[Answered] What are cryptocurrencies? Discuss various concerns related to cryptocurrencies.

Demand of the question Introduction. What are cryptocurrencies? Body. Discuss various concerns related to cryptocurrencies in India. Conclusion. Way forward.

A cryptocurrency is a virtual currency used for financial transactions. It uses blockchain technology for various transactions. Earlier, the RBI has issued a circular prohibiting use of these virtual currencies. Recently, The Supreme Court on Wednesday lifted the ban imposed by the Reserve Bank of India (RBI) on virtual currency trading, including cryptocurrencies.

Various concerns related to cryptocurrencies:

  1. Privacy Concerns: The privacy of users’ data is at stake. There is concern regarding privacy of users data in using cryptocurrencies as all the transaction information is stored in distributed ledger (called blockchain), which is publicly visible. Thus Hacker can easily observe how the money flows.
  2. High Volatility: The price of Bitcoin suddenly rose to almost $20,000 and then dropped to $6,000. Due to such incidents, it is complicated for the investors to trust the ecosystem.
  3. Destination for black money: The fear among regulators and policymakers is that cryptocurrencies, being an alternative source of value to fiat currency, could be misused to launder black money or finance terrorist activities.
  4. Cybersecurity Concerns: Cryptocurrencies are prone to cybersecurity breaches and hacks. Various attacks are common, even companies and governments are not full proof to them. For example, the Swiss blockchain company, Trade.io, has reported that crypto tokens worth almost $8 million have been stolen from their cold wallet.
  5. Dark activities: The possibility that the new money will nurture illicit activities and markets like drug selling, weapons etc. through Darknet is always high using cryptocurrency anonymously. It also increases the risk of its use in various terrorist activities across the border.
  6. Monetary control and economic behaviour: It could dramatically change global monetary policymaking. People will exchange their national currencies for the new digital coin in order to buy and sell the many products that will be priced in it. This will further impact the profit of banks and will put stress on their balance sheet.
  7. Inflation: Governments and policymakers will have reduced ability to control inflation. Usually, when inflation picks up, central banks take steps to control it through various monetary rates. Cryptocurrency will be out of control of the central bank so liquidity control will be an issue.

Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology. There are a thousand reasons to be excited about cryptocurrency, but also real reason to be conservative in your investment strategy.

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