The Questionable status of Digital Fiat Money
“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”
– Nassim Taleb, Author and Risk Analyst
A few days back, The Supreme Court of India scrapped the ban on the dealing of Cryptocurrency in India. The ban, which had been enforced by the Reserve Bank of India, has now been retracted because banking channels provide a platform for trading which should not be inaccessible to any individual. Having seen the Central Banks’ manipulated measures ensued by the pressure of the Central Government and frequent frauds within the banking sector in the past, we have been given a pretty good reason to question the Central Bank and their approaches. Keeping in mind the rapidly changing Information & Technology-enabled economy alongside the ever casting doubts over the banking sector, it’s natural for us to demand answers. This is where the concept of Cryptocurrency plays an integral role.
A Decentralized system of cryptocurrencies can offer solutions which the traditional banking sector is not able to. Better security, reduced bureaucracy or higher investment opportunities, cryptocurrencies have it all. Cryptocurrency allows us to make transactions without the involvement of an intermediary required in the traditional system. Instead of your money being stored in a bank, it is held on the cloud via Block-chain technology. This accessibility makes cross-border transactions quicker and more convenient, as there are no fiat currencies involved. With the introduction of cryptocurrencies as a widespread payment medium, the sellers might benefit by escaping the high transaction fee charged by bankers on digital payments.
Now you would possibly think: Why are bankers so critical of the introduction of cryptocurrency given the enormous benefits they offer?
The RBI justified the ousting of cryptocurrency based on its inability to satisfy the required criteria to be acknowledged as currency; that is, acting as a store of value, a medium of payment and a unit of account. The RBI also pointed out that transactions taking place through cryptocurrency will lead to an increase in money laundering and other illicit activities, as it will be troublesome to track down the money due to the element of anonymity once fiat money converted into other channels. It will also pose a threat to the Indian currency and therefore, the credit system in the country. Moreover, the speculative nature of cryptocurrency does not make them an ideal alternative for fiat money. In a nutshell, cryptocurrency became labelled as a “competitor” rather than a “contributor” in the current fiat system.
When rationalizing all the arguments made by RBI, one might identify the threats that these virtual currencies possess and why regulating and banning them became required from the viewpoint of the bankers. But the draft published by India’s National Institute for Smart Government on National Strategy on Blockchain has made things more interesting. The draft proposes the introduction of a Central Bank Digital Rupee (CBDR) on a publically permitted blockchain. The significant rationale for the CBDR provided in the document is the ability to monetize the Internet of Things (IoT) data and other personal data. Reportedly, the draft presently being prepared to ban cryptocurrency in India also includes a section for the legal framework of RBI backed digital currency.
One may now feel: Why is the Central Bank looking to issue its digital currency after highlighting the many problems attached to it? The answer is simple. Digital currencies are the “Tour de Forces” of the future. According to a study conducted by OMFIF/MORI, developing countries like India and Malaysia were more open to digital currencies compared to developed nations. The study also highlighted the fact that Central Banks were the most trusted source for digital currency. The digital currencies issued by the central bank might overcome problems faced by cryptocurrencies as they will have an intrinsic value resulting from being backed by the Central Bank, hence decreasing volatility.
Thus, one may not be wrong to believe that bankers are not opposed to the very idea of cryptocurrency. Instead, the thought of not having the power to regulate it haunts them. We will conclude the article the way we started; “Digital Currencies are the beginning of something great: a currency by the government, something necessary and imperative.” I hope you could notice the change 😉