Analysing Crypto-Currencies and the Block-Chain Technology

iasparliament
January 11, 2018
3 months
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What is the issue?

  • Indian Finance Ministry and the RBI had issued warning against investing in crypto-currencies (CC) and have likened them to ‘Ponzi schemes’.
  • The risks of CCs upending “terror-funding, smuggling, drug-trafficking, and money-laundering” were also highlighted. 
  • Despite these factors, CCs and the “Block-Chain Technology” on which they are based, have proliferated and do indeed have massive disruptive potential.
  • This article is an analysis of the opportunities and challenges that have arisen in this context.  

What is currently the most significant impact of CCs?

  • The “Bitcoin phenomenon” has shown promise of becoming the most potent challenge ever to the monopoly of states (or central banks) over currency.
  • While still in its nascence, on the fringes of the monetary system, CCs have already triggered the realisation that actions on controlling them is futile.
  • Significantly, central banks have themselves come out with their own “Central Bank Digital Currency” (CBDC) as a counter.
  • While CBDC is a complex tool whose functionality is still being researched, the inherent contradiction with it is its centralising tendency unlike other CCs.  
  • On the other hand, the Block-Chain on which all kinds of CCs are based is essentially a decentralised peer-to-peer module.  
  • In fact, the rise of CCs, inherently owe it to the “distrust of bankers” as central authorities in monetary transactions.
  • This was accentuated in the serious of banking collapses that occurred during the “Sub-Prime Crisis” of 2008-09.  

How does the “Block-Chain Ledger” work?

  • In order to be functional, a virtual currency must not allow double spending of the same money by copying or cyber-theft.
  • Conventional cashless transations are accounted through “centralised ledgers”, who act as ‘trusted intermediaries”, which is often a bank.
  • But Block-Chain Modules are based on decentralised ledgers stored across thousands of computers, and transaction data is continuously updated.
  • Blockchains also uses economic incentives to motivate members of the network to do the work of validating every transactions.
  • This hence makes the central trustee reudndent and thereby eliminated banks.  

What could be the larger monetary implications of the CCs?

  • Bitcoins, unlike a stock or a bond, are a purely speculative asset untethered to a material basis of value.
  • A major reason seasoned speculators find bitcoins irresistible is its deflationary nature, which makes it inflation-proof.
  • Since there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation.
  • In this regard, cryptocurrencies may herald the next stage of neo-liberal economics, which is the privatisation of currency .
  • Significantly, this means that the significance of fiat currencies would reduce.
  • Consequently, the state will have to become more fianancially disciplined as “Quantitative Easing” initiatives might become difficult. 

What is the true potential of “Block-chain Technology”?

  • While crypto-currencies have dominated discussions about the new block-chain technology, it is but just one application of it.  
  • In some ways, the present moment is analogous to the early days of the Internet, when internet was synonymous with e-mail.
  • Significantly, in a block-chain platform called Ethereum, an application that enables people to rent out idle storage space on their laptop can be setup.
  • This means that someone who needs cloud storage can directly pay the renter, instead of paying cloud storage intermediaries like Amazon.
  • This opens up a potentially monetisable resource that we didn’t even realise.
  • Also, two domains that would gain immensely from blockchain applications and CCs are Artificial Intelligence (AI) and Internet of Things (IoT).
  • Notably, IoT would require thousands of devices to rapidly and seamlessly transact without manual operator interference, which CCs would aid.
  • Also, enormous scope of block-chains for increased efficiency and cost-saving, is a serious threat to conventional “Fiance and Digital space businesses”. 

Can block-chains be seen as liberating?

  • Some argue that the decentralised nature block-chains are potentially liberating both politically and economically.
  • While the technology’s peer-to-peer orientation renders it more democratic, it is important to realise that even internet faced the same euphoria initially.
  • Now, with internet maturing to the masses, albeit its insurmountable benefits, it is increasingly turning out to an unequal arena.
  • Hence, despite its enormous potential, some of the current claims being made about block-chain are plain silly.
  • Clearly, technological innovations can’t substitute actual ground work for reducing socio-economic disparities and ushering in equality.

Quick Facts

  • Ponzi Scam - A business model where an entity doesn’t generate any actual profit but paying its existing investors by getting money from new investors.
  • This is basically a bubble, which collapses when no investments dry up.
  • Quantitative Easing – Is an expansionary monetary policy adopted by central bank to boost the economy which is reeling under stress.
  • In this process, money is pumped into the economy through the purchase of government securities.
  • This is done when the economy is unable to recover on its own and inherently runs the risk of triggering inflation.

 

Source: The Hindu

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