IS CRYPTOCURRENCY THE BEGINNING OF SOMETHING NEW?

The year was 2008. Lehman Brothers had fallen. The United States fed reserve was scrambling to help the U.S. economy which was crushed by the global financial crisis. The dollar was being discredited.

It was in these circumstances of faltering faith in the post-World War second, global financial order predicated on the fundamentals of the dollar, did Satoshi Nakamoto launch an alternative to the dollar. Bitcoin - a cryptocurrency.

Little did he/she realize that it was to spawn into so many cryptos like Ethereum, Lite coin, Omicron, and Stable coin among others. It would revolutionize the world of finance.

So the basic question arises as to what is cryptocurrency? Cryptocurrency is made up of two worlds - “crypto meaning is hidden and secretive and “currency” means anything that can be used as a medium of exchange, store of value, and standard of deferred payments. Thus cryptocurrency is that currency that is coded in terms of its foundation. It is a decentralized currency that does not depend on intermediaries like banks.

The proponents of cryptocurrency argue it is the next big thing post the internet-led global expansion. They present many arguments in the direction of crypto being the beginning of something great.

First and foremost, cryptocurrency has given a fillip to an easier and cost-effective, and faster mode of transfer of payment as intermediaries like banks are not involved.

The underlying technology of cryptocurrency - blockchain has the advantage of security which has become so important in the world of big tech where privacy has become a casualty. The benefits of blockchain are not limited to crypto but can be extended to banking, data privacy, MSP procurement, defense, etc.

It has given birth to non-fungible token (NFT) which has allowed digital ownership of famous memorabilia. It has allowed even small artists to monetize their art\music\painting.

Cryptocurrency has come to be accepted as an alternative to stockholding in view of varying earnings of stock in the world consumed by quantitative easing and then held ransom to monetary tightening by Fed Reserve.

Cryptocurrency has given level to de-fi i.e.. decentralized finance, a finance model that seemed to possess more inclusivity as compared to the present model of bank-led banking.

Seeing so many advantages would make one conclude it is indeed a great product of the 21st century. However many risks persist in the crypto ecosystem which creates fissures.

Primarily associated with cryptocurrency is the risk of stability in value if it were to serve from the fact that unlike a company’s fundamental, cryptocurrency has no underlying asset and flies high and with risk of excessive speculative gains.

The use of cryptocurrency for money laundering, financing terrorism, and purchasing prohibited contraband on the dark and deep web is another issue.

The cryptocurrency creation process of mining consumes a lot of energy and runs to the detriment of the negotiations at the climate change conference. It has the potential to adversely affect carbon-dioxide atmospheric levels.

Blockchain technology which forms the foundation of cryptocurrency also runs the risk of being hacked.

The use of crypto for ransom as it offers anonymity is another issue as we observed in the colonial pipeline issue in the U.S.A.

The most prominent risk highlighted by Central Banks like RBI, Fed is that cryptocurrency threatens to unravel the existing fiscal and monetary environment. Hiding the income in crypto reduces the tax earnings of the governments to spend on welfare. At the monetary level, a cryptocurrency like Bitcoin has the effect of dollarization which tends to make monetary policy ineffective. RBI chairman Shakti anta Das's recent warning of the effect on monetary policy by cryptos holds important lessons.

It is in this absence of regulatory confusion that different countries have taken different routes to manage the risks of cryptos.

While on one end of the spectrum are countries like China which had totally banned cryptocurrency mining and forbade banks from dealing with crypto with the effect the entire crypto ecosystem has come to a standstill.

We have, on the other hand, countries like El Salvador who have adopted cryptocurrency (Bitcoin) as a legal cinder.

In other countries like the U.S.A., India, and the EU, there still are present regulatory confusion with respect to cryptocurrency. While in India, a proposal is supposed to be introduced in the parliament’s winter session to regulate cryptocurrency.

While we have debated the success and issue of cryptocurrency, it is time we analyze the impact that crypto has had on the present system today.

One major change has been the growth of acceptance of the idea of a Central Bank Digital currency which RBI is considering right now. It will help in monetary transmission, reduce transaction costs, and increase the seignories of RBI.

The growth of the idea of regulation over the ban is another moment of regulatory success as financial innovation often has the capacity to transform like as we saw in the case of UPI.

Cryptocurrency has given rise to many start-ups in India like WazirX, Zeppay, CoinDCX, etc. utilizing the human capability to carefully round finance to generate gains, economic activity, and employment.

While the year 2021 has proven to be most beneficial for cryptocurrency which has led to the realization of the need to regulate the same. This growth has been driven by many factors at play like global liquidity on account of Q.T. to boost growth in the face of covid 19 induced economic contraction.

Another reason has been the advertisement run by crypto exchanges which have led to 15 million crypto owners in India who have invested 6 lakh crore in cryptos.

Another reason has been the over-bloated value of the stock with the risk of Sensex value correction happening anytime soon.

The risk of speculative gains can’t be ignored in a year when income has fallen the most.

Thus in the conclusion - whether cryptocurrency is the beginning of something great is very difficult. One thing that is clear is the need to regulate it.

Just as global problems need global solutions so is the case with cryptos which have a global presence and global ramifications. It is in this context, one PM Modi at Sydney Dialogue called for global cooperation to regulate cryptocurrency.

Cryptocurrency has the potential to truly revolutionize our financial order that has still many issues, not accessibility and inclusively. Klaus Schwab, the founder of the World Economic Forum argued, “the success of tomorrow depends on how we treat innovative ideas today”.

We need to look at crypto positively and at the same time educate their user on the potential risk and benefits so that an informed decision is made by both governments and citizens when dealing with cryptocurrency.