Editorial Simplified: Is Banning Cryptocurrencies the Solution? | GS – III


Relevance :  GS Paper  III



Theme of the article

A blanket ban will push the crypto currency into the black market and stifle innovation.


Why has this issue cropped up?

 Recently, a government panel (Grag panel) placed in the public domain a draft bill calling for a complete ban on private cryptocurrencies in India.


Recommendations of the  Garg panel

  • The panel recommended a fine of up to ₹25 crore and a jail term of up to 10 years for anyone found to be owning or handling private cryptocurrencies.
  • As an alternative to private cryptocurrencies, the panel recommended the introduction of a single cryptocurrency for the whole country that is backed by the Reserve Bank of India (RBI).

Reasons to ban cryptocurrency

  • The volatility of private cryptocurrencies is one of the reasons being given to ban them.
  • An issue raised against cryptocurrencies is that they aren’t really backed by an underlying commodity or a sovereign government.
  • Due to anonymity, the common objection to cryptocurrencies is that they can be used to finance various criminal activities.

Should crypto currency be banned?

  • Volatility doesn’t sound like a good rationale to ban cryptocurrencies because if cryptocurrencies are volatile, so are many other asset classes. We do not ban investments in any other asset class just because it is volatile.
  • Banning the consumption of a good or service doesn’t really mean that people will stop consuming it. The market for the good or service simply goes underground and becomes hard to track.
  • It is not absolutely essential that a currency needs to be backed by a commodity or an institution for it to be widely accepted in the market.
  • The way we define money is that it is a generally accepted medium of exchange. So, it’s just trust that basically drives the value of money. There is nothing to back it, except trust. Sit is the value that people think the currency will possess in the future that really drives its value.
  • People will move to alternative assets and seek more anonymity only if they lose trust in government institutions. So, as long as the trust is maintained, monetary policy doesn’t face any particular threat from cryptocurrencies.

Cryptocurrency vs blockchain

  • The Garg panel, while being opposed to the idea of private cryptocurrencies, still seems to be a fan of the blockchain technology. It has called for a national cryptocurrency backed by the RBI, which would probably be based on the blockchain.
  • Most people equate cryptocurrencies with blockchain, but there is a huge difference between them. The cryptocurrency is just one application of the underlying blockchain technology. The blockchain technology has a lot more potential beyond cryptocurrencies.

The EU regulations on cryptocurrency

  • One of the most comprehensive sets of regulations for cryptocurrencies is being brought in by the European Union.
  • The EU is putting in a bunch of regulations to tackle money laundering, and it is called the AMLD-5. It is a bunch of norms to make crypto transactions more secure.
  • It has a lot of very stringent KYC regulations and self-declaration laws which every holder of a crypto wallet or user needs to adhere to.
  • Crypto exchanges are all expected to maintain a database that is transparently shared between countries.

Should govts issue cryptocurrency as proposed by Garg panel ?

  • There is no case for governments issuing cryptocurrencies because it would create a lot of problems in the form of contradictions in existing regulations and the government will have to deal with severe mismatches in regulations.
  • Secondly, there are reputation effects. A digital currency issued by the RBI that gets misused by criminals can affect trust in the existing fiat currency protocol. A central bank would want to take that risk.

Way forward

  • The decision of whether to invest in an asset or not should be left to the investor. The risk return calculation should be done by the investor, not the government.
  • If the government feels that there is enough rationale to regulate the consumption of a commodity or a service or investments in a crypto asset, the best way forward is to come up with a regulatory framework that has incentives set right for the users. We can have a tax on capital gains from investing in crypto assets, just like we have taxes on investments in other assets.
  • Right now, currencies are the only viable practical application of the blockchain technology even though it can be extrapolated to a lot of other sectors. So, for the sake of innovation, even if the government is bringing in a state-backed currency, it will be better if the other currencies are also allowed to operate with sufficient regulations.
  • For a country like India, in terms of size, cryptocurrencies constitute a very, very minor share of the total amount of money that is already being used to carry out various activities in the black economy. But the potential rewards that could come out of the blockchain technology are big.

Conclusion

EU has started creating a bunch of regulations on cryptocurrency that could become stronger over time. This could be the best way to go forward rather than putting a blanket ban on cryptocurrencies, because the presence of cryptocurrencies is very important for the further development of the blockchain.


 

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