The Crypto Assets Conundrum- Relevance for UPSC Exam
- GS Paper 2: Important aspects of governance- Transparency & accountability and institutional and other measures.
- GS Paper 3: Indian Economy- Issues relating to planning, mobilization of resources, growth, development and employment.
The Crypto Assets Conundrum- Context
- While analyzing the recent steps of the Indian Government, it appears that the government is convinced that cryptocurrency is a dangerous proposition.
The Crypto Assets Conundrum- Associated Concerns with Cryptocurrencies
- Secrecy: Cryptocurrency enables relatively invisible transactions, with serious implications for crime, terrorism, money laundering, tax evasion, etc.
- Speculative Asset: Another worry is that a crypto mania is getting built of purely speculative investments. The eventual bursting of such bubbles will badly hurt people.
- Threatening Macro-economic stability: cryptocurrencies threaten the state’s macro-economic role.
The Crypto Assets Conundrum- Government’s Stand
- Government’s dilemma: Government proposes that cryptocurrencies be banned but crypto assets be legalized and strongly regulated.
- This is due to Government’s dilemma as it wants to avoid any tech-unfriendly image.
- Rationale: Through the above, the government aims to address the following issues-
- The problem of invisible value transactions gets taken care of,
- The interests of investors are protected, and
- The tech industry’s demand is met halfway.
The Crypto Assets Conundrum- Issue with government’s stand
- Asset vs Legal Currency: The distinction between an asset and currency may not be so much legal as it is about the inherent characteristic of what is considered an asset or currency.
- Land, gold and stocks do not lend themselves to becoming common mediums of exchange because these assets are not easily divisible and portable.
- On the other hand, crypto is more divisible and portable than even physical currency.
- Once legalized, crypto-assets may become a medium of exchange.
- Speculation vs Asset investment: Crypto assets are either ‘purely speculative assets’ or they have some underlying value, in which case such ‘value’ can consist only in their future as a medium of exchange.
- A purely speculative asset has zero underlying value (unlike assets like land and gold).
- If the Government legalizes a purely speculative asset, it provides a green signal to investors to invest in it and blow into the bubble.
- When the bubble bursts, there may be a heavy political price to pay for the ruling dispensation.
- A weak argument in favour of legalizing Crypto assets for promoting Blockchain Technology:
- Legalizing crypto assets primarily to support blockchain technology is like signing on to the use of space as a new frontier of war just because it would promote India’s space industry.
The Crypto Assets Conundrum- Way Forward
- Promoting Blockchain technology in other areas: Government should promote various innovations and services using blockchains
- Promoting a Central Bank Digital Currency: A centralized digital currency having legal status should be promoted as an alternative to private cryptocurrencies.
- International stand: It is true that India’s decision alone would not determine this issue. But with China having already banned crypto, what India decides at this stage would count for a lot.
Digital Rupee: India’s National Digital Currency