March 29,2018:
The Author, Deepika Kataria is a LLM student of University School of Law and Legal Studies,Guru Gobind Singh Indraprastha University, New Delhi.
Abstract
With each passing day Crypto currencies are becoming a galvanic and an engrossing phenomenon in India and the Rest of the World.
Every day we come across copious headlines in the newspaper relating to Crypto currency boon. So what is so magical about Crypto currencies? And if this is the layout, then what will be the status of the traditional banking system in this Crypto currency epoch?Thus, this Article is a comprehensive attempt to study the contrasting features of Crypto currency and traditional banking system. Further, the Article will analyze the influence of Crypto currency on traditional banking system, and the paper - based currency.
Purpose - The purpose of this Article is to study :-
- The influence of Crypto currencies on traditional banking system.
- To Analyze the reasons as to why did the Reserve Bank of India put a ban on Crypto currencies.
- Whether Crypto currencies are the real threat to the traditional banking system?
What are Crypto currencies?
Today Crypto currencies have become a worldwide phenomenon, but what actually are crypto currencies? How did they emerge? Are a few mind - boggling questions.Thus, According to a comprehensive definition by Merriam- Webster a Crypto currency or virtual currency is any form of currency that only exist digitally, that usually has no central issuing or regulating authority but instead use a decentralized system to record transactions and manage the issuance of new units and that relies on cryptography to prevent counterfeiting and fraudulent transactions.
But, how did Crypto currencies emerged is an exciting question to deal with at this juncture. so, here it goes like this that the merchants in earlier times offered virtual currencies to their customers which represented fiat currency these virtual currencies were redeemable and were used as the medium of exchange and transfers the early experiments with Crypto currencies began in the early 1980’s.
Further in 1983 An American Cryptographer David Chaum started Cryptographic electronic money (blinded money) called e - cash and in 1995 he implemented it through Digicash . In 1998 Wei Dai described “b-money” and thereafter Nick Szabo described “bit-ld” as the types of cryptocurrencies.
However, the first decentralized Crypto currency ie:- Bitcoin was created in 2009 by Satoshi Nakamoto. Further in April 2011 “Namecoin” wa created and soon thereafter Litecoin was released.As of now there are over 850 Crypto currencies being traded across the world, and popular among them are Litecoin , Dash ,Ripple ,Zcash ,Stratis etc a new currency which has emerged recently is Ethereum and it is giving strong competition to Bitcoin.
Crypto currencies are breaking all borders and barriers in the context of finance but, another question which is to be answered at this point is how do these Crypto currencies work? the next section deals with this aspect.
How do Crypto currencies work?
By now we are fully conversant with the fact that Crypto currencies are virtual or digital form of currencies that run on a new monetary system which is not regulated by any Central Authority.
There are many types of Crypto currencies with various functions but the common feature of each Crypto currency is that it is supported by a decentralized peer to peer network called the Blockchain.
The Blockchain technology ensures that all Crypto currenices are recorded whether they are held in a digital wallet or being used in trading. A Crypto currency has a ledger where all transactions are made public to ensure transparency,nobody owns that ledger or Crypto currency Blockchain instead it is self - governing and hence, decentralized.
A Crypto currency is first purchased from a major Crypto currency exchange for eg.CEX.IO is one of the oldest Crypto currency exchanges in the world also there are BITTRE, BITBUY.CA, COINBASE ,KRAKEN, SHAPESHIFT,POLONEIX to name a few. A Crypto currency transaction is not final until it is added to the Blockchain. Further every Crypto currency holder has a private key which reflects his identity and allows them to exchange units, without the private key the holder cannot spend or convert his Crypto currencies rendering them worthless.
A crypto currency user has a wallet with unique information which confirms the holder as temporary owners of their Crypto currency units.
After discussing about the evolution and functioning of Crypto currencies it is imperative to understand about the advantages of Crypto currency system in contrast with the traditional banking system.
Advantages of Crypto currency system:-
Many countries of the world like Japan, Canada, Malta, United States, Mexico, Kyrgyzstan Cyprus, Russia etc. have welcomed the Crypto currency era .So Is there any whip hand of Crypto currencies as compared to traditional currencies? Are they going to replace the fiat currency in the near future or will we ultimately do away with the banks?
To answer these questions it is pertinent to note a few advantages of Crypto currencies first, Crypto currency enables the user to send or receive money without an intermediary, thus giving the user more control of his finances.
Second, Crypto currencies are also extremely secure as they use ‘Hashing’ to effectively verify the integrity of the data also privacy and anonymity are the two virtues of Crypto currencies.
Third advantage is that in most Crypto currencies there is in-built scarcity, in this way Crypto currencies are more like precious metals and also due to its scarce nature Crypto currency offers inflation protection which is unavailable to fiat currency.
The fourth advantage and the most important advantage of Crypto currency is that it provides reliable medium of exchange outside the direct control of central banks. It Is not subjected to rules and regulations imposed by banks and other financial institutions. Thus, it works on the principle of self-governing.
Fifth, Crypto currencies tackle fraud as it is not associated with the bank account or cash funds and is transferred electronically and securely with the Block chain recording all the transactions.
Sixth advantage is that, it helps in making capital market strong through crowd-funding ICO ie: Initial Coin Offering are centered around.
