The emergence of crypto currency such as Bitcoin is traced to the financial crisis of 2008 reflecting the inherent crisis in established Banks and Financial institutions around the world. When people invest their hard-earned savings in banks trusting the financial system, they expect a reasonable return covering the inflation. When banks lend to those who seek loans for various purposes, the borrowers are expected to economically perform and return the loan with the associated interest payment.

Financial crisis of 2008

In the US for instance, the financial crisis of 2008 was due to risky loans / bad loans lent to attract new borrowers and banks faced significant default on the loans. Due to heavy default on loans, major banks collapsed and became bankrupt.  As the customers who deposited their savings in the Banks were to lose, the US Government had to bail out banks from bankruptcy. Obviously, the Governmental efforts to bail out banks are from the taxpayers' money which lead to the dissatisfaction among customers who invested their savings in banks. As the world economy is interdependent, the financial crisis in the US affected the world and reflected the issues involved in the banking sector.

Fiscal deficit norm of 3.5%

Banks are not performing well to affect investors, and this leads to the Government bailing out banks from crisis by using taxpayers' money. When the Governmental expenditure exceeds revenues, it will have to borrow from the Central Bank and in results in higher money circulation in the economy.  Even though the fiscal deficit is usually maintained at around 3.5% of the GDP, that is, the gap between Governmental revenues and expenditure should be within 3.5% of the GDP, it so happens that at times of crisis, be it financial or pandemic or any other valid reason, the fiscal deficit can exceed 3.5%. For example, in 2021, the fiscal deficit is 9.5 percent of the GDP due to Covid 19 pandemic. Therefore, theoretically even though the limit to the amount of Governmental borrowings is 3.5% of GDP, practically, it may be difficult to adhere to this limit due to factors beyond the control like these crises. Obviously pumping more money into the economy will have an impact on inflation and the value of money which also needs to be kept under check.

Financial entrepreneurs, innovators thought of devising a currency which is decentralized, not under the control of Central authority, such as the Government or Central Bank in order that people’s trust in currency is maintained in terms of value and that their contributions are not used to bail out banks during crises. However, there are challenges in achieving both.

Crypto currency

Crypto currency is a digital or virtual currency functioning on Block Chain Technology which enables to trace / track all transactions made by the user. Crypto currency is not a material or physical currency. There are around 8000 crypto currencies with market capitalization of more than $1 trillion around the world. The heart of Crypto currency is Block Chain Technology (BCT) and hence theoretically the efficiency, quality of BCT shapes the strength of Crypto currency.  Accordingly, if Crypto currency is a car, BCT is its engine. Crypto currency cannot exist without BCT, while BCT can exist independently as a technology due to its various applications in e-commerce, fund transfers, voting, health care, marketing and all activities where accountability, transparency, accuracy in tracking, transaction costs matter in productivity of service through quality control.

Bitcoin

Bitcoin is a major crypto currency devised by Satoshi Nakamoto, a pseudonymous person or a group of persons in 2008. Since usually the fiscal deficit of 3.5 percent is crossed in most economies due to crisis entailing the Central Bank to release funds to the economy resulting in inflation and reduced value of currency, the problem is addressed by fixing the maximum number of crypto currencies. In the case of bitcoins, the maximum number works to 21 million of which, it is said that around 18.5 ml is in circulation already and no more bitcoins will be generated. This mathematics is ambiguous as nowhere it is mentioned that 21 million bitcoins are fixed considering demand supply factors. The very price of bitcoin being $51541 per coin (Rs. 38 lakhs) in itself indicates that demand is rising and is way beyond common man’s affordability.  Bitcoins are stored in a Bitcoin account called Bitcoin Wallet) on the user’s computer or smartphone. The bitcoin wallet is the bank - like a physical wallet. The user is his/her own banker and is responsible for adding or taking out from the wallet. The ‘Miners’ with the help of computers maintain the transactions. The value of Bitcoin began at US $ 0.0001and has risen to  US $51541 (Rs 38 lakhs). Satoshi Nakamoto is the pseudonymous person or a group of persons who developed Bitcoin, devising the first block chain database, solving the double-spending issues using peer to peer network. Several people claimed to be Nakamoto. The question which arises here is, if crypto currency is so transparent and accountable, why the developers of Bitcoin have maintained secrecy and therefore gives rise to apprehensions regarding the future of crypto currencies irrespective of their potential benefits.

