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Problems with Private Crypto-Currencies

Cryptocurrencies, built on blockchain technology, as in the case of Bitcoin, is a different form/method of issuing or creating “currency or money”. Block-chain technology is a decentralized technology, which allows, every holder of a piece of crypto-currency to be part of a decentralized ledger. Transactions in cryptocurrencies are “mined” or located by the “miners” or the computer programmers, who get paid for in the same cryptocurrency.

Paper currency is issued by the Central Bank of a country and in this sense, it is a centralized currency with any individual owning or being part of the currency only to the extent of currency notes or broader money actually owned by her. Currency technology has evolved over time since time immemorial. Gold and Silver, the valuable metals ruled as currency bases for a long. Paper currency, which replaced the metal currency, has been around for quite some time. Increasingly, the currency is becoming digital now with more and more payments and transfers being made digital.

Cryptocurrencies, based on decentralized blockchain technology, can be understood as another potential evolution in the issuance of currency and the creation of money. In such a case, no paper currency, as we know it today, need to be issued or only a required number of small denomination notes can be issued in paper form for small transactions, with the bulk of money/currency being issued and managed using blockchain technology. Such a currency, the crypto-currency, would have a decentralized ledger, with all participants owning a part of the cryptocurrency stock, keeping the entire decentralized ledger, and then transacting- making and receiving payments- using this decentralized ledger.

The currency and monetary systems are very large. Maintaining the value of currency and money is complex. Block-chain technology is designed to keep a decentralized record, but it has no algorithms or programme which can manage, maintain or move the value of the currency with the real economy and stable conversion with the real/official currencies.

Inherent technological deficiencies can possibly improve in the future, though it is not known at this stage. What, however, has gone crazy is that the currency issuance function has been taken over by the private entrepreneurs and that too mostly in a secretive, manipulative and cryptic manner. 

Problems with Private Crypto-Currencies

There are three basic problems with the private crypto-currencies:

1. Is it a currency or a commodity? A currency primarily serves the purpose of making payments for goods and services. A commodity is a good which has value for the consumer. Some commodities like gold and silver have also served the purpose of currency. That required stable value of such a commodity. The value of gold and silver also fluctuated sometimes and the size of the economy grew much faster than the growth of gold and silver leading to the abandonment of these valuable metals also as currency. A crypto-currency is not a commodity with any intrinsic or commonly acceptable value. For some, it might have value like crazy work of art. Moreover, as crypto-currencies can be created in almost unlimited quantities, these, by economic logic, have no value as the supply far outstrips demand. Given the nature of private crypto-currencies, there are no attributes of a currency. Even as commodities, these seem to be regressing towards being of no value.

2. How do you maintain the value of a freely supply crypto-currency? The most basic feature of a currency is that it serves as a standard unit of value to enable payments to be made for goods and services in the economy. This standard unit of value cannot be set or discovered in isolation of the production and exchange of goods and services in the economy. The Central Banks, using their monetary policy tools and instruments, maintain the value of currency or money.

The crypto-currency private entrepreneurs do not have any ability to maintain the value of the currency. In fact, they mostly destroy the value by expanding supply, which can be limitless. That is the reason these crypto-currencies, barring a few, have not survived as a payment medium, including for making international remittances and payments, the purpose for which these were arguably designed. This is what is reflected in the demise of many crypto-currencies or almost total loss thereof.

The social media giant, Facebook, is attempting to come up with a decentralized block-chain based currency, in permission mode, called Libra to enable easier payments. Libra is not intended to create a quick fortune for Facebook as other crypto-currency entrepreneurs have tried to do.  Libra’s design is based on its standard value being set in relation to a basket of currencies. It is more like an attempt to use the concept of Special Drawing Rights or SDRs created by IMF.

Facebook can succeed in socializing the concept of SDRs for making payments, but in such a case, no new cryptocurrency will be created. It will be a digital currency based on the value of an underlying basket of official currencies.

The integrated world of today needed a common language. English is increasingly serving that purpose. The integrated financial world of today also needs a common currency. US dollar is serving that purpose. The English language is not owned or controlled by the British, the US dollar is by the United States of America. The world needs a global currency that no particular nation controls. Libra is possibly trying to meet this need.

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