Seventh, although Bank to Bank transfers have become efficient but still they have to go a long way but as far as the transfer of Crypto currency is concerned it does not require any checks and balances that banks do before the funds can be transferred and moreover in Crypto currency transfers there is a low fee or no transfer fee.
Last but not the least advantage is that Crypto currency helps in making e-commerce stronger and create worldwide business opportunities as it is almost accepted worldwide and it provides stability and certainity to people living in economically unstable countries.
As we have seen in the foregoing paragraph that Crypto currencies have a pelothra of advantages, so does this mean that it will end paper-based currencies altogether? Or is the traditional banking system under fear from the Crypto currency boon? Section IV deals with the analysis of this aspect.
Do banks fear Crypto currencies? An Analysis.
As we are aware of the fact that in India the Crypto currencies are rendered illegal and the transfer or exchange based on them has been banned as it is evident by the speech given by the Finance Minister of India Mr. Arun Jaitely in the 19th meeting of the Financial Stability and Development Council.
Further, the Central Bank of India ie: The Reserve Bank of India has banned the use of Crypto currencies it means that Indian residents cannot purchase Crypto currency through their bank accounts and it also dictated other banks to not provide any services to business dealing with or settling Crypto currency.
In Canada also in April 2018, the Bank of Montreal announced the ban of Crypto currencies and also Central Bank of Bolivia has put an absolute ban on Crypto currencies. Further Bangladesh Bank has also banned the use of virtual currency. The Nepal Rastra Bank has also banned Crypto currencies and even People’s Bank of China has banned Crypto currencies.
The question that comes to my mind is that why there is a banking ban on Crypto currencies? Furthe, is the traditional banking system under threat from Crypto currencies or is there any operational difficulty or risk involved?
After the Crypto currency boon a major shift has occurred in how people do their business and other transactions also exchange/transfer are taking place outside the traditional banks digitally by the use of a mobile phone.
Further, Crypto currency users handle their finances on their own without incurring any Bank Fee thus, Crypto currencies eliminate the need for a third party intermediary like a bank.
The data of parties transacting is not revealed and the money can be tracked when it is converted into cash thus, this has created a wave of change in the Banking sector across the world.
Also, the economic power which lies with the government and financial institution has shifted to Crypto currencies holder/masses which has resulted into threat to the government and financial institutions.
Crypto currencies have opened new kind of market and the striking feature of it is that it is controlled by no one and the zero transaction cost made these Crypto currencies superior to the Fiat currency.
The threat to Banks from Crypto currency is so much evident from the fact that some Banks of the World have even launched their own Crypto currencies as a substitute or even replacement for their current money base for instance, Sweden’s Riksbank has launched ”e-krona” Crypto currency that could be launched within the next decade and also a New York based investment Bank JP Morgan Chase is launching the major Crypto currency backed by a US Bank called “JPM coin”.
As far as India’s stance on Crypto currencies is concerned the Reserve Bank of India has cautioned users against trading and use of Crypto currency the reasons the Bank gave for cracking down Crypto currencies in India are its concerns about Investor protection and Bank fraud as there is anonymity of transaction and lack of fundamental or intrinsic value (it means they are not backed by asset).
Reserve Bank of India is also concerned about tracking the source of money according to the Reserve Bank of India virtual currencies cannot be recognized by the existing monetary and legal regime as it is neither currency nor money it can’t be considered as a valid legal tender. Reserve Bank of India is also concerned about market integrity and money laundering.
The Reserve Bank of India has instructed other Banks and financial institutions as to not to accept digital currency as a mode of payment and stop investing in it as the money in banks is public money and Reserve Bank of India cannot allow other banks to put public money at risk without proper legal mechanism to back the transactions however, if we take a situation that what will happen if Crypto currencies will eventually takeover? will it be the end of banking system? This Aspect has been discussed in the next section.
What can be done?- concluding remarks:-
Crypto currencies currently constitute a negligible fraction of the world’s assets but still traditional banks are becoming very much aware of the new wave of Crypto currency revolution. Does this mean it will be a huge wind up for the Banking system?
Answer to this can be a little vague as it will depend on the near future strategies adopted by Banks under which they will be able to cope up and will actually play an important role in a Crypto currency dominated Economy.
Further, Banks need to evolve, they should be digitally equipped, Banks should dump their traditional methods and should adopt a more flexible approach in adopting the use of blockchain technology.
Traditional banks have often been accused of being unfriendly with their customer and account manipulation therefore, traditional Banks have to be to be vigilant in the areas of customer services, digitalization and fees charged getting acquainted with digital trends may help the banks to lessen the Crypto currency threat. In my opinion even though Crypto currencies have a lot of advantages but it has a downside too.
Some of the disadvantages with which Crypto currency saga suffers are firstly, Crypto currencies empower the dark web, which people often use for illegal purposes as their identity is not revealed this aspect will eventually give impetus to cyber crimes.
Crypto currencies give rise to speculative activities too and there has been a trepidation among the central banks that Crypto currencies can be used secretly for money laundering.
Thus, I am of the view that something which is so menacing like Crypto currency boon will not render the traditional banking system useless atleast for a quite sometime as people rely on something having a proper legal backing which is there in the traditional banking system and not in the Crypto currency system.
