Sunday, May 29, 2022
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The Pitfalls Of Using Cryptocurrencies Weigh Over The Benefits

Cryptocurrencies are highly risky and have the potential to create financial instability. Plus, in India, crypto payments are not as smooth as one would like to believe.

The Pitfalls Of Using Cryptocurrencies Weigh Over The Benefits

Though the number of globally cryptocurrency users is steadily growing, many countries are taking a tough stance on them. The number of global crypto users reached 106 million in January 2021, according to Crypto.com, a crypto research firm. At the same time, countries including China, Russia and Bangladesh, have banned cryptocurrencies. Though the Indian government is not expected to ban cryptocurrencies, there is a lot of speculation on the future of these digital assets.

While enthusiasts cite a lot of reasons to legalise cryptocurrencies, there are certain pitfalls that these currencies come with. Let’s take a look at the benefits crypto enthusiasts list out and the pitfalls.

Pitfalls

High VolatilityCryptocurrencies are very volatile. Bitcoin (BTC), the top crypto coin by market capitalisation, in the last one month, from November 14 to December 14, reached the peak of $66,281.57 and a trough of $42,874.62, a percentage difference of approximately 54% if we take the lowest price as the current price. Similarly, Ethereum was at $3,680.61 at its lowest and at $4,891.70 at its highest, a percentage change of approximately 32% over the same period. The prices are as per data from the global crypto exchange coinmarketcap.com.

“The absence of any asset or a sovereign guarantee backing the currency also exposes it to a considerable degree of volatility and risk particularly if the bulk of the currency is controlled by a few owners,” says Abhishek Tripathi, managing partner, Sarthak Advocates & Solicitors. 

After El Salvador officially adopted Bitcoin as legal tender, the International Monetary Fund (IMF) pointed out financial and consumer risks associated with the cryptocurrency.

“Given Bitcoin’s high price volatility, its use as a legal tender entails significant risk to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, bitcoin should not be used as a legal tender. Staff recommends narrowing the scope of the bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem,” said IMF in its 2021 Article IV Mission published in November 2021. 

Payments Are Not Easy Yet: To start with, most businesses do not accept payments in cryptocurrencies, especially in India. A handful of them do have faced challenges.

A study conducted by Smahi Foundation of Policy and Research, a non-profit organisation based in Bengaluru, found that purchasing a cup of coffee using Bitcoin as a payment method took about 10 minutes.

“We started accepting payment through cryptocurrency as an experiment in October 2021. One of the customers tried to make payment through cryptocurrencies, but, unfortunately, it took a lot of time, and the transaction didn’t go through. Crypto as a payment method is not a good idea. We have halted this method for some time and are waiting for government regulations,” says Suveet Kalra, owner of Delhi-based restaurant Ardor 2.1. The restaurant received no payments in cryptocurrencies until it suspended the facility last week.

Threat to Economic Systems: Eswar Prasad, an economics professor at Cornell University and a research associate at the National Bureau of Economic Research, while talking to CNBC in October, said that Bitcoin is likely one long-lasting bubble, and digital money could leave the government with more control than ever, while making wealth inequality much worse. 

“Cryptocurrencies may contribute to monetary and financial instability, especially if they were to spawn a large and unregulated financial system that lacks investor protection,” Prasad was quoted as saying. 

During a panel discussion at the Bloomberg New Economy Forum in Singapore in November 2021, former Democratic presidential candidate and Secretary of State Hillary Clinton said that cryptocurrency’s widespread adoption could undermine traditional currencies, including the dollar, and destabilise nations, big and small, businessinsider.com reported. 

Cross-Border Transactions: Crypto enthusiasts swear by blockchain’s decentralised distributed networks, saying they are better suited for low-frequency flows. For cross-border payments, too, they are said to be good options, but that also opens up the element of risk of generation of illegal cross-border funding.

Terror financing is a big concern that the India government plans to address through regulation of cryptocurrencies. A recent report of IANS said that terror financing and money laundering have flourished in the last year (2020-2021) as countries and cryptocurrencies have also boosted terror financing, especially during the pandemic when governments across the world directed their focus only on battling the Covid 19 pandemic. 

Benefits

While crypto enthusiasts list some benefits, they all come with risks.

Cheap Remittance: Cryptocurrencies can facilitate cheap remittance, which can be beneficial as the volume of remittance in India is quite high.  

India has been estimated by the World Bank in December 2018 to be the largest receiver of inward remittances globally, at $79.5 billion for 2018. The same World Bank report also noted that the average cost of receiving remittances in South Asia was 5.4 per cent, which would translate to a cost of approximately $4.29 billion, or over Rs 300 billion, annually for India.

Many migrants don’t have a bank account in the country where they work, and their families back home may also be among the 1.7 billion unbanked people worldwide, Smahi Foundation research noted. Despite several appeals from the UN and the G20 to cut the charge that migrants must pay to send money home, remittance remains expensive, it said.

But there are several challenges in its acceptance as well. The risk of a sudden drop in its price means that migrants and their families back home can never be sure about the amount of money transferred.

Decentralisation: Unlike fiat currencies, which are controlled by the government, cryptocurrencies are decentralised. As a result, the flow of money is not controlled by a single organisation. However, because it eliminates the government and regulation, there would be no one to protect the poor and underprivileged who may not understand technology well.

“Crypto is a new, innovative technology but just a part of a bigger economic boost that blockchain offers for financial activities such as lending, payments, and distributing credit,” says Vikas Ahuja, CEO India at CrossTower, a global crypto exchange.

Likelihood of High Returns: The cost of high volatility and risk could be high returns. “It is true that the crypto market is more volatile than other markets. But the risk of volatility can be rewarded with high rewards (returns). In that sense, volatility is not the enemy,” says Ajeet Khurana, a crypto project advisor and investor.

Vishal Bhardwaj, 29, who works as a senior engineer in a company in Delhi has been investing in cryptocurrencies for quite some time. “I have earned more than Rs 1 lakh in a single day, but the volatile nature of cryptocurrency is always a concern, so I have faced losses as well,” he says.

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