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Subject: Economics

  • Who is a Registered Valuer?

    A valuation report by a registered valuer is at the heart of the recent controversy surrounding a Rs 4,000 crore share allotment decision by PNB Housing Finance.

    Who is a Registered Valuer?

    • A registered valuer is an individual or entity which is registered with the Insolvency and Bankruptcy Board of India (IBIBI) as a valuer in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017.
    • Under Section 458 of the Companies Act, IBBI has been specified as the authority by the central government.
    • The concept of registered valuer was introduced in the Companies Act in 2017 in order to regulate the valuation of assets and liabilities linked to a company and to standardize the valuation procedure in line with global valuation standards.
    • Before the concept of registered valuer became part of the Companies Act, valuation was done in an arbitrary manner, often leading to question marks over the authenticity of the valuation.

    What does the valuation report comprise?

    • As per the Companies (Registered Valuers and Valuation) Rules, 2017, the valuer should, in his/its report, state 11 key aspects including disclosure of the valuer’s conflict of interest, if any.
    • Among others, it must include the purpose of valuation; sources of information; procedures adopted in carrying out the valuation; valuation methodology; and major factors that influenced the valuation.

    Who can become a registered valuer?

    • An individual needs to clear the Valuation Examination conducted by IBBI.
    • The rules state that an individual who has completed 50 years of age and has been substantially involved in at least ten valuation assignments of assets amounting to Rs 5 crore rupees or more, during the five years preceding the commencement of these rules, shall not be required to pass the Valuation Examination.
    • The individual should, however, have a postgraduate degree in the specified discipline (relevant for valuation of the class of asset for which the registration is sought) and should have at least three years of experience in the discipline thereafter.
    • As of March 31, 2021 there were 3,967 registered valuers in the country. Only 40 of them are registered entities; the rest are individuals.

    For what assets can a registered valuer undertake valuation?

    • A registered valuer can get themselves registered for valuation of assets such as land and building; plant and machinery; and securities and financial assets.
    • They can get registered for valuation of all three classes, and can undertake valuation of only the assets for which they have got the registration.

    Answer this PYQ in the comment box:

    Q.Which of the following statements best describes the- term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (CSP 2017)

    (a) It is a procedure for considering the ecological costs of developmental schemes formulated by the Government.

    (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

    (c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.

    (d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.

  • Bad bank

    The article suggests drawing the lessons from China’s experience with the bad bank as India India gets ready to operationalise a new bad bank.

    Bad bank in China and issues

    • In the aftermath of the Asian financial crisis, China set up dedicated bad banks for each of its big four state-owned commercial banks.
    • These bad banks were meant to acquire non-performing loans (NPLs) from those banks and resolve them within 10 years.
    • In 2009, their tenure was extended indefinitely.
    • Chinese banks can currently transfer NPLs only to the national or local bad banks.
    • One of China’s biggest bad banks is the China Huarong Asset Management Co. Ltd. (Huarong).
    • The Chinese government is its principal shareholder.
    • Recently this bad bank stoked financial stability concerns when it skirted a potential bond default.
    • An incentive to conceal: Recent research at the National University of Singapore and others highlights that Chinese bad banks effectively help conceal Non-Performing Loans.
    • The banks finance over 90 per cent of NPL transactions through direct loans to bad banks or indirect financing vehicles.
    • The bad banks resell over 70 per cent of the NPLs at inflated prices to third parties, who happen to be borrowers of the same banks.
    • The researchers conclude that in the presence of binding financial regulations and opaque market structures bad bank model could create incentives to hide bad loans instead of resolving them.
    • Broadening of tenure: In case of Huarong, the main source of the problem appears to be the gradual broadening of the original mandate and tenure of Chinese bad banks.

    Four lessons for India

    • India is about to operationalise a new bad bank, the National Asset Reconstruction Company Ltd. (NARCL).
    • The Chinese experience holds four important lessons for India.

