Crypto currencies are not my currencies….. as yet…..
(Originally published on LikedIn on October 12, 2017)
There has been a lot of hullabaloo on crypto currencies (Bitcoin, Ethereum etc.) and related ICOs in last few weeks. I got intrigued and decided to read and understand more on crypto currencies. The more I read, the more confused I got. Hence, I decided to pen down my queries / points of doubt with respect to crypto currencies.
(i) If one of the fundamental rationales for advocating crypto currency is that in crypto currency system there is no centralization, then why only miners can create currency and others have to purchase it or acquire it or receive as consideration for some product or service? How is this different from government / central bank controlling currency?
(ii) If one of salient feature of the crypto currency is that its value is determined on the basis of real demand and supply (and there is no single entity / establishment which can tinker with the value of the currency), then why the value of crypto currency is still reflected in another non-crypto currency viz. USD, GBP, Euro etc.
(iii) Is there a possibility of a consortium of miners manipulating (slowing) the mining process or creating artificial demand and letting the value of the currency rise artificially?
(iv) How is the concept of shared ledger, at a fundamental level, different from multi-bank settlement system? Can we not achieve the same result by applying the technology to existing banking / currency systems? If the crypto-currency, in simpliciter terms, is just a ‘set of entries’, then do we really need another form of currency or should we focus on securing our existing banking system?
(v) If creation of crypto-currency is restricted in terms of time i.e., only certain amount of currency can be created in certain time, then are we not leaving scope for creation of artificial demand and consequently a valuation bubble?
In my view, in order for the crypto currency to really emerge and be considered as substitute for existing currency, the following issues need to be addressed:
(i) The ‘anonymity’ around the system needs to go away and identity of every miner, user or holder should be clear.
(ii) The ‘usage’ of the crypto currency needs to be restricted to only (genuine) transactions and hoarding of crypto currency or treating crypto currency equivalent to an investment security should not be permissible.
(iii) The crypto currency should be completely delinked from all of the existing currencies viz. USD, GBP, Euro etc.
