Although decentralised cryptocurrency is slowly becoming part of the mainstream narrative, it is beset with many infirmities giving scope to malicious activities raising doubts over its safety and reliability.
In the past six months, between April-September 2021, the top three cryptocurrency exchanges – WazirX, CoinSwitch Kuber and CoinDCX – have blocked over two lakh accounts citing dubious activities.
WazirX was recently issued a show-cause notice by the Enforcement Directorate for alleged violation of the Foreign Exchange Management Act on transactions involving crypto-currencies worth Rs.2,790 crore.
The biggest problem the regulators have is with people buying bitcoins on one platform and sending it to unknown addresses. Nobody is able to track who these addresses belong to and what is the intent of these addresses. Even the crypto exchanges are unable to track such activities.
The exchanges are themselves blocking suspicious accounts. The crypto world is largely unregulated. While the Reserve Bank of India has already expressed its reservation in allowing cryptocurrency, the government is yet to announce its stance on the issue. This has made the job more complicated. A parallel economy cannot be run on the system which is more or less like Hawala transactions, say experts.
The increasing usage of crypto currency trend is facing dampeners owing to lack of an adequate safety net, reliance solely on self regulation, volatile nature of the assets and predators preying on the gullibility of investors.
Let’s take up Bitcoin as a study case as it amounts for nearly 44% of the crypto currency that is being used globally. The problem any user or investor first meets is that everything about Bitcoin is of a virtual nature. Even the Bitcoin address is a virtual location.
In short, Bitcoin is not governed by any central authority. There is no central server that can be used to retrieve Bitcoin information. Besides, there is no central storage space for Bitcoin. To emphasize on how unsafe such virtual currency can be, in the year 2020 alone losses owing to theft, hacks and frauds resulted in losses to the tune of USD 1.9 billion to the crypto currency users.
To make matters worse, those trying to lure more and more investors into using Bitcoin and other crypto currencies, keep saying there being no intermediaries it results in cutting of costs. Absence of intermediaries means those using crypto currencies have no need to bother their heads with banks, bankers or brokers or clearing houses.
However, when one analyzes properly, it would become clear that it’s the presence of such intermediaries that make the financial system trustworthy and people can stay rest assured about the safety of their financial assets. It means, absence of intermediaries causes the trust factor also to evaporate.
Another aspect that Bitcoin users globally in most countries are faced with is the law of their land has no regulation to ensure any sort of safety net. As of now our government at the Centre recognizes only currencies floated by India’s Central banker, the Reserve Bank of India (RBI).
In absence of any recognition or proper laws to deal with such currencies, in the event of any wrongdoing or fraud, the user or investor has nothing to fall back on. He or she can only rely on the self-regulations that such crypto currency entities impose on themselves.
In the absence of proper regulatory norms floated by the government or our banking regulator RBI, compliance or due diligence to ensure safety of the investors in Bitcoin type crypto currencies, they are faced with high potential risks.
A person no less than amazingly sensible American investor Warren Buffet has clearly spelt out that the Bitcoin craze will come to a bad end. This statement cannot be taken lightly. The “bad end” part specifically refers to the highly volatile nature of this crypto currency.
Unlike in other forms of exchange, Bitcoins are not supported or backed by any physical assets. In absence of any sound backing, the currency’s volatile nature can get fueled by any casual remark or tweet posted by people on social media. Such casual remarks can result in anywhere between 30 to 40% fluctuation in its pricing over a week’s time.
The most risky part of dealing with crypto currencies like Bitcoin emerges from their ability to lure retail investors into buying complex financial products without adequate disclosures. Such investors are clueless after being misguided and have no recourse to justice. In other words, they cannot even run to the courts to press for recovery in the event of fraud.
To sum up on things to be borne in mind when investing in crypto currencies:
· It’s an unsafe investment to venture into
· Only protective cover is its self regulation
· Crypto currencies are volatile in nature
· Many retail investors get misguided
“Our government should proactively create awareness about the pitfalls of using such virtual currencies. This will help avoid middle income investors like us from losing our hard-earned money.”