    1) Finite tenure of bad bank

    • A centralised bad bank like NARCL should ideally have a finite tenure.
    • Such an institution is typically a swift response to an abrupt economic shock (like Covid) when orderly disposal of bad loans via securitisation or direct sales may not be possible.
    • The banks could transfer their crisis-induced NPLs to the bad bank and focus on expanding lending activity.
    • The bad bank in turn can restructure and protect asset value.
    • Over time, it could gradually dispose of the assets to private players.

    2) Narrow mandate

    •  A bad bank must have a specific, narrow mandate with clearly defined goals.
    • Transferring NPLs to a bad bank is not a solution in itself.
    • There must be a clear resolution strategy.
    • Otherwise, allowing a bad bank to exist in perpetuity risks a potential mission creep, which might in the long run threaten financial stability itself.

    3) Diversify the sources of funds for ARC

    • Indian banks remain exposed to these bad loans even after they are transferred to asset reconstruction companies (ARCs).
    • The RBI Bulletin (2021) notes that sources of funds of ARCs have largely been bank-centric.
    • The same banks also continue to hold close to 70 per cent of the total security receipts (SRs).
    • To address this problem, RBI has tightened bank provisioning while liberalising foreign portfolio investment norms.

    4) Resolution of bad loans should be through market mechanism

    • In a steady state, the resolution of bad loans should happen through a market mechanism and not through a multitude of bad banks.
    • In India, the Narasimham Committee (1998) had envisaged a single ARC as a bad bank.
    • Yet, the SARFAESI Act, 2002 ended up creating multiple, privately owned ARCs.
    • As a result, regulations have treated ARCs like bad banks, although functionally they are closer to stressed asset funds registered as Alternative Investment Fund Category II (AIFs).
    • With the setting up of NARCL as a centralised bad bank, the regulatory arbitrage between ARCs and AIFs must end.
    • While AIFs should be allowed to purchase bad loans directly from banks and enjoy enforcement rights under the SARFAESI Act.
    • ARCs should be allowed to purchase stressed assets from mutual funds, insurance companies, bond investors and ECB lenders.
    • ARC trusts should be allowed to infuse fresh equity in distressed companies, within IBC or outside of it.
    • Lastly, the continued interest of the manager/sponsor of ARCs should be at par with AIFs, that is, at least 2.5 per cent in each scheme or Rs 5 crore, whichever is lower.

    Conclusion

    The Chinese experience should nudge Indian policymakers to limit the mandate and tenure of NARCL, while facilitating market-based mechanisms for bad loan resolution in a steady state.

  • GIMAC: India’s first maritime arbitration centre

    The Gujarat Maritime University signed a Memorandum of Understanding (MoU) with the International Financial Services Centres Authority in GIFT City to promote the Gujarat International Maritime Arbitration Centre (GIMAC).

    What is GIMAC?

    • The GIMAC will be part of a maritime cluster that the Gujarat Maritime Board (GMB) is setting up in GIFT City at Gandhinagar.
    • The Maritime Board has rented about 10,000 square feet at GIFT House which is part of the Special Economic Zone (SEZ) area with clearance from the development commissioner.
    • This will be the first centre of its kind in the country that will manage arbitration and mediation proceedings with disputes related to the maritime and shipping sector.
    • The centre is expected to be ready by the end of August.

    Why is such a centre needed?

    • It is required because, for instance, the ship owners belong to a different country and the person leasing the ship is from another country.
    • Any dispute arising between them can be resolved within this centre.
    • There are over 35 arbitration centres in India. However, none of them exclusively deals with the maritime sector.
    • The arbitration involving Indian players is now heard at the Singapore Arbitration Centre.
    • The idea is to create a world-class arbitration centre focused on maritime and shipping disputes that can help resolve commercial and financial conflicts between entities having operations in India.
    • Globally, London is the preferred centre for arbitration for the maritime and shipping sector.

    What is the current status of the project?

