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The fall of the crypto currency

Protagonists of crypto currencies had a bad experience recently. Their euphoria went for a toss when the market price of bitcoins crashed to sub- $600 level from a high of $1100 as a result of several bitcoin exchanges either going bankrupt or supsending operations because of extraneous reasons. A firm in Tokyo dealing with the virtual currency lost some 650,000 bitcoins after hackers found their way into the system. Similarly, some exchanges had to halt transactions following hacker attacks. While many say such incidents are bound to happen where technology is involved and when physical is replaced by virtual and it is a temporary setback, there are academics who have followed the evolution of the concept who now dismiss it as an aberration. At best, they claim, crypto currencies could eventually be something not more than a niche in the world’s payment system. Bitcoin creater Satoshi Nakamoto felt his system would one day parallel the traditional currency system or even replace it and will have the benefits of low fees and anonymity for the users and shield them from government and regulatory manipulations, but it was exposed to the maladies like drug trafficking and terrorist activity. Even at the time when it was most popular, bitcoin holdings were just a mere fraction of the total physical currency in circulation – trillions in whatever value. The bitcoin system is actually designed to yield only 21 million bitcoins by 2040. But there are flaws in the system because there is no regulatory oversight or any methodology to ensure that there are protocols and verification of transactions. It is basically humans who control the system – setting the protocol, the standards, supervising the miniing. And the miners can easily change the software and mine more bitcoins than stipulated.

Having said this, many proponents who advocate reformation in the world financial system see a role for virtual currencies albeit a limited one, especially in the developed economies. If such currencies are allowed, definitely there will be regulations built around, they aver, which make them a viable proposition. Virtual currencies would also have effective use in countries where inflation is a challenge and controls on money are in existence. But what is required for the currency to survive is government support. It may not succeed unless accorded recognition by the governments, which is not the case today – bitcoins cannot be used as collateral, it cannot be foreclosed upon or reassigned in bankruptcy. So the commercial value is negligible.

Quite expectedly, we in India seem to be not very enthusiastic. We are rather tradition-bound, averse to high risks. It is unlikely that we will catch the crypto currency cold in the near future.

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