Bitcoin’s credibility problem here to
stay (The Hindu)
Mains Paper 2: Economy
Prelims level: Bitcoin
Mains level: Bitcoin trade system
Bitcoin, the most popular crypto asset, made yet another dramatic
comeback this year with prices rising 147 per cent in the five months to May
2019, when most believed that it would be unable to recover from the
debilitating crash in 2018.
This revival has rekindled the debate about the future of these assets.
There is no denying that bitcoin and other crypto assets, as envisaged
in their original form, have great potential to transform the global payment
But for this system to work effectively, all the users need to be
idealistic, earnest, honest and trustworthy; in other words crypto assets
can replace traditional currency only in a fantasy land.
Types of crypto asset users
There are two other categories of crypto asset users besides the
believers in an alternative currency system who have eroded the credibility
of these assets.
The traders and speculators, who view these crypto assets as a new
avenue to make disproportionately large profits, are behind the sharp
rallies and equally steep plunges.
The other category posing a threat to the existence of these assets
comprises, among others, money launderers, drug traffickers and Ponzi
With almost no supervision, crypto assets provide an easy channel for
this group to move money across borders, pay for drugs, arms, etc., and to
A problem with the ecosystem
The presence of speculators in the ecosystem has made the value of the
crypto assets extremely volatile, rendering them unfit to serve as a medium
In 2016, the value of bitcoin against the dollar increased 110 per cent
and in 2017, the gain was 1,493 per cent. But in 2018 bitcoin price plunged
77 per cent.
This kind of volatility is fine if you are a speculator, but if you are
holding it with the intent of purchasing a property or some other high value
item, it would be difficult to estimate the amount you need to hold, given
the gyrations in price.
Similarly, it cannot be a store of value either, because the large
fluctuations will make it difficult for bitcoin value to remain stable in
The activities of the other set of users money launderers and the like
have brought down the ire of central banks and governments on crypto assets.
Since many investors find it difficult to understand the working of
these crypto assets, many Ponzi schemes have sprung up, promising fixed
returns to investors. Besides these, the crypto trading platforms are mostly
unregulated, posing a risk to investors.
Regulatory action in India
The Reserve Bank of India initially restricted itself to issuing a note
of caution to users of crypto assets.
But the sharp rally towards the end of 2017 and the crash that followed
in early 2018, made the government swing into action.
Finance Minister, Arun Jaitley, declared in the Budget speech of 2018
that crypto assets are not ‘legal tender’.
But trading in cryptos continued on the trading platform even after this
pronouncement. With SEBI unwilling to regulate these ‘exchanges’, investors’
money was at risk.
Following allegations of money laundering through some of these
platforms, the RBI prohibited all banks and NBFCs from servicing individuals
or businesses that deal in or settle crypto assets. This has resulted in
most of the crypto asset trading platforms shutting shop in India.
The right approach
For now, bitcoin and other crypto assets cannot hope to displace
traditional currencies due to extreme volatility in prices.
Besides, the lack of regulation and supervision is their greatest
undoing as users do not have any one to turn to in case of any fraud. With
scamsters abounding, crypto assets can function in the current format, only
Also, a currency created out of thin air, such as bitcoin, can have no
intrinsic value, besides the value imputed by the demand for it.
It can be argued that it is the same with other global currencies. But
there is a way to arrive at the value of a typical currency based on the
external balances of a country, purchasing power, interest rates associated
with the currency, and so on.
Besides, the government of a country is guaranteeing the payment of the
value ascribed to a typical currency.
But in crypto currencies, the creator and the miners are faceless,
nameless people, who will not and do not have the wherewithal to guarantee
the payment in case of defaults.
That said, there is no denying the potential these assets hold to change
the payment system of the future. A via media is possible if central banks
can consider issuing digital currencies that can be used in certain
These could form part of the notes issued for circulation, thus
addressing the other issue with crypto assets the lack of inherent value and
absence of sovereign guarantee. Yes, the transaction cost will be higher in
such digital currencies, but the higher security will compensate this.
A good diversifier
Crypto assets are much in demand of late as an investment avenue. The
MSCI World Index fell from 2072 to 1794 in December 2018 and from 2185 to
2045 in May.
The prices of bitcoin rose 35 per cent in December and 73 per cent in
May. This inverse relation of crypto assets to equity markets makes it a
Both institutional as well as retail demand is emerging for these assets
which are viewed as high-risk, high-reward investments. Many hedge funds and
other alternate investment funds are quite active in these assets.
While crypto assets replacing traditional currency is quite some way
away, Indian investors should be provided some way to take exposure to these
Q.1) Consider the following statements about Joint Maritime Surveillance
system as recently seen in news: 1. It is a joint maritime surveillance system between India and European
2. It will use constellation of low-Earth orbiting satellites to track movement
of ships globally.
3. It provides for a maritime surveillance centre to be set up in India.
Which of the statements given above is/are correct? (a) 1, 2 and 3
(b) 1 and 2 only
(c) 2 and 3 only
(d) 3 only
Q.1) Should Indian investors be allowed to trade in crypto assets? Comment.