Focus: GS-III Indian Economy, Science and Technology
There has been growing interest in cryptocurrencies since Bitcoin captured the imagination of people.
How do you define cryptocurrencies?
- Cryptocurrencies are e-currencies that are based on decentralized technology and operate on a distributed public ledger called the blockchain.
- Blockchain records all transactions updated and held by currency holders.
- The technology allows people to make payments and store money digitally without having to use their names or a financial intermediary such as banks.
- Cryptocurrency units such as Bitcoin are created through a ‘mining’ process which involves using a computer to solve numerical problems that generate coins.
- Bitcoin was one of the first cryptocurrencies to be launched and was created in 2009.
How are they different from actual currency?
- The Main difference is that unlike actual currencies cryptocurrencies are not issued by Governments.
- Actual money is created or printed by the government which has a monopoly in terms of issuing currency. Central banks across the world issue paper notes and therefore create money and assign paper notes their value.
- Money created through this process derives its value via government fiat, which is why the paper currency is also called fiat currency.
- In the case of cryptocurrencies, the process of creating the currency is not monopolized as anyone can create it through the mining process.
How do cryptocurrencies derive their value?
- Any currency has its value if it can be exchanged for goods or services and if it is a store of value (it can maintain purchasing power over time).
- Cryptocurrencies, in contrast to fiat currencies, derive their value from exchanges.
- The extent of involvement of the community in terms of demand and supply of cryptocurrencies helps determine their value.
What is behind the cryptocurrency ban?
- While some governments have recognized the potential of the technology underlying cryptocurrencies, most remain sceptical and several have banned them.
- Regulators fear that Bitcoin and the others could be used to circumvent capital controls or launder money.
- They can be used for illegal purchases or for other criminal activity. Several regulators have discussed their systemic concerns—they could destabilize or undermine the control of central banks on their respective economies.
Will the Govt. control of money end as a result?
- The present structure of the global financial system puts central banks at its center, making them an integral part of economies. This happens through the sovereign’s monopoly on issuing fiat currency.
- Governments, central banks are unlikely to let go of the state’s monopoly to issue currency while they use regulation to ban or discourage cryptocurrency use.