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International Monetary Fund on Regulating Cryptocurrency

Cryptocurrency:

International Monetary Fund (IMF) Chief Economist has made a strong case for regulating cryptocurrencies, saying it will always be a challenge to ban them as they operate from offshore exchanges; and feels it to be more attractive to adopt cryptocurrencies and assets in emerging economies than in advanced economies

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems

Significance of Cryptocurrencies

  • As blocks run on a peer-to-peer network, it helps keep corruption in check by tracking the flow of funds and transactions.
  • 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.
  • 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.
  • Integrating blockchain into these sectors could result in hundreds of billions of dollars in savings.

Cryptocurrencies pose risks to consumers.

  • They do not have any sovereign guarantee and hence are not legal tender.
  • 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.
  • A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
  • In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
  • 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.
  • 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.
  • 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).

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