BS Number Wise: Throttling innovation due to speculation may harm Bitcoin

Bitcoin is easily influenced by governments and whims and wishes of famous personalities and companies

Last month, the value of Bitcoin fell below $30,000. It had touched a high of $61,000 in March. Although Bitcoin is now trading at over $37,000, speculation is rife, and the currency may go either way.

Avoiding the pitfalls of the gold standard and silver standard, Bitcoin and other digital currencies have been able to solve the problem of uncertainty by allowing only a fixed amount of currency in circulation. The issue they have not been able to resolve is volatility in value. The value of fiat currencies, like the Indian rupee or US dollar, is based on fundamentals, but digital currencies work on pure speculation.

An analysis of cryptocurrencies’ price movement shows that ‘fiat’ or government’s acceptability plays a big role in value determination. Moreover, private individuals and corporations also hold sway over the currency’s value.

Will cryptocurrencies remain beholden to governments? Can the system become truly decentralised?

The cryptocurrency craze has prompted governments to float central bank digital currencies (CBDCs). As of this moment, 83 countries are in different stages of development.

Countries worry that private digital currencies could be misused to commit fraud. A company, when it makes an initial public offering (IPO) to raise capital, has to fulfil the market regulator’s rules. In the digital world, companies can launch their own coins using initial coin offerings (ICO) and raise capital. Some of these ventures are legitimate, but most are fraudulent. A study conducted by Statis Research for ICOs with more than $50 million market capitalisation found that 80 per cent of ICOs were scams, 6 per cent had failed, 5 per cent had gone dead. Even among the 8 per cent surviving ones, nearly half were dwindling.

But not all ICOs are bad. For India, digital currencies have opened investment opportunities for startups and young people. For a country that has the lowest financialisation rates — only 14 per cent of households have equity exposure as compared to 28.8 per cent in China and 45.5 per cent in the US — this can be a boon.

Appeals to ban digital currencies ignore the fact that the technology behind them is transforming governance. Blockchain is being used to digitise land records and experiment with shareholder voting. Even the Election Commission is looking to implement the technology for voting.

A Business Standard analysis finds that the regulatory architecture of digital currencies and innovation in the blockchain ecosystem are correlated. Countries that have not banned digital currencies or regulated them are also the ones that are home to a large number of blockchain startups, which attract better financing.

Is it prudent to throttle innovation in the name of speculation, or is it better to regulate the system to ensure traceability and curb misuse? The government is leaning towards throttling. What do you think?