    • The process of recruiting staff for the arbitration centre is currently underway.
    • A 10-member advisory board for GIMAC, consisting of international experts and professionals, has been created, which will help in the framing of rules for the arbitration centre and in empanelling arbitrators.

  • National Anti-Profiteering Authority (NAA)

    The National Anti-Profiteering Authority (NAA) has directed GST officials across the country to ensure that the tax rate cuts notified on some COVID-19-related essentials are passed on to consumers.

    What is National Anti-Profiteering Authority (NAA)?

    • The NAA has been constituted under Section 171 of the Central GST Act, 2017 to ensure that the reduction in the rate of tax or the benefit of the input tax credit is passed on to the recipient by way of commensurate reduction in prices.
    • The decision about the formation of the NAA came in the background of a rate reduction of a large number of items by the GST Council in its 22ndmeeting at Guwahati.
    • At the meeting, the Council reduced rates of more than 200 items including goods and services.
    • This has made a tremendous price reduction effect and the consumers will be benefited only if the traders are making the quick reduction of the prices of respective items.
    • There was a concern that traders are reluctant to make price cuts so that they can make a profit.

    Answer this PYQ in the comment box:

    Q. Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    What is profiteering?

    • Profiteering means unfair profit realized by traders by manipulating prices, tax rate adjustment etc.
    • In the context of the newly launched GST, profiteering means that traders are not reducing the prices of the commodities when the GST Council reduces the tax rates of commodities and services.
    • Conventionally, several traders will have a strong tendency to quickly increase the price of a commodity whose tax rate has been increased.
    • But on the opposite side, they may delay the price reduction of a commodity whose tax rate has been cut by the government.
    • A delayed or postponed price reduction helps business firms to make a higher profits. The losers here are the consumers.

    Functioning of NAA

    • The Authority’s main function is to ensure that traders are not realizing unfair profit by charging high prices from the consumers in the name of GST.
    • Traders may charge high prices from the consumers by naming the GST factor.
    • Similarly, they may not make quick and corresponding price reductions when the GST Council makes a tax cut. All these constitute profiteering.
    • The responsibility of the NAA is to examine and check such profiteering activities and recommend punitive actions including the cancellation of licenses.

    Steps were taken by the NAA to ensure that customers get the full benefit of tax cuts:

    • Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of Central Tax to stress upon consumer awareness programs;
    • Launching a helpline to resolve the queries of citizens regarding registration of complaints against profiteering.
    • Receiving complaints through email and the NAA portal.
    • Working with consumer welfare organizations in order to facilitate outreach activities.

  • It’s time for RBI to turn its attention to inflation

    Recently, CPI inflation crossed the RBI’s upper limit of 6%. The article explains the implications of this for various stakeholders.

    How inflation benefits government as a borrower

    • Rising inflation hurts lenders and benefits borrowers.
    • To that extent, the government, one of the biggest borrowers, stands to benefit as high inflation will lower the national debt load in relation to the size of the economy.
    • The Union budget 2021-22 assumed a 14.4 per cent growth in nominal GDP, however, actual growth is set to exceed this.
    • The GDP deflator, which measures the difference between nominal and real GDP, is a weighted average of WPI and CPI, with a higher weightage to WPI.
    • And given that nominal GDP is used as a base for computing the fiscal ratios, all of these will get deflated.
    • The value of past debt and debt servicing costs thus gets pared in real terms as inflation rises.
    • Viewed from a debt dynamics perspective, as the gap between growth and interest rates rises, the debt/GDP ratio falls.

    Impact on other stakeholder

    • That inflation reduces purchasing power and hits private consumption is well known.
    • Overall food CPI inflation (5 per cent) was lower than non-food inflation (7.1 per cent) in May.
    • Lower food inflation, coupled with higher non-food inflation means reduced purchasing power for farmers.
    • Inflation trends, specifically input prices (reflected better by WPI), matter for corporate performance as well.
    • While producers seem to be bearing a part of the burden of rising input costs for now, these could get passed on in greater measure to consumers once demand recovers.
    • Rising inflation reduces returns on fixed income instruments, including bank deposits, which account for over 50 per cent of households’ financial savings.
    • This has already induced a shift to riskier asset classes such as equities, which has ramifications for overall financial stability.

