This is not an investment advice column, nor is it going to tell you where to find a broker so that you can invest in bitcoin or any other private crypto currency. The Reserve Bank of India had tried to ban investing in crypto currencies back in April 2018. Its circular basically said that you could not use your bank account, net banking, bank loan, or a prepaid wallet to invest in bitcoin. Prior to this prohibitory circular, for more than four years the RBI had repeatedly warned about the hazards and frauds involved in speculating in crypto currencies.
entire order of the Supreme Court is 180 pages long, and is worth reading as an excellent, albeit technical, primer on the evolution of virtual currencies.
All this may soon be moot, since there is a bill tabled in Parliament which aims to make all trading and speculation in private crypto currencies illegal. The bill proposes to create a facilitative framework for an official digital currency issued only by the RBI.
India is joining the global race. China is already experimenting with a central bank-issued crypto currency. Other countries, including the European Central Bank, are expected to follow soon. In the next three years, many more countries will likely issue a central bank digital currency. Meanwhile, the market value of bitcoin, the dominant private crypto currency, has exceeded $1 trillion. This has happened in just 12 years since its inception. Remember, there are only about 19 million bitcoins out there and each is already worth $54,000. A new coin has to be laboriously created, or ‘mined’, and this process is slowing down. Unlike fiat currency issued by a central bank – which can be created out of thin air, and can be potentially unlimited in supply – the bitcoin is produced by a decentralised, anonymous network, authenticated by the blockchain cryptography technology.
When a central bank issues digital currency, it will have visibility on every transaction that uses the digital cash. Monetary policy and rate transmission can become even more effective, and a reduction in interest rates can even go into negative territory. With deeply negative interest rates, the central bank can penalise private hoarding of digital cash. Similarly, for fiscal and tax authorities, digital currency is attractive since every transaction is visible and that means tax evasion becomes very difficult. The government can deduct its tax claim, sort of like TDS, instantly and presumptively on every transaction. On the expenditure side, digital currency makes it easier to micro target beneficiaries.
The biggest downside to digital currency is the loss of anonymity that paper cash can give you. Since there is a digital trail, the entire transaction history is available to the central bank. Will you be comfortable with Big Brother watching every breath you take, every payment you make? Don’t worry, for now cash is still king; but a future with digital cash may not be that distant.
Ajit Ranade is an economist and writes on the wheels that make Mumbai run — money and economy
(Disclaimer: The views expressed here are the author’s own)
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