From UPSC perspective, the following things are important :
Prelims level : Cryptocurrencies
Mains level : Issues with Cryptocurrencies
China’s crackdown against cryptocurrencies, which are those that aren’t sanctioned by a centralized authority and are secured by cryptography, is said to have a lot to do with the crashing of the value of cryptocurrencies.
- The price of the world’s most prominent cryptocurrency Bitcoin has more than halved in the last two months after hitting a peak in mid-April.
- The second-most valuable cryptocurrency, Ether, has seen a similar fall from its peak last month.
What is Cryptocurrency?
- A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers.
- This decentralized structure allows them to exist outside the control of governments and central authorities.
- The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
- Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
- Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
- Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.
What has China done?
- In recent weeks, China has reportedly cracked down on crypto mining operations.
- The country has over the years accounted for a large percentage of the total crypto mining activity that takes place.
- In purpose, Bitcoin miners play a similar role to gold miners — they bring new Bitcoins into circulation.
- They get these as a reward for validating transactions, which require the successful computation of a mathematical puzzle.
- And these computations have become ever-increasingly complex, and therefore energy-intensive in recent years. Huge mining operations are now inevitable if one is to mine Bitcoins.
Why is Crypto mining booming in China?
- Access to cheap electricity has made mining lucrative in China.
- According to the Cambridge Bitcoin Electricity Consumption Index, China accounted for nearly two-thirds of the total computational power last year.
For an ‘unregulated’ market
- Actually, there is little change in the policy as far as China is concerned. It first imposed restrictions on cryptocurrencies way back in 2013.
- It then barred financial institutions from handling Bitcoin.
- Four years later, it barred what are called initial coin offerings, under which firms raise money by selling their own new cryptocurrencies.
- This is largely an unregulated market.
What does China want?
- An inter-ministerial committee report in India two years ago noted that in 2017, the government of China also banned trading between RMB (China’s currency renminbi) and cryptocurrencies.
- Before the ban, RMB made up 90% of Bitcoin trades worldwide.
- The fact that cryptocurrencies bypass official institutions has been a reason for unease in many governments.
- Not just that. The anonymity that it offers aids in the flourishing of dark trades online.
- While many countries have opted to regulate the world of cryptocurrencies, China has taken the strictest of measures over the years.
- According to observers, the latest set of measures are to strengthen its monetary hold and also project its new official digital currency.
For a digital Yuan
- China launched tests for a digital yuan in March.
- Its aim is to allow Beijing to conduct transactions in its own currency around the world, reducing dependency on the dollar which remains dominant internationally.