    Way forward

    • The RBI will have to closely monitor inflation trends and calibrate its policy response.
    • It has not intervened on high inflation since the onset of the pandemic and, rightly so, in order to support growth.
    • But the current spell of inflation is over a high base and a continuation of recent trends will persuade it to turn the focus back on inflation.
    •  Given the need for monetary policy to stay accommodative, it might be time to consider other supply-side interventions such as cuts in excise rates on petroleum products to soften the inflation blow.

    Consider the question “As a one of the largest borrowers, how rising inflation benefits the government? How high inflation affects the other sections of the economy?”

    Conclusion

    Given the impact rising inflation has for the braoader sections of the economy, it is time for RBI to turn its attention to inflation.

  • What is AgriStack?

    The Department of Agriculture, Cooperation and Farmers Welfare has entered into an MoU with Microsoft Corporation to start a pilot project in 100 villages to create a ‘Unified Farmer Service Interface’ through its cloud computing services.

    AgriStack

    • The AgriStack is a collection of technologies and digital databases proposed by the Central Government focusing on India’s farmers and the agricultural sector.
    • The central government has claimed that these new databases are being built to primarily tackle issues such as poor access to credit and wastage in the agricultural supply chain.
    • Under AgriStack’, the government aims to provide ‘required data sets’ of farmers’ personal information to Microsoft to develop a farmer interface for ‘smart and well-organized agriculture’.
    • The digital repository will aid precise targeting of subsidies, services and policies, the officials added.
    • Under the programme, each farmer of the country will get what is being called an FID, or a farmers’ ID, linked to land records to uniquely identify them. India has 140 million operational farm-land holdings.
    • Alongside, the government is also developing a unified farmer service platform that will help digitise agricultural services delivery by the public and private sectors.

    Issues with the move

    • Agriculture has become the latest sector getting a boost of ‘techno solutionism’ by the government.
    • But it has, since then, also become the latest sector to enter the whole debate about data privacy and surveillance.
    • Since the signing of the MoUs, several concerns related to sharing farmers’ data with private companies the major one being Microsoft whose owner Bill Gates is said to be the largest private farmland owner in the US.
    • In all the MoUs, there are provisions under which the agriculture ministry will enter into a data sharing agreement with the private companies of the likes of Amazon, Microsoft and Patanjali.
    • The development has raised serious concerns about information asymmetry, data privacy and consent, profiling of farmers, mismanaged land records and corporatization of agriculture.
    • The formation of ‘Agristack’ also implies commercialization of agriculture extension activities as they will shift into a digital and private sphere.

    Why such concerns?

    • The project was being implemented in the absence of a data protection legislation.
    • It might end up being an exercise where private data processing entities may know more about a farmer’s land than the farmer himself.
    • Without safeguards, private entities would be able to exploit farmers’ data to whatever extent they wish to.
    • This information asymmetry, tilted towards the technology companies, might further exploit farmers, especially small and marginal ones.

    What are some major threats?

    • One of the biggest worries is the threat of financial exploitation.
    • We have already seen how microfinance firms have wreaked financial havoc in rural hinterlands.
    • Now, once Fintech companies are able to collect granular data about the farmers’ operations, they may offer them usurious rates of interest precisely when they would be in the direst need for credit.
    • With this, the risk of commodifying agriculture and farmer data ran high.

  • [pib] Guidelines for Other Service Providers (OSP)

    The Union Minister for Electronics & Information Technology has further liberalized the guidelines for Other Service Providers (OSPs).

    Do you remember quaternary and quinary sectors of Economy from NCERTs?

    What are OSPs?

