UPSC Express

Discuss the advantages and risks of crypto-currencies like the Bitcoin.

Approach

Introduce with the concept of cryptocurrency

Discuss its advantages

Highlight the risks

Conclude with the government’s position that they have been outlawed

Cryptocurrency is an electronic or digital currency that works on a peer-to-peer basis without the need for a trusted third party such as a governmental agency, bank etc. Cryptocurrencies have gotten impressive following over the last few years and many believe that they will offer serious competition to national currencies issued by central banks.

Advantages:

No Third-party Interruptions – Governments, banks and other financial intermediaries have no way to interrupt user transactions or place freezes on Bitcoin accounts. As a result, users experience a greater degree of freedom than with national currencies.

Very Low Transaction Fees – Since Bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are kept very low. This can be a major advantage for travelers and MSME sector.

Real time – Additionally, any transfer in Bitcoins happens very quickly, eliminating the inconvenience of typical authorization requirements and wait periods.

Transparency – With the block chain, all finalized transactions are available for everyone to see (however personal information is hidden) and anyone can verify the transaction, which also means the currency cannot be manipulated.

User Anonymity – Bitcoin purchases are discrete and cannot be traced back to the one holding them.

Risks posed by these Currencies:

Risk and Volatility – There is no underlying or backing of any asset for these currencies and their value seems to be a matter of speculation. Huge volatility in their value has been noticed in the recent past.

Cyber Security Threat – These are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc.

Outside the regulatory zone – These are being traded on exchange platforms set up in various jurisdictions whose legal status is unclear. Hence, the traders are exposed to legal as well as financial risks.

Source of Money Laundering and Terror financing – Due to anonymity, black money can proliferate easily and terror funding becomes easy.

Conclusion:

Due to the security risks and lack of government oversight, cryptocurrencies, including Bitcoins, have been outlawed in India. The Union Finance minister said that the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate use of these cryptoassets in financing illegitimate activities, or as part of the payment system. However, the government would explore the use of blockchain technology (underlying the cryptocurrencies) to add muscle to the digital economy