Cryptocurrency vs Currency

Cryptocurrency vs Currency

Subject: Economy

Section: Monetary policy and banking

Context:. The RBI Deputy Governor T Rabi Sankar said recently that banning cryptocurrencies is the most advisable choice for India as they are akin to Ponzi schemes and “may even be worse.

Concept:

A crypto does not possess the characteristics of a currency — namely, durability, portability and divisibility — and there is no sovereign guarantee for its value. Also, a crypto does not have any underlying asset to fall back upon .Therefore; the Deputy Governor is right when he says that it is akin to Ponzi scheme.

Characteristics of good money

General Acceptability

An important quality of money is its acceptance. Good money requires acceptance to all without any hesitation. Since the law declares Money as the legal tender, it has an inherent quality of general acceptability.

Portability

Apart from its acceptance, good money also requires portability. If people can carry or transfer money from one place to another, then it is good money.

Durability: Acceptance and portability aside, the material used to make money must last for a long time without losing its value. For example, ice and fruits are not good money since they lose their value quickly with the passage of time. After all, ice melts and fruits perish. Therefore, durability is an essential quality of good money.

Divisibility: If someone wants to buy a smaller unit of a commodity, then divisibility of money can make it possible. For example, goats cannot function as good money. This is because you cannot divide a cow without making it lose its value.

Homogeneity: Nobody can distinguish between two currency notes right out of the mint. If money is not homogeneous, then transactions will become uncertain as people would be unsure of what they are receiving.

Cognizability: The ability to recognize money is critically important. Today, we can look at a currency note and tell its value. If money is not cognizable, then people can find it difficult to determine if they are dealing with money or some inferior asset.

Stability: Of all the qualities of good money, stability is probably the most essential one. The value of money cannot change for a long period of time and hence remain stable. If the value of money keeps changing, then it will fail to function as a measure of value and as a standard of deferred payment.

Backed by government: The last but not least important feature of currency is that it is backed by sovereign government.