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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.