THE GIST of Editorial for UPSC Exams : 06 JUNE 2019 (Bitcoin’s credibility problem here to stay (The Hindu))

Bitcoin’s credibility problem here to stay (The Hindu)

Mains Paper 2: Economy
Prelims level: Bitcoin
Mains level: Bitcoin trade system

Context

• 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 system.
• 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 schemes managers.
• 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 dupe investors.

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 of exchange.
• 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 future.
• 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 in Neverland.
• 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 transactions.
• 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 good diversifier.
• 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.

Conclusion

• While crypto assets replacing traditional currency is quite some way away, Indian investors should be provided some way to take exposure to these assets.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

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 Union.
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

Answer: C
Mains Questions:
Q.1) Should Indian investors be allowed to trade in crypto assets? Comment.