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Bitcoin as Legal Tender In Central African Republic (CAR) - UPSC Current Affairs
May 17, 2022
Accelerate your UPSC exam preparation with our daily edition of Current Affairs Dialog Box. In today’s edition, we will talk about the Bitcoin as Legal Tender In Central African Republic and how it is related to the UPSC CSE syllabus.
Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.
Mains: Awareness in the fields of IT, Space, Computers, Robotics, Nano-technology, Bio-technology and Issues relating to Intellectual Property Rights.
Why in the News?
Recently, the Central African Republic (CAR) became the second country after El Salvador to adopt Bitcoin cryptocurrency as legal tender.
Leaders in both El Salvador and CAR have maintained that financial inclusion is the prime rationale for according to Bitcoin the status of a legal tender.
Image Source: Business Standard
The way forward to tackle the surge in the cryptocurrency in the economy is to regulate them rather than imposing an outright ban. Comment
A Cryptocurrency is a medium of exchange, such as the rupee or the US dollar, but is digital in format.
For Example, Bitcoin, Ethereum
It uses encryption techniques to both control the creation of monetary units and to verify the exchange of money.
In traditional financial deals, where two parties are using fiat money, a third-party organisation — usually a central bank — assures that the money is genuine, and the transaction is recorded.
With cryptocurrencies, a chain of private computers — a network — is constantly working towards authenticating the transactions by solving complex cryptographic puzzles.
For solving the puzzles, these systems are rewarded with cryptocurrencies. This process is called mining.
These are decentralised in nature, which means that no single entity owns or controls them. Moreover, it does not rely on central banks, and is a collection of data, overall designed to work as a medium of exchange, using its underlying technology, the blockchain.
There are two types of crypto assets - coins and tokens. Coins have their own blockchain network while tokens are part of projects built on top of existing blockchains.
They are not backed by conventional assets such as gold reserves.
Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market.
This is in contrast to national currencies, which get part of their value from being legislated as legal tender.
What is Blockchain Technology? Also referred to as Distributed Ledger Technology (DLT), Blockchain is a system which helps in recording information. The system is basically a digital ledger of transactions that is distributed with the entire network of computer systems and servers on the blockchain. Every block in the chain contains information of transactions made and every new transaction’s information is added to each participant’s ledger. In this way, the database is managed by multiple participants and is decentralised (there is no central agency managing the system). Bitcoin and other digital currencies such as Ethereum use blockchain technology to function.
Checks Corruption: As blocks run on a peer-to-peer network, it helps keep corruption in check by tracking the flow of funds and transactions.
Cost Saving: Cryptocurrencies and blockchains bring many advantages, including cost-savings, decentralisation and transparency.
Saves Time: They are entirely conducted on the internet so, can save substantial time for the remitter and the receiver.
In India’s context, if private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over the monetary policy and financial stability, as it would not be able to keep a tab on the money supply in the economy.
Scaling up such a currency system over a large population would require crippling levels of energy resources.
Currencies such as Bitcoin require humongous processing power.
The anonymity of private digital currencies make them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult.
There is no grievance redressal mechanism in such a system, as all transactions are irreversible.
Non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors.
For example, Bitcoin was selling at $20,000 per coin in December 2017 but in less than a year, it was trading at $3,800 per coin.
The fact that transactions using such currencies can easily bypass the tax net, and therefore be used for illicit transactions, have been bothering governments across the world.
Cryptocurrencies Across World: Cryptocurrencies are being considered in different perspectives by various countries.
First category are the Crypto-friendly countries like Malta and Singapore and Switzerland, which promote use of cryptocurrency.
Second category of countries restrict cryptocurrencies such as China, South Korea, Bangladesh, which has largely banned cryptocurrencies.
Third category regulates use of cryptocurrencies. These countries seek to balance encouraging the use of cryptocurrencies and balancing the risks attached in use of cryptocurrencies, such as the USA.
What has been India’s approach to cryptocurrencies?
In 2018, the RBI had banned banks and other regulated financial entities from dealing with clients who handled private cryptocurrencies such as bitcoin
However, the Supreme Court had overturned the 2018 RBI order saying that under existing laws the RBI does not have the powers required to restrict individuals dealing in cryptocurrencies.
An inter-ministerial committee submitted a report in 2019 which recommended a ban on all cryptocurrencies.
The emergence and acceptance of cryptocurrencies in different parts of the world cannot be ignored or sidelined rather ways should be found to promote their safe use which could include:
Establishing norms and rules for use of crypto instruments in countries and at a global level.
Capturing transactions through KYC and developing norms for taxing transactions.
Developing and regulating Crypto Exchanges.
Collecting data and conducting research to find and plug avenues for money laundering.
India should drop the temptation to join China in banning virtual currencies and instead aim to tightly regulate their trading through monitored exchanges and earn revenue.
Simultaneously, it should expedite the RBI’s pilot of the Central Bank Digital Currency so as to offer an alternative to cryptocurrencies.
Legal Tender Legal Tender is any form of paymentrecognized by a government, used to pay debts or financial obligations, such as tax payments. For Example, National currencies, such as the U.S. dollar, Rupee are legal tender. In the U.S, the Treasury is authorised to create and issue dollars to the public. Laws ensure nothing other than official legal tender gains enough traction to be used as money in the economy.