In the flux after the 2008 financial crisis, an extraordinary instrument dubbed cryptocurrency was created. Bitcoin, the first cryptocurrency, was introduced by Satoshi Nakamoto, a pseudonym used by the mysterious originator. It turned our understanding of currency on its head. Inspired by the philosophy of “self-sovereign identity” cryptocurrencies are an asset which are not anyone’s liability; neither is there a single authority or institution to maintain records. What we have are digital currencies designed for decentralised operations, cutting out a regulated intermediary like a bank.
Conventional money, or fiat currency, is issued by the state. It is usually the liability of a central bank such as RBI, which also oversees the recordkeeping of transactions. Its essential features are the credibility that comes from being guaranteed by the state, which leads to a central record keeper like RBI. Cryptocurrencies such as Bitcoin and Ripple are just the opposite. They are underpinned by a network called blockchain, run by anonymous computers linked together by a ledger of anonymised transactions. There are two potential issues that arise from cryptocurrencies. Will they supplant conventional currency, a state monopoly? Highly unlikely because inherent limitations of cryptocurrencies limit scalability and mass use.
A cryptocurrency like Bitcoin is also traded on exchanges, including in India, taking on the role of an asset. Here many governments, including India’s, have taken a dim view. Cryptocurrencies thrive on anonymity. They open the door to peer-to-peer transactions that circumvent state controls. FATF, the inter-government body that sets standards to combat money laundering and terror financing, worries about this instrument becoming a safe haven for illegal deals. Will a ban on cryptocurrencies solve the problem? It won’t because not only do they already exist, they are designed to bypass normal filters. It is a tricky issue which needs a well-thought approach.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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