RBI is unhappy with the way crypto markets are evolving - an update
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Cryptocurrencies and the RBI - Shakti pradarshan
- The story: RBI Governor Shaktikanta Das feels are deep issues regarding the rapid spread of virtual cryptocurrencies, as far as India's economic and financial system stability is concerned. In parallel, Indian PM Modi too held a meeting on the worries over misleading claims of huge returns on cryptocurrency investment.
- Other developments: The Parliamentary Standing Committee on Finance also discussed the pros and cons of crypto finance with various stakeholders, and several members were in favour of regulating crypto currency exchanges rather than an outright ban on such currencies. The Centre may introduce a bill on cryptocurrencies during the winter session of Parliament, 2021.
- Beware: The RBI governor doubted the current trading numbers in crypto currencies and said the investors are being lured to open accounts by offering credit. He said the RBI had received a lot of feedback that credit has been provided to open accounts and various other kinds of incentives are being provided to open accounts, but the total account balance is just about ₹500, ₹1,000 or ₹2,000, and that covers about 70 to 80% of the accounts. He said the value of transactions and trading in virtual currencies has gone up but the number of accounts is exaggerated. He felt that new-age currencies pose serious threats to the macroeconomic and financial stability of the country.
- SC versus RBI: On March 4, 2021, the apex court had set aside an RBI circular of April 6, 2018, prohibiting banks and entities regulated by it from providing services in relation to virtual currencies. The Supreme Court had chided the RBI for completely freezing an entire sector in the financial system, instead of trying to evolve a regulatory regime for it. The SC said it was a violation of the fundamental rights of Indians.
- What are cryptocurrencies: Cryptocurrency is decentralized digital money, based on blockchain technology. Other than the most popular versions, Bitcoin and Ethereum, there are more than 5,000 different cryptocurrencies in circulation. A cryptocurrency is a medium of exchange that is digital, encrypted and decentralized. Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
- Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.”
- A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.
- Proof of work and proof of stake are two different validation techniques used to verify transactions before they’re added to a blockchain that reward verifiers with more cryptocurrency. Cryptocurrencies typically use either proof of work or proof of stake to verify transactions. Proof of work is a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers race to solve. To reduce the amount of power necessary to check transactions, some cryptocurrencies use a proof of stake verification method. With proof of stake, the number of transactions each person can verify is limited by the amount of cryptocurrency they’re willing to “stake,” or temporarily lock up in a communal safe, for the chance to participate in the process. It's a collateral. Each person who stakes crypto is eligible to verify transactions, but the odds you’ll be chosen to do so increase with the amount you front. Because proof of stake removes energy-intensive equation solving, it’s much more efficient than proof of work, allowing for faster verification/confirmation times for transactions.
- EXAM QUESTIONS: (1) Explain the reason the RBI isn't too comfortable with cryptocurrencies. (2) What kind of instability can cryptos create in the Indian system? Explain technically. (3) What is the difference between proof of stake, and proof of work? Explain.
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