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No change in RBI’s view on cryptocurrencies

Context:

RBI Governor Shaktikanta Das made it clear that the central bank’s view on cryptocurrencies like Bitcoin remains unchanged and it continues to have “major concerns” on the volatile instruments.

Relevance:

GS-III: Indian Economy (Banking, Money, Monetary Policy), GS-III: Science and Technology (Developments in Science and Technology, Application of Technology in Daily life, Blockchain technology)

Dimensions of the Article:

  1. What are cryptocurrencies?
  2. How are they different from actual currency?
  3. How do cryptocurrencies derive their value?
  4. RBI’s views on Cryptocurrency

What are 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.

RBI’s views on Cryptocurrency

  • The Reserve Bank of India (RBI) informed the Supreme Court that dealing in cryptocurrency will encourage illegal transactions.
  • According to the RBI, Cryptocurrencies are “a stateless digital currency” in which encryption techniques are used for trading and these ‘currencies’ operate independently of a Central bank, rendering it immune from government interference.
  • An interdisciplinary committee headed by secretary of economic affairs Subhash Garg was set-up in 2017 to examine virtual currencies and recommend the regulatory framework for crypto currencies.
  • The RBI had already issued a circular prohibiting use of these virtual currencies.

-Source: The Hindu

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