Choice: media hype against climate change, regulation against ban

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Cryptos, a byproduct of Blockchain technology, are often referred to as currencies because they can be a medium of exchange. But unlike paper money or bank accounts, they use encryption tools to verify the currency unit and control its creation. They are not validated by a government or a bank, but by the repeated use of electricity dependent IT processes. They live like stocks, only in “their specified exchange” and can only be bought / sold by members of that exchange. Unlike equity stocks, however, they have no intrinsic value or “earning power” except for “mining” gains. They order prices based on their ability to convince the buyer of their “scarcity” premium.

Crypto was invented in 2008, the year of the global financial crisis. It was considered an alternative asset class, like gold, because it was generated by a framework mathematically designed to ensure an accurate finite supply. Each bitcoin is unique and cryptographically secure and cannot be replicated or hacked. Thus, crypto cannot be twice spent or counterfeited.

It created glamor and hype. Proponents of Blockchain technology and its associated cryptocurrencies foresee increased importance in the future, as in the current monetary configuration, governments are reckless about printing money regardless of inflation. , which wipes out laboriously earned income / wealth. Cryptos quickly grew to a global market capitalization of over $ 1.5 trillion. In India, there are around 15 million subscribers, with an estimated investment of over $ 6 billion. Currently, it is classified as an unregulated asset.

Blockchain technology is essentially a shared database authentication system. It has the potential to reform financial record keeping, including asset transactions. It can support smart contracts, facilitate low-cost instant settlement of cross-border payments, and fight money laundering.

In Blockchain technology, each “block” of a shared database must be validated by all computers connected to the network, before being added to the previous chain. Users of a publicly distributed database need incentives. This is provided endogenously. The authentication or extraction process, if performed a number of times, “produces” the crypto. This “rewards” the miner performing the authentication. The mathematics are such that each crypto requires more and more “authentications” for production than its predecessor. Computers inside an institution will not seek incentives, so they will use less computing power than “public / open” systems.

Also Read: Global Action Needed To Regulate Technology Like Cryptocurrency, Says Nirmala Sitharaman

The need for incentive makes technology energy intensive. According to the University of Cambridge’s Bitcoin Electricity Consumption Index, bitcoin miners currently consume 130 terawatt-hours of energy (TWh), or roughly 0.6% of global electricity consumption. This puts the crypto economy at its current size on par with the carbon dioxide emissions of Finland or Sri Lanka.

The hype about a technologically limited finite supply can be contrasted with the fact that as of May 2021 there were already 10,115 different cryptocurrencies. The number is increasing every day. Two cryptos, Bitcoin and Ethereum, account for 60% of the market’s valuation, not because of an inherent quality difference or separately proven revenue stream, but because of brand / first-come advantages. This can change course, or even evaporate overnight.

Neither Bitcoin nor any other specific crypto is essential for carrying out a blockchain operation on a commercial scale. Any of the many variations will do, or a brand new variation can be configured with the same ease. Moreover, it is often overlooked that the “core banking technology” (housing all of a bank’s global accounts, regardless of country, in a single mainframe supercomputer configuration) now used by banks allows for the same instantaneity as that claimed for blockchains. Bank transactions are priced according to what the regulator authorizes. In India, UPI person-to-person remittances from Mumbai to J&K or the North East are free, but a bank transfer to an account in Dubai would incur high fees.

There are concerns that cryptos will confer anonymity on the holder and therefore may be a popular settlement mechanism for a variety of illegal / dark web transactions. So there is an interesting conundrum. On the one hand, there is a new technological discovery, the Blockchain, which has the potential to grow but has an energy-intensive by-product, crypto. On the other hand, a planet scrambles to save itself from a climate catastrophe due to global warming caused by excessive carbon use, focusing on achieving carbon efficiencies / reducing energy dependencies. At the recent CoP-26 summit, the EU and US pledged to achieve net zero carbon by 2050, China by 2060, and India by 2070. So how will this paradox be managed?

The recent government announcement of an intention to regulate cryptos is a welcome move in this highly volatile emerging industry, given that politics is currently lagging behind technology. What should regulators do? Attempts to outright ban, limit use, or take a rigid stance may not be appropriate. The selection and choice between cryptos will also not be desirable. Excessive exuberance in an energy-intensive sector is what must be curbed.

It will be better to treat cryptos as a luxury good, because it is not a currency, or a stock, or an asset in common use. It should be subject to standard GST, income and capital gains taxation rules. Also, like all remittances of stocks, commodities, or currencies, crypto trading must be fully RBI compliant, allowing only domestic interrelationships. All export / import transactions must be done “Exchange to Exchange” with a full KYC. All crypto exchanges must be subject to the usual regulations set out by SEBI. Subsequently, the authorities may authorize the development of scenarios before attempting further regulation.

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