    • These entities are business process outsourcing (BPO) organizations giving Voice based services, in India and abroad.
    • The term Business Process Outsourcing or BPO as it is popularly known, refers to outsourcing in all fields.
    • A BPO service provider usually administers and manages a particular business process for another company.
    • BPOs either use new technology or apply an existing technology in a new way to improve a particular business process.
    • India is currently the number one destination for business process outsourcing, as most companies in the US and UK outsource IT-related business processes to Indian service providers.

    Main features of the liberalized guidelines

    • Distinction between Domestic and International OSPs has been removed. A BPO centre with common Telecom resources will now be able to serve customers located worldwide including in India.
    • EPABX (Electronic Private Automatic Branch Exchange) of the OSP can be located anywhere in the world. OSPs apart from utilising EPABX services of the Telecom Service Providers can also locate their EPABX at third Party Data Centres in India.
    • With the removal of the distinction between Domestic and International OSP centres, the interconnectivity between all types of OSP centres is now permitted.
    • Remote Agents of OSP can now connect directly with the Centralised EPABX/ EPABX of the OSP/ EPABX of the customer using any technology including Broadband over wireline/ wireless.
    • No restriction for data interconnectivity between any OSP centres of same company or group company or any unrelated company.

  • Population decline: Bane and Boon for the economy

    Deflation. A recent (2014) study found substantial deflationary pressures from Japan’s ageing populationThe article argues that a decline in population is not always as worrisome as it is made to be.

    Declining fertility rate

    • China’s fertility rate of 1.3 children per woman in 2020 is well below replacement level, but so, too, are fertility rates in every rich country.
    • In all developed economies, fertility rates fell below replacement in the 1970s or 1980s and have stayed there.
    • In India, more prosperous states have fertility rates below replacement level, with only the poorer states of Bihar and Uttar Pradesh still well above.
    • And while the national rate in 2018 was still 2.2, the Indian National Family Health Survey finds that Indian women would like to have, on average, 1.8 children.
    • In all prosperous countries where women are well educated and free to choose whether and when to have children, fertility rates fall significantly below replacement levels.
    • If those conditions spread across the world, the global population will eventually decline.

    Is the declining population good or bad for the economy

    • A pervasive conventional bias assumes that population decline must be a bad thing.
    • But while absolute economic growth is bound to fall as populations stabilise and then decline, it is the income per capita that matters for prosperity and economic opportunity.
    • It is true that when populations no longer grow, there are fewer workers per retiree, and healthcare costs rise as a percent of GDP.
    • But that is offset by the reduced need for infrastructure and housing investment to support a growing population.
    • A stable and eventually falling global population would make it easier to cut greenhouse-gas emissions to avoid climate change, and alleviate the pressure that growing populations inevitably place on biodiversity and fragile ecosystems.
    • And contracting workforces create stronger incentives for businesses to automate while driving up real wages, which, unlike absolute economic growth, are what really matter to ordinary citizen.
    • In a world where technology enables us to automate ever more jobs, the far bigger problem is too many potential workers, not too few.
    • Even when the Indian economy grows rapidly, its highly productive “organised sector” of about 80 million workers, fails to create additional jobs.
    • Growth in the potential workforce simply swells the huge “informal sector” army of unemployed and underemployed people.

    So, when declining populations turns to be a problem?

    •  Fertility rates far below replacement level create significant challenges, and China may well be heading in that direction.
    • At those rates, population decline will be precipitate rather than gradual.
    • If Korea’s (fertility rate 1.09) birth rate does not rise, its population could fall from 51 million today to 27 million by 2100, and the ratio of retirees to workers will reach levels that no amount of automation can offset.

    Conclusion

    The average fertility rates well below replacement level in all developed countries, and, over time, gradually falling populations. The sooner that is true worldwide, the better for everyone.

  • Why counting of poor matters?

