The Editorial Analysis- The Crypto Assets Conundrum

The Crypto Assets Conundrum- Relevance for UPSC Exam

• GS Paper 2: Important aspects of governance- Transparency & accountability and institutional and other measures.
• GS Paper 3: Indian Economy- Issues relating to planning, mobilization of resources, growth, development and employment.

The Crypto Assets Conundrum- Context

• While analyzing the recent steps of the Indian Government, it appears that the government is convinced that cryptocurrency is a dangerous proposition.

The Crypto Assets Conundrum- Associated Concerns with Cryptocurrencies

• Secrecy: Cryptocurrency enables relatively invisible transactions, with serious implications for crime, terrorism, money laundering, tax evasion, etc.
• Speculative Asset: Another worry is that a crypto mania is getting built of purely speculative investments. The eventual bursting of such bubbles will badly hurt people.
• Threatening Macro-economic stability: cryptocurrencies threaten the state’s macro-economic role.

The Crypto Assets Conundrum- Government’s Stand

• Government’s dilemma: Government proposes that cryptocurrencies be banned but crypto assets be legalized and strongly regulated.
  • This is due to Government’s dilemma as it wants to avoid any tech-unfriendly image.
• Rationale: Through the above, the government aims to address the following issues-
  • The problem of invisible value transactions gets taken care of,
  • The interests of investors are protected, and
  • The tech industry’s demand is met halfway.

The Crypto Assets Conundrum- Issue with government’s stand

• Asset vs Legal Currency: The distinction between an asset and currency may not be so much legal as it is about the inherent characteristic of what is considered an asset or currency.
  • Land, gold and stocks do not lend themselves to becoming common mediums of exchange because these assets are not easily divisible and portable.
  • On the other hand, crypto is more divisible and portable than even physical currency.
  • Once legalized, crypto-assets may become a medium of exchange.
• Speculation vs Asset investment: Crypto assets are either ‘purely speculative assets’ or they have some underlying value, in which case such ‘value’ can consist only in their future as a medium of exchange.
  • A purely speculative asset has zero underlying value (unlike assets like land and gold).
  • If the Government legalizes a purely speculative asset, it provides a green signal to investors to invest in it and blow into the bubble.
  • When the bubble bursts, there may be a heavy political price to pay for the ruling dispensation.
• A weak argument in favour of legalizing Crypto assets for promoting Blockchain Technology:
  • Legalizing crypto assets primarily to support blockchain technology is like signing on to the use of space as a new frontier of war just because it would promote India’s space industry.

The Crypto Assets Conundrum- Way Forward

• Promoting Blockchain technology in other areas: Government should promote various innovations and services using blockchains
• Promoting a Central Bank Digital Currency: A centralized digital currency having legal status should be promoted as an alternative to private cryptocurrencies.
• International stand: It is true that India’s decision alone would not determine this issue. But with China having already banned crypto, what India decides at this stage would count for a lot.

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