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Current Affairs

Adoption of cryptocurrencies as legal tender

Date: 17 May 2022 Tags: Miscellaneous

Issue

The Central African Republic (CAR) has joined El Salvador in the list after it declared Bitcoin as legal tender in the country.

 

Background

Being one of the poorest and economically fragile nations, the CAR has made a bold decision. About 71% of the country’s population lives below poverty line.

 

 

Details

  • Many countries experiencing prolonged inflation and improper currency mechanism have adopted cryptocurrencies.

  • The zeal has been further strengthened by overdependence on varied colonial-era currencies and geopolitical tensions.

 

The colonial influence

  • Countries that have legalized cryptocurrency (bitcoin) do not have a currency of their own. They still use currency of other countries.

  • El Salvador uses US Dollars and CAR along with 14 other former French colonial countries of Africa use Franc as the official currency.

 

Need for adopting cryptocurrency mechanism

  • Use of cryptocurrency is a seen as a move by several countries to circumvent sanctions and embargos imposed on them.

  • Countries like Cuba are cut-off from global financial system and cannot access goods beyond their international borders through credit or debit cards.

 

Role of cryptocurrency in solving economic problems

  • Cryptocurrencies can help in tackling inflation in a country as it is unaffected by monetary policy of a country.

  • The purchasing power remains unaffected as compared to legal currency. Legal currencies are vulnerable to depreciation.

 

Concerns of legal crypto

  • Cryptocurrency may witness sudden decline in its value owing to market fluctuations. The whole system may collapse as value of assets suddenly declines.

  • Cybercrime and theft can create the risk of households and business losing a large amount of wealth. 

  • Crypto assets work on speculation and thus central banks will be unable to devise their interest rates in accordance with their domestic requirements. 

  • Cryptocurrencies may be potentially used for money laundering, terrorist financing or other illegal activities as source cannot be traced.

  • There would be a need to increase internet infrastructure as crypto assets need internet for usage.

 

Cryptocurrency

They are financial assets having high volatility. Their unregulated nature makes them attractive as well as vulnerable.