies offer the user a reliable and secure means of exchange of money outside the direct control of national or private banking systems.
5. Fast and efficient: Fund transfer is easier and faster with cryptocurrencies as compared to conventional.
6. Open Source Methodology and Public Participation: A majority of the cryptocurrencies are based on open source methodology, their software source code is publicly available for review, further development, enhancement, and scrutiny.
7. Immunity to Government-led Financial Retribution: Governments have the authority and means to freeze or seize a bank account, but it is infeasible to do so in the case of cryptocurrencies. For citizens in repressive countries, where governments can easily freeze or seize the bank accounts, cryptocurrencies are immune to any such seizure by the state.
8. Counterfeiting: It is created by cryptography and uses blockchain technology and hence is much harder to counterfeit than paper currency.
The associated concerns are as follows-
Despite these numerous advantages and user-friendly processes, cryptocurrencies have their own set of associated risks in the form of volatility in valuation, lack of liquidity, security and many more.
Fluctuation in value: cryptocurrencies has seen very high fluctuation in their values because it depends on supply and demand. This results in fluctuation in the wealth of cryptocurrency holders.
Cryptocurrencies are being denounced in many countries because of their use in grey and black markets. There are two sets of interconnected risks; one being to the growth and expansion of these platforms in the uncertain policy environment, and the other being the risks these platforms pose to the users and the security of the state.
They also have the potential use for Illicit Trade and Criminal Activities and can be used for Terror Financing.
They also have the Potential for Tax Evasion.
Energy consumption: With an increase in mining of cryptocurrencies, there has been an increase in energy consumption as well. It was reported that, on November 2017, the power consumed by the entire bitcoin network was higher than that of Ireland. This will have an impact on power production, consumption, power prices, global warming, etc.
The future and further success of cryptocurrencies depends upon the way regulatory frameworks are devised. Different countries have approached this innovation in different ways, and therefore the regulatory environment remains uncertain. The government will have to take considered steps, given the risks from possible use of cryptocurrencies in terror financing, money laundering and tax evasion.