Regulating Cryptocurrency: A Challenge for the Central Government and Central Bank

Abstract

A cryptocurrency is designed to be a currency, but it does not really function like a currency. Currency always has an issuer, usually a trusted entity like the sovereign.  There are already indications that cross-border flows are taking place in cryptocurrencies. If this trend is regulated, a part of the flows related to trade payments, remittances or cross border investments would be made in these cryptocurrencies. Cryptocurrencies have specifically been developed to ignore the regulated financial system. These should be reason enough to treat them with caution. It is also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to Ponzi Schemes, and may even be worse. These should be reason enough to keep them away from the formal financial system. More significantly, they can destabilise the currency system, the monetary authority, the banking system, and in general Government’s ability to control the economy.