Top investors in Bitcoin

Bitcoin is the most popular crypto currency among 8000 crypto currencies currently in circulation with the price beating bullion prices of precious metals. Bitcoin is not a coin in the conventional sense. Bitcoin is the world’s biggest crypto currency with a price of $51541 per coin, followed by Ethereum ($2205), Bitcoin cash ($927), Litecoin ($267) and so on.  The value of Bitcoin fell by 14% on 20^th April 2021. The top investors in Bitcoin inter alia are Barry Silbert, CEO of Digital Currency Group, Dan Morehead CEO of Pantera Capital, inventors Tyler and Cameron Winklevoss, Michael Novogratz CEO of Galaxy Digital Holdings, Digital Asset Holdings, and a financial technology company which developed Digital Asset Modeling Language. In India, according to two major crypto exchanges WazirX and CoinDCX, everyday around Rs. 350 crores of trading are taking place in crypto currencies with a majority of investors in the young age group who are aware that investing in crypto currencies is highly risky and speculative.

Bitcoin is a gamble

Bitcoin with a track record of 10 years has registered impressive growth compared with any other investment attracting speculative investors. The price of bitcoin varies considerably within a day. There is no reason attributable to such a high price for bitcoin even though there are reasons for volatility. According to Grant Sabatier, the founder of Millennial Money Bitcoin is not an investment but a gambling as there may not be any value in Bitcoin and it is impossible to value it.

Ambiguous legal status to Bitcoin

Legal status offered to bitcoin as a currency is ambiguous in many developed countries. Bitcoin is treated as a commodity and not as a currency in many developed countries such as Canada, Australia, where bitcoin transactions are treated as barter transactions.  In some countries (Finland), it is treated as a financial service. In the US, Bitcoin is treated as a property for taxation purposes.  Many countries have not permitted bitcoin to be legal tender (China, Russia, Vietnam) due to its volatility and decentralized nature. And also, because it poses a threat to the current monetary system, and its possible link with drug trafficking and corruption. With a decade of experience with bitcoin, several countries are in the process of restricting, regulating, banning crypto currency. Due to its decentralized and anonymous nature, it challenges the governance in matters regarding legalization as countries are amenable for criminal transactions. By allowing crypto currencies as legal tender in addition to country currency, how do we quantify and evaluate economic parameters? Even though crypto currency allows transactions to remain anonymous through private keys, and protects the user to some extent, it is not backed by fiat from a responsible authority and thus it is subject to high volatility.

Block Chain Technology (BCT)

Each transaction is stored in a block and broadcast to peer-to-peer network assisted by computers validating transaction and user’s status with the help of algorithms. Verified transactions in blocks can be contracts, records, crypto currency or other documents. Verified transaction is combined with other transactions creating a new block of data, called a ledger. The new block is added to the existing block chain completing the transaction. The BCT is a digitized, distributed and secure ledger guaranteeing unchangeable transactions by offering trust in the system in the process of exchange. Sahyadri Farms, FPO in Nasik, Maharashtra using BCT in exporting quality grapes emerged as India’s largest grape exporter, exporting 17% of grapes. In agriculture, consumers who pay a premium price for organic produce will benefit from BCT as they can track the farm, farmer and quality.

Secure from counterfeit

Crypto currencies are secured from counterfeiting, and avoids double accounting and do not require monitoring and control by any Central Bank. While there are advantages of this benefit, there can be potential disadvantages since the trust of citizens lies with the Central Bank – the Reserve Bank of India.  The benefit of avoidance of counterfeit notes is enormous for India where neighboring countries are often found to have reported counterfeit involvement as also disturbing peace and tranquility in border areas. Similarly, the benefit of double accounting, i.e., a currency once transacted for a purpose is recorded and cannot be transacted again since each transaction is recorded in the public ledger in the block chain. Since each digital or virtual currency is numbered and unique it is possible to locate each transaction made by person/s, institution/s and there can be no double transaction. This avoids corruption / rent-seeking behavior.  

