Cryptocurrencies a challenge for emerging markets, Cryptocurrency UPSC | IAS Target IAS Target

Cryptocurrencies a challenge for emerging markets, regulation needed: IMF chief economist

03 Jan 2022

Category : Economical Issue

Topic: Cryptocurrencies a challenge for emerging markets, regulation needed: IMF chief economist

Context:

The International Monetary Fund's (IMF) Chief Economist advocates and bans cryptocurrency regulations, saying that banning them is always a challenge as it operates from offshore exchanges.
It's often more attractive to introduce cryptocurrencies and assets into emerging markets than in developed countries.

What is cryptocurrency?

  • Cryptocurrency is a digital investment intended to act as a medium of exchange, with individual records of coin possessions stored in ledgers that exist in the form of computerized databases.
  • Uses potent encryption to safeguard transaction records, control the creation of additional coins, and confirm the transfer of ownership of coins.
  • It does not usually exist in physical form (such as banknotes) and is not issued by central authorities.
  • Cryptocurrencies commonly utilize decentralized rules as opposed to centralized digital currencies and central banking methods.

Cryptocurrency and its Importance:

Corruption Checks: Blocks run on peer-to-peer networks, so keeping money and Tracking the flow of transactions helps prevent corruption.
Time Effect: Cryptocurrencies help save money and time as senders and receivers are entirely on the Internet and run on a mechanism that runs almost instantly with meagre transaction fees.
Cost-effectiveness: Banks, credit cards, payment gateways and other intermediaries receive nearly 3% of the world's total economic output over the US $ 100 trillion for services. Integrating blockchain into these sectors could save hundreds of billions of dollars.

Cryptocurrency Concerns:

State Guarantee: Cryptocurrencies pose a risk to consumers. It is not fiat currency as there is no guarantee of states.
Market Volatility: Due to its speculative nature, it is very volatile. For example, the value of Bitcoin decreased from $ 20,000 in December 2017 to $ 3,800 in November 2018.
Security risk: If a user loses their private key, they will not access their cryptocurrencies (unlike traditional digital bank accounts, resetting this password is not possible).
Malware Threats: In some circumstances, these personal keys are stored by technology service providers (cryptocurrency exchanges or wallets) vulnerable to malware and hacking.
Money Laundering: Cryptocurrencies are more exposed to illegal exercises and money laundering. It is more anonymous than other payment methods because the transaction's public key cannot be linked directly to a person.
Bypassing regulations: Central banks cannot regulate the supply of cryptocurrencies to the economy. This can risk a country's financial stability as its use becomes widespread.
Electricity consumption: This can adversely affect the country's energy security as transaction validation is energy-intensive (total electricity consumption of bitcoin mining in 2018 is for medium-sized economies such as Switzerland, equivalent to total power consumption).
Before advancing the regulatory aspect, we need to weigh the strengths and weaknesses of cryptocurrencies.

Advantages

  • High Profitability-Cumulative Annual Growth Rate of 14.5%
  • Some have cited cryptocurrencies as an alternative hedging tool to gold in the context of their portfolio.
  • Protection against the threat of currency depreciation and rising inflation.
  • Expansion of acceptance and usage.
Cryptocurrency UPSC may hold a heavy weightage in the upcoming examinations in terms of General Knowledge Syllabus.

Disadvantages

  • High volatility and potential for significant losses
  • The number of Bitcoins produced is indeed limited to 21 million at some point.
  • Many other cryptocurrencies are also limited in supply by protocol to bring a growing number of new cryptocurrencies to market.
  • There is nothing to prevent at this point.
  • Bitcoin and several other cryptocurrencies are being accepted by more and more payment platforms. Still, the number of places where cryptocurrencies can be exchanged for authentic goods and services is minimal.
  • Cryptocurrencies can be abused by criminals to deceive careless investors
  • Money laundering, drug trafficking, terrorist financing, gun spread, cybercrime, and avoidance of sanctions are some activities in which cryptocurrencies are vulnerable to misuse.
India is considering a "middle way" of cryptocurrencies. India does not seek a total ban on cryptocurrencies and is not considered feasible given India's significant investment in such products; It is unlikely to use these unregulated cryptocurrencies as fiat currencies.
India has already said no to cryptocurrencies, but how FinTech can help maximize its potential has not yet been considered.

Take into consideration before regulating cryptocurrencies:

Digital currencies
Should they be taxed as an asset, commodity, or capital gain? Countries worldwide have established rules and regulations to include companies trading these cryptocurrencies in their radars.
Securities consist of tradable financial assets. However, it is unclear if cryptocurrencies will fall into the asset category. Governments may need to use existing definitions of security or amend existing laws to include cryptocurrencies in their definition of security.

Conclusion:

Cryptocurrencies have grown tremendously due to lack of regulation. However, there is a risk of over-regulation. There is a misinterpretation in the minds of the authorities that cryptocurrency transactions cannot be traced. This is a complete mistake as all transactions are part of a currency package.
Therefore, authorities at all levels need to be trained to understand and prevent the misuse of cryptocurrencies. Indians are currently hesitant to invest in cryptocurrencies due to the lack of regulation.
However, the government's recent announcement to launch a central bank's digital currency has given little hope to those considering investing in cryptocurrencies. The sooner its use is regulated, the better it will be for the country.