Ques. “Cryptocurrency has fundamental flaws that cloud its much-hyped promise”. Elaborate.
- Cryptocurrency is a form of virtual currency is a digitally tradable form of value, which can be used as a medium of exchange or acts as a store of value. It does not have the status of a legal tender and is decentralised through distributed ledger and protected by cryptographic encryption techniques. Ex: Bitcoin, ripple.
Predicted potential of Crypto currencies
- User Autonomy: Digital currencies allow users more autonomy over their own money than fiat currencies do. No place of an intermediary authority like a bank or government.
- Discretion: Purchases are discreet and are never associated with his personal identity.
- Elimination of Banking Fees: This means no account maintenance or minimum balance fees, no overdraft charges and no returned deposit fees, among many others.
- Very Low Transaction Fees for International Payments: This can be a major advantage for travellers. This happens very quickly, eliminating the inconvenience of typical authorization requirements and wait periods.
Fundamental flaws in virtual currencies
- Volatile: Cryptocurrencies are subjected to market fluctuations. Even a single tweet by Elon Musk can make it move by half its value.
- No regulation: Cryptocurrencies are decentralised, which makes them difficult to regulate.
- Prone to cyber theft: Cryptocurrency leave consumers open to risk of phishing cyber-attacks and ponzi schemes. Further, transactions are irreversible, meaning there is no way to redress wrong transactions
- High energy consumption: cryptocurrencies require large amount of storage and processing power, which can have unfavourable consequences on country’s energy resources.
- Prone to misuse: cryptocurrencies provide greater anonymity making them more vulnerable to money-laundering and terrorist funding activities.
- Clarity on Crypto-currency definition: A legal and regulatory framework must first define crypto-currencies as securities or other financial instruments under the relevant national laws and identify the regulatory authority in charge along with.
- Ensuring Compliance and Transparency- Licenses may be issued based on compliance with eligibility requirements and detailed scrutiny of operational policies and procedures on internal governance, risk management and financial resources.
- Implanting the measures as suggested by SC Garg committee.