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OP-ED: Cryptocurrency and medium of transactions

Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021 Reuters

Digital money and crypto money are different items

The definition of cryptocurrency is not well defined.

There are many ideas regarding the new form of currency.

It is termed as a private currency, private medium of transactions, digital store of value, even as instruments like stocks traded in stock or commodity exchanges.

In the payments ecosystem of the domestic market, payments are executed through legal tenders or fiat money.

Transactions can be executed virtually with the help of electronic media by accounting entities – debit and credit.

This is digital money within the purview of legal tender or fiat money.

Cross border transactions of Bangladesh are executed within the framework of foreign exchange regulatory framework of the country.

In accordance with the regulations any person resident in Bangladesh may sell or purchase foreign exchange to or from an authorized dealer if such sale or purchase is a current account transaction.

However, the central bank has regulatory power to impose such reasonable restrictions on current account transactions as may be needed to respond to current or capital account imbalances.

Soon after independence, a controlled foreign exchange regime prevailed for all external transactions in terms of foreign exchange regulations.

The regime of foreign exchange is said to be controlled unless the central bank gives waiver for restrictions on transactions.

In accordance with the regulations, external payments are subject to authorization from the central bank conditionally or unconditionally.

In terms of the power under foreign exchange regulations, the central bank specifies permissible transactions from time to time to execute transactions under current account transactions.

History shows that restrictions have been relaxed on current account transactions early in 1990s with the adoption of Article VIII of the IMF Articles of Agreement.

Authorized dealer banks can execute permissible transactions within indicative limits.

Transactions not specified within the regulatory framework are subject to approval from the central bank on a case to case basis. 

Regime known as controls specifies only positive lists of permissible transactions.

In accordance with the concept, there is no negative list for current account transactions under the prevailing foreign exchange regulatory regime.

Authorized dealer banks can execute transactions for which general authorization is available.

Hence, banks cannot make payments on account of purchase of cryptocurrencies which is not within the purview of authorized deals.

Forex regulations

Foreign exchange regulations defines “currency” as (i) all coins, currency notes, bank notes, postal notes, money orders, cheques, drafts, traveller’s cheques, letters of credit, bills of exchange and promissory notes; and (ii) Such other similar physical or non-physical instruments, or both as may be notified by the Bangladesh Bank from time to time.

On the other hand, “foreign currency” is defined as any currency other than Bangladesh currency.

With regards to cross border transactions, foreign exchange regulations permit banks to maintain nostro accounts in freely convertible currencies with their correspondent banks abroad.

In the context of maintaining relationships, opening of nostro accounts abroad and transactions with correspondents, banks need to comply with AML/CFT regulations of Bangladesh.

As such, the medium of transactions with outside Bangladesh is convertible currencies like US dollars, Euro, British pound, Japanese yen and others.

The regulatory regime does not allow to maintain accounts abroad with crypto-type virtual currencies and execute transactions thereby.

They need to settle the transactions mandatorily through prescribed currencies.

The fund retained by banks abroad is an account-fund which is virtual in a sense supported by the legal framework of the countries where accounts are maintained.

Bangladesh Taka is not convertible for capital account transactions, except inward investment in the form of equity, portfolio investment, alternative investment fund, and open end mutual fund.

Subject to such restrictions as may be prescribed, the central bank can specify the classes of permissible capital account transactions in consultation with the government, as per law.

It is reported that on a case to case basis, the central bank accords permission to export industries to invest abroad in equity form, with the consent from the Government.

No permission is granted for transactions to transfer capital for purchase of real estate, portfolio investment and so on.

As per legal definition, purchase of real estate and/or portfolio investment abroad constitute capital transactions.

In the same way, purchase of virtual assets like virtual/crypto currencies is restricted.

As such, resident persons cannot purchase or facilitate to purchase such virtual assets and retain the same.

Digital money and crypto money are different items – the former one is in operation in nation states backed by laws and the later one is a private mode of transactions executed among peer groups.

It is said that some Satoshi Nakamoto of Japan in the first decade of this century mined cryptocurrency usable in peer networks through block chain technology.

Recently, the Wall Street journal ran a news article on ‘Finance Froze When Bitcoin Crashed. Now Users Want Their Money Back.’

As such, crypto currency plays a spree like speculative trading.

In practice, there are some fundamental functions of money.

They are the unit of account, medium of transactions and store of value. Standard of human life depends on production of output.

In the twentieth century, mass production led to enhancement of income level. Production process needs inputs.

Land, labor, capital and organization help to produce outputs. In the hunting society, people need to produce all items required for livelihoods.

But the introduction of division of work does not require people to do all the work. Individual person works a single part of production which supports final production.

Output is not used as remuneration; rather money works for disbursements of remuneration in the name of salary and wages.

Since money does the function, inter alia, of medium of exchange, output produced needs not be hoarded for future use.

Monetary system deserves special thanks in this context of replacing the storing system.

In hunter gathering society, a barter system was in place.

Later, commodity money like salt, copper, silver, gold and other metals was used as medium of exchange.

Digital Taka supported by central authority is not the same as private media like reward points, travel mileage, gift card, priority pass and so on.

These private mediums may be usable privately. But at first leg in case of cash transactions and at end leg in case of credit…

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