The cryptocurrency conundrum

Cryptocurrency is the term used to denote a set of currencies which are a subset of digital currencies using the…

The cryptocurrency conundrum

Bitcoin(Getty Images)

Cryptocurrency is the term used to denote a set of currencies which are a subset of digital currencies using the technique of cryptography and which exist only on the digital platform. As of July 2017, there are 900 digital currencies in existence. Bitcoin is best known of such currency formats and is based on the pioneering work of its unknown founder Satoshi Nakamoto whose identity remains shrouded in suspense even today.

As of now, hundreds of cryptocurrency specifications exist which are mostly similar to and derived from the first fully implemented decentralised cryptocurrency, bitcoin. The safety, integrity and balance of ledgers within cryptocurrency systems is maintained by a community of parties referred to as miners. Members of the public add these transactions to the ledger in accordance with a particular scheme of time-stamping using their computers to help validate and time-stamp transactions.

The distributed nature of miners trying to maintain ledgers at the cost of a built in financial incentive forms the cornerstone of security of the cryptocurrency system. Decentralised cryptocurrency is produced through the entire cryptocurrency ecosystem collectively, at a rate which is defined when the system is first created and which is publicly known. For example, the Bitcoin system specifies that new coins added to the system shall halve every four years till the new additions become zero by 2140 reaching the ultimate limit of 21 million coins.


One of the fundamental challenges posed by the rise of cryptocurrency systems is the complete lack of control on the issue and flow of currency in the economic system by governments. In the centralised banking based economic systems such as the Federal Reserve System, the government control the supply of currency by printing units of money or demanding additions to digital banking ledgers. In the case of decentralised cryptocurrency, governments cannot produce new units, and have neither provided any kind of backing so far for other firms, banks or corporate entities which hold asset values measured in it.

The printing of currency is a core function, privilege and monopoly of the sovereign. Losing control over generation and flow of currency threatens the sovereignty of a country, unless the sovereign decides to adopt cryptocurrency as an official medium of exchange. But that means the sovereign also decides to exercise absolute control over the form, manner and extent of cryptocurrency in the system to the exclusion of all other forms of currency which undermines one of the basic tenets behind the success of such currency whose generation, control and flow is distributed over a bigger amorphous system based on rules.

The world is still grappling with the implications of the meteoric rise of cryptocurrency as a medium of exchange. Some countries have banned its use officially or restricted its usage. Some have recognised ‘Bitcoin’ officially like Russia. Most of the central bankers and governments are studying the dynamics of cryptocurrency. It is early days for the adoption of cryptocurrency in the wider economy; but a large number of exchanges – recognised and unrecognised, official and unofficial – offer connectivity and exchange with real currency and the real economy. Worldwide hundreds of thousands of establishments are directly recognising bitcoin for exchange of goods and services in the real economy; be it restaurants, pubs, or sellers of air tickets or hotel reservations. They even charge a lower fee of 0 to 2 per cent as against 2-3 per cent as commission. As of 2014, some of the big corporations accepting Bitcoin include Paypal, Microsoft, Dell and Newegg.

As the acceptance of Bitcoin increases in the system, it spreads its popularity from early adopters to the general public. As per some reports, there are at least 1.3 million users of Bitcoin and as per a separate research conducted by Cambridge university, there were between 2.9 million and 5.8 million unique users using a cryptocurrency wallet as of 2017, most of them using Bitcoin. As of June 2017, total market capitalisation of cryptocurrencies is higher than $100 billion and record high daily volume exceeds $6 billion.

Aiding and abetting the popularity of these currencies is their unique feature which combines in them the feature of a medium of exchange like a regular currency and also the feature of a hard asset like property which can appreciate or depreciate. Incidentally, the value of Bitcoin has been increasing regularly and continuously despite occasional corrections. The value of Bitcoin has increased from $0.30 in 2011 to $ 3961 in 2017; a rise which has raised concerns of its being a Ponzi scheme or a fraud.  If it is not a fraud as claimed by some investigations and studies, than at least the rise does reflect a manic chase by investors.

Inherent and related to the function of the sovereign for control of currency/cryptocurrency are the concerns around control of money supply in the economy and consequently, also interest rate, inflation and employment. Control of money supply remains one of the most potent weapons in the hands of central bankers to influence interest rates and inflation in the system. Cryptocurrency by its very nature of distributed rules of generation and uncontrolled though secure flow across systems, threatens the control of central bankers and governments over a vital policy measure.

While underlying technology for control and flow of cryptocurrencies is technically very sound, control and monopoly of such system by a central bank shall kill the fundamentals of the underlying technological system which is built around random distribution.

Another important aspect arising out of cryptocurrency relates to financing of criminal activities like terror funding, drug peddling etc. With the flow of currency virtually borderless and instant, and outside the regular banking system; it offers a unique advantage as a medium of exchange for criminal elements. They can move funds virtually, almost anonymously, across multiple borders. This is becoming especially attractive as the linkages of cryptocurrency with the real economy are becoming stronger by the day. Governments are aware of the dangers of leaving the control of cryptocurrency outside the regulatory mechanism for too long.

As cryptocurrencies have yet to attain legality in a majority of countries, evasion of taxes is another important challenge. Recently, IRS in US framed rules to recognise Bitcoin like currencies as property so that any gains arising out of an increase in its value shall be taxed as capital gains. But this is only one aspect of the problem. Cryptocurrencies can create virtually their own tax haven systems which tax administrators across the world would have to keep chasing.

The rise and increasing popularity of cryptocurrency undoubtedly reflects the dawn of a new era based on an entirely new platform. The advantages posed by the new system in terms of security, integrity, convenience, stability and scalability are unquestionable. In fact, the underlying technology is so robust that many other systems are exploring the possibility of adaptation in diverse categories like maintenance of land records, stock trading etc. The governments of the day are aware of the challenges and opportunities offered by the new currency system. The only thing to see is how fast and to what extent they move in to take charge for an orderly growth of cryptocurrencies with enough safeguards to prevent misuse by unscrupulous elements.


(The writer is a scholar, student and thinker and can be reached at vasushaurya@gmail.com)