Syllabus Section: Government Initiatives (GS Paper II)

Importance: UPSC Prelims and UPSC mains

Why in News?

Recently, it has been observed that allowing cryptos for transactions will undermine central banks and strike at the efficacy of monetary policy

What are crypto currencies?

• A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services but uses an online ledger with strong cryptography to secure online transactions.
• Cryptocurrencies work using a technology called blockchain which is a decentralized technology spread across many computers that manages and records transactions.

• Examples of cryptocurrencies include Litecoin, Ripple, Bitcoin, Ethereum, Dogecoin, Tether, Solana, etc.

Legal Backing:

• Cryptocurrencies does not come under the Securities Contracts (Regulation) Act, 1956 and hence SEBI is not involved in regulation.
• It does not involve financial institutions and hence RBI is out of the purview.
• It has not been declared illegal by the Courts and hence the government cannot do anything as of now.

Suspicion about Crypto Currencies:

Mode of transaction

• We cannot have parallel currencies in the country and allowing crypto as a currency for transactions will undermine the monetary policy affecting the entire system of payments.
• If there is a crash in value, the investors will lose money for which there is no recourse.
• Bitcoin is rendered an inappropriate medium of exchange because the aggregate supply is inelastic and demand shocks result in outsized price volatility.

Impact on currencies

• It is unclear whether the transactions are done in rupees and remain in this currency or get converted to dollars.
• If cryptos begin to get mined onshore they will induce capital inflows and will increase capital account volatility which will directly impact the currency market.
• If there will be conversions into dollars then there would be needed Foreign Exchange Management Act (FEMA) rule to deal with.

Investment option

• It is still not clear if the gains come under short or long term and the IT Department will have to decide on this issue.

Gambling

• If one can trade in imaginary currencies it amounts to gambling which is partly permitted in the country.
• If trading in cryptos fall in this category, it can be argued that people should be allowed to gamble on cricket matches too and there should be a level playing field.

Fiscal Policy:

• Fiscal revenues can be adversely impacted by the increased tax evasion opportunities that crypto currencies can facilitate.

Way forward:

• Deep analysis into this entire issue of crypto currency as the level of interest is high and increasing.
• IMF points out that if cryptos are only used for niche purposes (narrow cross-country transfers and remittances), which are then quickly converted back into local fiat currencies, the implications for monetary policy can be contained.

Source: The Hindu