From UPSC perspective, the following things are important :
Prelims level : Blockchain technology
Mains level : Paper 3- Adopting and regulating cryptocurrencies
The article highlights the need for coherent cryptocurrency policy and avoid missing the benefits offered by the technology.
Growing dominance of cryptocurrencies
- Created by Satoshi Nakamoto in 2008, Bitcoin is the most popular cryptocurrency.
- It is a fully decentralised, peer-to-peer electronic cash system that didn’t need the purview of any third-party financial institution.
- The Bitcoin, which traded at just $ 0.0008 in 2010, commanded a market price of just under $65,000 this April.
- Many newer coins were introduced since Bitcoin’s launch, and their cumulative market value touched $ 2.5 trillion this May.
- Within a span of just over a decade, their value has surpassed the size of economies of most modern nations.
- The “cryptomarket” grew by over 500 per cent, even while the pandemic unleashed global economic carnage not seen since the Great Depression.
- China’s recent crackdown on cryptocurrency had far-reaching consequences.
- An astounding trillion US dollars were wiped out from the global cryptomarket within a span of 24 hours.
- This kind of volatility mentioned above has always been a concern for regulators and investors alike.
- Law enforcement and taxation agencies have called for a ban, expressing concerns over cryptocurrencies being used as instruments for illicit activities, including money laundering and terror funding.
- In 2018, the Reserve Bank barred our financial institutions from supporting crypto transactions — but the Supreme Court overturned it in 2020.
- Yet, Indian banks still block these transactions, and the government has circulated a draft bill outlawing all cryptocurrency activities, which has been under discussion since 2019.
- The Reserve Bank has announced the launch of a private blockchain-supported official digital currency, similar to the digital Yuan.
- India is increasingly mimicking China’s paradoxical attempt to centralise a decentralised ecosystem.
- India is trying to decouple cryptocurrencies from their underlying blockchain technology, and still derive benefit.
- Unfortunately, this is impractical, and shows a lack of understanding of this disruptive innovation.
- The funds that have gone into the Indian blockchain start-ups are less than 0.2 per cent of the amount the sector raised globally.
- The current central government approach makes it near-impossible for entrepreneurs and investors to acquire much economic benefit.
Need for regulation
- Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams.
- However, regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
- India has not been able to tick these boxes, and we’re in danger of missing out in the global race altogether.
- Any new regulations made in this sector should prevent the misuse of these digital assets without hindering innovation and investments.
- Provisions have to be made to route the value extracted from these networks transparently into our financial system.
- Regulatory uncertainties over India’s position on cryptocurrency highlights the need for clear-headed policy-making.
Consider the question “India was a late adopter in all the previous phases of the digital revolution be it the semiconductors, the internet or smartphones. Do you think the same is happening again in India’s adoption of cryptocurrencies and blockchain technology?”
We are currently on the cusp of the next phase, which would be led by technologies like blockchain. We have the potential to channel our human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. All we need to do is to get our policymaking right.