Risks associated with private crypto

Risks associated with private crypto

Subject :Economy

Context:

Reserve Bank of India Governor Shaktikanta Das warned against the private cryptocurrencies that could lead to the ‘next financial crisis’.

Concept:

Cryptocurrency:

A cryptocurrency or crypto, is a virtual currency secured by cryptography. It is designed to work as a medium of exchange, where individual ownership records are stored in a computerised database using blockchain technology.

Defining traits

• No intrinsic value
• Scarce
• Not issued by central banks
• Based on blockchain-a decentralized public ledger
• Understanding transaction

Merits of cryptocurrency

• Basic feature of a currency: scarce and acceptability
• Corruption Check: As blocks run on a peer-to-peer network, it helps keep corruption in check by tracking the flow of funds and transactions.
• Time Effective: Cryptocurrencies can help save money and substantial time for the remitter and the receiver, as it is conducted entirely on the Internet, runs on a mechanism that involves very less transaction fees and is almost instantaneous.
• Cost Effective: Intermediaries such as banks, credit card and payment gateways draw almost 3% from the total global economic output of over $100 trillion, as fees for their services.
• Increase digitalisation
• Difficult to counterfeit: as based on blockchain technology

Concerns

Financial 

• Lack of backing – Such currency don’t have an intrinsic value or legal backing Such digital currency may not be accepted as a medium of exchange, store of value or a unit of account — essentially de-recognising the three key functions of money.
• Sovereign guarantee: Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.
• Market volatility: Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.
• Money laundering: Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.
• Regulatory bypass: A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread. It will make monetary policy transmission difficult.
• Weaken central bank: disturb the sovereignty of the central bank. When the crypto is introduced, other governmental departments such as IT and telecom will need to be involved for its smooth functioning. This may, initially at least, create coordination and implementation issues.
• Uncertainty in financial markets: Many public sector and private banks have been hit by a huge number of fraudulent transactions. The situation could worsen when there is an increasing shift to digital currencies without having proper regulation.

Other-

• Risk in security: A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
• Malware threats: In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
• Power consumption: Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland)
• Expensive: access to digital currency transactions is expensive because those interested will need to have a computer, tech gadgets and internet connectivity.
• Compromise on privacy– While transacting in cash in a retail store,one may not leave any trial whereas with crypto will leave a trial. This could make the ordinary citizens feel uncomfortable.
• In a developing economy like India where access to the internet and digital literacy are still a challenge, coexistence of cash and crypto will be an unrealistic option making it difficult to understand and penetrate. Thus, could increase income inequality.