Modules for Personal Finance
Introduction to cryptocurrencies
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Who manages a cryptocurrency
The cryptocurrency market and the stock market have many similarities. Both are volatile, although the stock market is less so. Both are preferred greatly by new-age investors. And both markets have the potential to offer inflation beating returns - or so they say.
But when you look past these similarities, there is a glaring distinction between the two. And that lies in the aspect of market management. In the case of the stock market, you know who the regulating authority is. In India, it is the Securities and Exchange Board of India (SEBI). In the case of the American stock markets, it is the U.S. Securities and Exchange Commission (SEC).
Like this, most countries in the world have a regulatory body governing the stock and securities market and overseeing the functioning of the same. So, in case of a grievance, you know whom to approach.
But what about the crypto market? What is the SEBI’s equivalent in this case? In short, who manages a crypto market? Let’s find out.
Who controls the cryptocurrency market?
Every market has a controlling authority. Every asset too. Money - the most common asset - is typically controlled and managed by central banks and governments. But what about the digital equivalent of fiat currency - which is cryptocurrency? Who manages cryptocurrency?
The short answer - nobody. But also, everybody.
If that has you confused, you’re not alone. Crypto asset management has long been cryptically assigned to everybody and nobody at the same time. This is because the crypto market is decentralised.
What is decentralisation?
Decentralisation is a simple concept where the control and responsibility is transferred from a single, central entity to a wider, distributed network. In this kind of a setup, power is dispersed away from a central authority and distributed across a network of users.
Think of it like this. In a regular classroom setup, the teacher is the controlling authority. However, in case the teacher is absent, every student is responsible for doing what they are supposed to do, isn’t it? This is because the central authority is not present in the given scenario.
This is a rudimentary yet efficient example to explain decentralisation.
The crypto market is decentralised. So, there is no specific entity in charge of crypto asset management. The transactions in this market occur on a peer-to-peer basis, without the presence or interference of any third party.
So, the crypto market has no managing authority. But shouldn’t this be a problem? Not quite. Decentralisation has its own set of advantages. Let’s dig deeper into this and see how this kind of a market structure can be beneficial.
What are the advantages of a decentralised crypto market?
Decentralisation has several upsides. Here is a closer look at the benefits of a crypto market with no central managing authority.
Data reconciliation is more efficient
The data stored on the blockchain is easier to verify and reconcile, since every entity on the network has access to the data real-time. It greatly minimises the potential for loss or alteration of data.
There are fewer weak links
In a centralised setup, the points of weakness are easy to identify and take advantage of. A decentralised system, however, reduces the weak links in the environment. It makes the data much less easier to corrupt.
Resources are optimally distributed
The resources in a decentralised setup are not concentrated in a few specific areas. They are optimally distributed across the network. This is quite unlike a centralised market, where poor resource allocation may interfere with the timely delivery of services.
Decentralisation creates a ‘trustless’ environment
The biggest upside of a decentralised market is that it removes the point of trust from a single entity. No market participant needs to implicitly trust another. This is because the same data is available to every person on the network - simultaneously.
What are the disadvantages of a decentralised crypto market?
Remember the answer to the question ‘who manages cryptocurrency?’ It was everybody and nobody. And the part about ‘nobody’ managing it can be an issue. This is where decentralisation also has its downsides. Here is a preview of these pitfalls.
- There is no governing authority to address grievances
- There is no legal framework around cryptocurrencies, in most countries at least
- There is less scope for financial regulators to address and bring suspicious trades to task
Can governments manage cryptocurrency?
Precisely because of the disadvantages outlined above, it may be essential for governments to enter the crypto market and bring about a much-needed regulatory framework. But is it possible for governments across the world to fully regulate the crypto market the way other financial markets are monitored and operated?
Truthfully, only time will tell us the answer to this question. However, all over the world, we are already seeing governments making efforts to manage or regulate the crypto market in some way or the other.
Some governments take the friendlier approach and embrace cryptocurrency, while simultaneously bringing crypto transactions within the purview of the legal framework. Top among these is El Salvador, which has not only accepted the crypto market easily, but has also declared Bitcoin as legal tender. Other countries like Canada and Australia have an overall friendly policy towards cryptocurrencies and their transactions.
Meanwhile, the governments in countries like Bangladesh, Algeria, Egypt, China, Morocco, Iraq, Qatar, Tunisia and Nepal have banned cryptocurrencies outright.
So, there are governments that are on both ends of the spectrum. But we may never have an absolute governing and managing authority for the crypto markets like we do for the stock markets - at least for the foreseeable future. This is because unlike the stock market, which is largely localised, the crypto market transcends borders and is an international space.
So, you now know the answer to the question - who manages cryptocurrency? In the context of crypto asset management, however, it is important to know that the Indian government has declared its own intent to bring a part of the crypto market under its control by issuing the Digital Rupee. The Reserve Bank of India is expected to issue this virtual currency in the year 2023.
A quick recap
- Every market has a controlling authority. Money - the most common asset - is typically controlled and managed by central banks and governments.
- But who manages cryptocurrency? The short answer - nobody. But also, everybody.
- Crypto asset management has long been cryptically assigned to everybody and nobody at the same time. This is because the crypto market is decentralised.
- Decentralisation is a simple concept where the control and responsibility is transferred from a single, central entity to a wider, distributed network.
- It has its own advantages and disadvantages.
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