Regulating cryptocurrencies

(Mains GS 3 : Science and Technology- Developments and their Applications and Effects in Everyday Life.)

Context:

• The crash in the price of cryptocurrencies is a timely reminder to retail investors to stay far away from this highly speculative asset class. 
• The popular cryptocurrencies like Bitcoin has lost over two-thirds of its value since its peak in November last year and has wiped out many retail investors. 

Crisis in making:

• The current crash was a long time in the making as Cryptocurrencies were initially touted to be alternatives to fiat currencies. 
• Since the supply of a lot of cryptocurrencies is limited by design, investing in them seemed like a good way to protect one’s wealth from inflation fuelled by central banks. 
• But as it became obvious that cryptocurrencies have had very little acceptance as money, crypto-enthusiasts began to argue a slightly different case. 

Wider market correction:

• Cryptocurrencies were now touted as an independent asset class like gold and silver that could serve as an effective hedge in times of crisis.
• The crash in the crypto market amidst wider market correction has put to rest the argument that crypto, as an asset class, is as good a hedge as precious metals. 
• There is little reason to believe that cryptocurrencies possess any intrinsic value that can make them serve the role of widely accepted money or as a legitimate asset class such as precious metals.

Climate of easy monetary policy:

• The acceptability of cryptocurrencies in the wider economy has remained minuscule and there are no signs of their use for purposes other than wild speculation. 
• But the only tailwind that has kept cryptocurrencies rallying despite concerns about their fundamental or intrinsic value has been the climate of easy monetary policy adopted by central banks. 
• Easy money from central banks fuelled the rise of a get-rich-quick industry that depended on selling to a greater fool. 

Unwilling to recognise cryptocurrencies: 

• Just as Internet stocks and tulip bulbs were the hallmarks of liquidity-fuelled bubbles in the past, cryptocurrencies are the leading symbol of the current bubble in markets.
• But the biggest threat to their prospects has been an existential one that the Governments and their central banks have been largely unwilling to recognise cryptocurrencies as a legitimate investment asset. 
• They are also unlikely to recognise private cryptocurrencies as they infringe on the state’s fiscal and monetary authority. 
• Moreover, this hostile attitude is at least partly to blame for the shady nature of the crypto industry at large. 
• Retail investors looking for quick market gains have had to plunge into an unregulated space marked by scams and other pitfalls in the absence of a legal environment that can protect investor interests. 

Conclusion:

• Regardless of the investment prospects of cryptocurrencies, a proper regulatory framework may help in protecting retail investors, at least from outright scams.