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The Age of Crypto-Economics : Civil Services Mentor Magazine: FEBRUARY - 2018

::The Age of Crypto-Economics::

Promotion of Digital economy is in integral part of Government’s strategy to clean the system and weed out corruption and black money. The earlier initiatives of the Government to promote financial inclusion and the Jan Dhan-Aadhaar-Mobile (JAM) trinity were important precursor. However, RBI has cautioned the users, holders and traders of Virtual Currencies (VCs), including Bitcoins about the potential financial, operational, legal customer protection and security related risks that they are exposing themselves to. The creation, trading or usage of VCs including Bitcoins, as a medium for payment have not been authorised by the Reserve Bank of India.
There has been a phenomenal increase in recent times in the price of Virtual ‘Currencies’ (VCs) including Bitcoin, in India and globally. The VCs don’t have any intrinsic value and are not backed by any kind of assets. The price of Bitcoin and other VCs therefore is entirely a matter of mere speculation resulting in spurt and volatility in their prices. There is a real and heightened risk of investment bubble of the type seen in ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes. VCs are stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack etc. which may also result in permanent loss of money. As transactions of VCs are encrypted they are also likely being used to carry out illegal/subversive activities, such as, terror-funding, smuggling, drug trafficking and other money-laundering Acts.

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VCs are not backed by Government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as ‘Coins’. There is however no physical attribute to these coins. Therefore, Virtual ‘Currencies’ (VCs) are neither currencies nor coins. The Government or Reserve Bank of India has not authorised any VCs as a medium of exchange. Further, the Government or any other regulator in India has not given license to any agency for working as exchange or any other kind of intermediary for any VC. Persons dealing in them must consider these facts and beware of the risks involved in dealing in VCs.
There are various problems with the virtual currencies. Important among them is the how do you prevent it from double spending. Given that anything digital can be copied, how do you prevent someone from spending the same unit of currency twice? The blockchain uses economic incentives (payment in the form of bitcoins or other CCs) to motivate members of the network to do the work of validating every transaction. It does away with the bank’s role as an intermediary, and this is what differentiates CCs from (the digital version of) fiat currencies. Other problem with the virtual currency is that it has no material basis of value, it is purely speculative asset.
However there are great many positives of the bitcoins ass well, important among them is that it has deflationary in nature. The reason why bitcoins are deflationary are that they are limited in number there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation.
Bitcoin is only one of the cryptocurrencies which is being actively traded in the market. coinmarketcap.com, a website that tracks the market capitalisation of cryptocurrencies, lists 1,379 currencies. Away from the hysteria around bitcoin, lesser known cryptocurrencies such as Omisego, TRON, Golem, and Storj are attracting investments that are helping to set up an entire decentralised ecosystem and payments infrastructure on blockchain platforms that could radically transform the way businesses transact with each other.
It so happens that right now any technology that drives decentralisation also carries some political promise by virtue of challenging the centralising tendency of power. But that is a byproduct, and not to be confused with its intent, which remains the same as with any other IT innovation of recent times: efficiency and profit.