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Health & Medicine
Komal gupta

19/11/21 14:40 PM IST

Cryptocurrencies

In News

Bitcoin and other private cryptocurrencies have been on a bull run recently. Unlike previous rallies, the current rally in bitcoin has witnessed the increasing participation of retail investors in India.

Importance of Fiat currency - like Rupee:

  • Power & Influence: The monopoly that governments (and central banks) possess over the issuance of money is at the root of their power and influence.
  • This allows governments to fund their budget deficits, particularly during times of crises such as the current pandemic when tax revenues have taken an unprecedented hit.
  • It also allows central banks to tinker with the money supply under the mandate of managing aggregate demand in the economy.
  • In essence, monopoly control over money allows governments to indirectly tax citizens by increasing the supply of currencies, thus devaluing them.

Advantages of Private currencies like Bitcoin:

  • Instantaneous settlement across the globe.
  • Privacy of transaction.
  • Limited supply limiting inflation risks.
  • Government cannot devalue the currency - reducing private risks.
  • No costs to central bank.
  • The benefits of free market competition in money were elaborated by economist Friedrich Hayek in The Denationalization of Money.
  • It offers people greater choice in what currencies they choose to use as a medium of exchange.

Problems of Private Crypto currencies in India:

  • Classification Challenge: It cannot be any of the three:
  • Gambling in India is illegal.
  • Legal Tender: Only Rupee is legal in India.
  • Commodity regulation: It would then invite the Capital gains tax.
  • P2P transactions for illegal online market places. Its use in illegal online marketplaces that deal with drugs and child pornography is well-documented.
  • These are neither issued by a central authority nor a central validating agency for transactions.
  • If cryptocurrencies like bitcoin are going to challenge fiat currencies like the U.S. dollar as a medium of exchange, they would essentially be challenging the authority of the government to print and spend.
  • It is highly volatile.

Way Forward

The future of bitcoin and other cryptocurrencies is unlikely to be as bright as many believe it to be.

 

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