    Counting the number of the poor

    • If the state of the Indian economy is to be repaired, we need to meticulously count the number of the poor and to prioritise them.
    • The World Bank $2-a-day poverty line might be inadequate but it would be a start and higher than the last line proposed by the C. Rangarajan committee.
    • A survey in 2013 had said India stood at 99 among 131 countries, and with a median income of $616 per annum, it was the lowest among BRICS and fell in the lower-middle-income country bracket.
    • Since 2013 three important data points have made it clear that the state of India’s poor needs to be acknowledged if India is to be lifted.
    • The first being, the fall in the monthly per capita consumption expenditure of 2017-18 for the first time since 1972-73.
    • Second is the fall of India in the Global Hunger Index to ‘serious hunger’ category.
    • Third,  health census data or the recently concluded National Family Health Survey or NFHS-5, which had worrying markers of increased malnutrition, infant mortality and maternal health.
    • A fourth statistic, Bangladesh bettering India’s average income statistics, must also be a reason for Indians to introspect.

    Increase in number of poor in India

    •  In 2019, the global Multidimensional Poverty Index reported that India lifted 271 million citizens out of poverty between 2006 and 2016. 
    • Since then, the International Monetary Fund, Hunger Watch, SWAN and several other surveys show a decided slide.
    • In March, the Pew Research Center with the World Bank data estimated that ‘the number of poor in India, on the basis of an income of $2 per day or less in purchasing power parity, has more than doubled to 134 million from 60 million in just a year due to the pandemic-induced recession’.
    • In 2020, India contributed 57.3% of the growth of the global poor.
    • This has thrown a spanner in the so far uninterrupted battle against poverty since the 1970s.
    • Urgent solutions are needed within, and the starting point of that would be only when we know how many are poor.

    Debate on the poverty line

    • In 2011, the Suresh Tendulkar Committee report at a ‘line’ of ₹816 per capita per month for rural India and ₹1,000 per capita per month for urban India, calculated the poor at 25.7% of the population.
    • The anger over the 2011 conclusions, led to the setting up of the C. Rangarajan Committee.
    • In 2014, C. Rangarajan Committee estimated that the number of poor were 29.6%, based on persons spending below ₹47 a day in cities and ₹32 in villages.
    • The National Commission for Enterprises in the Unorganised Sector in 2004, had concluded that 836 million Indians still remained marginalised.
    • The Commission’s conclusion was ignored — that 77% of India was marginalised — emphasising that it was a problem of a much bigger magnitude, than the figure of 25.7% conveyed.

    Why counting the poor matters?

    1) Helps in forming public opinion

    • Knowing the numbers and making them public makes it possible to get public opinion to support massive and urgent cash transfers.
    • The world outside India has moved onto propose high fiscal support, as economic rationale and not charity.
    •  In India too, a dramatic reorientation would get support only once numbers are honestly laid out.

    2) It helps in evaluating success of policies

    •  Recording the data helps to evaluate all policies on the basis of whether they meet the needs of the majority.
    • Is a policy such as bank write-offs of loans amounting to ₹1.53-lakh crore last year, which helped corporates overwhelmingly, beneficial to the vast majority?
    • This would be possible to transparently evaluate only when the numbers of the poor are known and established.

    3) Helps in addressing the concerns of real majority

    • If government data were to honestly account for the exact numbers of the poor, it may be more realistic to expect the public debate to be conducted on the concerns of the real majority.
    • Such data would also help in creating a climate that demands accountability from public representatives.

    4) To gauge the rising inequality

    • India has clocked a massive rise in the market capitalisation and the fortunes of the richest Indian corporates, even as millions of Indians have experienced a massive tumble into poverty.
    • To say that the stock market and the Indian economy are ‘not related’ is ingenuous.
    • Indians must have the right to question whether there is a connection and if the massive rise in riches is not coincidental, but at the back of the misery of millions of the poor.
    • If billionaire lists are evaluated in detail and reported upon, the country cannot shy away from counting its poor.

    Conclusion

    The massive slide into poverty in India that is clear in domestic and international surveys and anecdotal evidence must meet with an institutional response.

  • Why is China targeting 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.

    Background

    • 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.

    Also read:

    Legalizing Bitcoin in El Salvador and takeaways for India