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explained: Why Are Governments Banning Cryptocurrencies?

Do you know that if you would have invested Rs 10,000 in Bitcoin in the year 2010 you would have Rs 66 crore today.

Cryptocurrency in recent times has been stealing every headline. What was once popular only in the science community, is now a buzzword. 

India also ranked no. 2 in a poll of nations that use cryptocurrency the most.

But did you know that even as cryptocurrencies are growing fast, not everyone is on board.  Many Govts. around the world have banned dealing and trading in Crypto.

China, which was the second largest crypto market, Russia, Bolivia, Indonesia, Turkey, Bangladesh, Morocco are some of the countries that have completely banned the use of crypto.

But exactly why are governments wary of crypto and why are some of them banning it? 

Before we decode the hype around crypto, let’s understand what crypto is and how it works.

What is Cryptocurrency

Cryptocurrency is a digital currency or a decentralised form of currency that can be used for payments or investments. What digital currency means is that it’s not in the form of physical money. Rather, it’s a type of encoded digital form, whose record is stored in millions of computers all around the world.

Coming to decentralisation..what it means is that crypto is not controlled by any authority, banks or government. 

So that means you can buy goods, invest money and earn profits on investments all through crypto.

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Cryptocurrencies work using a technology called blockchain, a technology that manages and records transactions. 

But how can one actually use cryptocurrency?. You can pay crypto to buy anything that you would probably do with normal cash. More and more brands like Subway, Paypal, Microsoft and many others are changing their payment methods so that you can pay them in crypto to get anything. Even Tesla has started accepting bitcoins to sell their electric vehicles. Some Indian companies too have begun accepting virtual coins.

But how exactly did they get so popular?

Why Is Cryptocurrency Popular?

Cryptocurrencies appeal to their supporters for a variety of reasons. First, the ease of transfer.

To exchange cryptocurrency between two parties, there is no need for a third party or a middleman. Since, Crypto is not issued by any central authority, they are immune to government interference or manipulation. 

Another reason why people are attracted to cryptocurrencies is their value. Investing in cryptocurrency is like investing in the stock market. When Bitcoin, which is the world’s largest cryptocurrency was launched in 2017, its value was $100 which is almost Rs 7,500 . Now in 2021, Bitcoin hit its all-time high price of $62,000 which is almost Rs 46,00,000.

This growth tempts people into investing. Not just Bitcoin, other cryptos like Ethereum, Litecoin, and Dogecoin, have followed a similar growth trend.

Apart from the value, the other thing that attracts investors is its safety. Cryptocurrencies are built on blockchain technology, which is known for its security and privacy. The transactions made cannot be traced so easily as they involve navigating through a series of web transactions.

Banking and financial institutions levy charges on everything. If you travel overseas, you will have to pay a fee to use your credit card. If you want to open a bank account, you will have to pay a fee to maintain it. 

Crypto investors believe that these charges, when added, result in a big amount that can be avoided if they use crypto. The fee for using crypto is very low, which makes it an ideal choice for all kinds of transactions.

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While India is letting these currencies stay for now, there are some countries that have completely closed their doors for crypto and have imposed a stringent ban on them. Let’s try and understand why govt’s around the world want cryptocurrency to go.

Why are Govts Banning Cryptocurrencies

Governments have the power to control traditional currencies also known as fiat currencies such as Rupees, Dollars, Euros, Yuan, etc. Governments, in particular, are extremely fond of fiat currencies because of one simple idea and that is – the control they have over it. 

They control money circulation and also avoid financial crises by controlling it. This control is also helpful to governments as they try to keep their economy healthy by adjusting the amount of money in circulation in an effort to stimulate investors or avoid a financial crisis. They can change the monetary policy to run the economy. They can track the movement of money in the economy, which earns profits and collects tax accordingly.

However, no government controls cryptocurrencies, so no government can collect taxes on it, track its movement, or even adjust its distribution. The govt. can’t even set its price. Crypto users don’t have to deal with banks.  So to answer the question, cryptocurrencies take control away from the government and put it in the hands of the people.

Reportedly, Due to decentralization and anonymity, cryptocurrency is also being used as a viable method for illegal activities. Several drug mafias are using the bitcoin network to trade drugs and harmful chemicals. Cryptocurrency has been flagged by law enforcement agencies in India too, for use in illegal and criminal activities like money laundering, illegal fundraising, fraud, pyramid schemes, and drug trafficking.

In 2018, the RBI had banned trading of cryptocurrency, which was later overruled by the Supreme Court.

China recently banned trading in cryptocurrency raising concerns around its national security and energy-intensive mining. Countries like Turkey and Bolivia have also quoted similar reasons for banning crypto. This is therefore one of the biggest reasons due to which many governments fear legalizing bitcoin and other cryptocurrencies.

With the advent of crypto, central banks have lost their business, which is eventually a loss to the government. Thus, the government, as well as central banks, are averse to the idea of crypto. However, a point to note is that there are several governments around the world who have either launched their own digital currency or are in the process of bringing it. India too is all set to bring its Central bank digital currency soon.

Today, while there are reportedly over 5,000 known cryptocurrencies in the world, only time can tell if crypto prospers or governments around the world come down heavily upon them.

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