Currency, a national identity

Even with all the benefits appreciable, the crucial question is, can any country sacrifice its own currency and accommodate a crypto currency, like, for example Bitcoin?  Indian Rupee for India, US $ for the US, Japanese Yen for Japan, for instance serve as the nation’s identity. Can any country sacrifice its nation’s identity?  

Ruling on Crypto currency

Can any country permit more than one currency in its transactions? It is crucial to ponder over regarding the permission of operation of two or more currencies in any country and the confusion it can create among the general public. In the absence of monitoring by a central Bank, crypto currencies can be conduit for black money or money for funding illegal activities such as terrorism. The RBI in a circular issued in April 2018, banned financial institutions providing services in exchange /trading of crypto currencies. This was challenged in the Supreme Court which ruled that crypto currency is capable of being accepted as valid payment for purchase of goods and services, and payment systems can be regulated by the RBI. Thus, RBI by law can protect the monetary system from threat to the financial system.

Ban private crypto currencies

In 2018, there was a recommendation to the Govt of India to ban all private crypto currencies with a jail term of a decade for offenders. Former Finance Minister Arun Jaitley had said that the Govt. of India does not recognize crypto currency as a legal tender or coin and will take measures to eliminate use of crypto-assets in financing illegitimate activities or as part of the payment system.  The Government of India has already drafted The Crypto Currency and Regulation of Official Digital Currency Bill, 2021. The purpose of this bill is to create an ambience for creation of official digital currency issued by Reserve Bank of India. In addition, this prohibits all private crypto currencies but promotes adoption of Block Chain technologies. Bitcoin crypto currency has sensitized Governments to evolve Central Bank Digital Currency (CBDC) which is respectful to the suggestions of John Maynard Keynes the exponent of fiscal and monetary policy.

Crypto currency banned in some countries

Crypto currencies are banned in Saudi Arabia, Bolivia, Iceland, Ecuador. Crypto currency is a digital asset serving as a medium of exchange designed to ensure safe financial transactions using strong encryption in tracking and monitoring financial transfers. Unlike centralized controlling and regulatory networks of digital currencies and banking, crypto currency uses decentralized monitoring systems. With no centralized database, if there is a loss of a digital wallet, it may lead to a permanent loss of virtual currency. The digital wallet is amenable for hacking, malware. Crypto currencies extremely volatile have no protection asset backing. Due to their anonymous function, crypto currencies face the risk of violation of laws against money laundering and countering the terrorism funding.

Central Bank Digital Currency (CBDC)

Central Banks are contemplating to launch their own versions of crypto currencies with regulation, called CBDC operated by central banks / monetary authorities of each country. These legal crypto currencies are called digital fiat currencies or digital base money where, CBDC is digital representation of a country’s fiat currency backed by monetary reserves such as gold or foreign currency reserves. CBDC secures digital instruments equivalent to legal tender carrying unique serial number, distinguishable to prevent imitation. CBDC will be a part of the money supply controlled by the central bank along with coins, bills, notes, and bonds. Bank of England is the pioneer to initiate CBDC, followed by central banks of China, Canada, Uruguay, Thailand, Venezuela, Sweden, and Singapore. Russia is bringing crypto-ruble as Putin was impressed by this suggestion from economic advisor Sergei Glazyev.

CBDC will have to offer greater benefits such as higher interest rates, used in helicopter payments.  US, China, Japan, Canada, Venezuela, Estonia, Sweden, Uruguay, are exploring developing national digital currencies. There are crucial and significant differences between CBDC and private crypto currencies such as bitcoin. Private crypto currencies such as bitcoin are decentralized, while national digital currencies are centralized, a must for offering security, trust and solidarity to citizens.  Thus, CBDC secures national crypto currency through regulation, reserved-backed money circulation with the central bank competent monetary authority solely liable for operations. India too is moving towards this direction with the enactment of The Crypto currency and Regulation of Official Digital Currency Bill, 2021 in Parliament.

 

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