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Adam Smith, the father of modern economics, believed in laissez-faire. Free markets, Smith argued, can regulate themselves through an interplay of competition, supply and demand, and self-interest. And yet, as the world discovered in the wake of the Lehman Brothers collapse in 2008 and the ensuing global financial crisis, capitalism has its imperfections. Markets need regulatory oversight to deliver the maximum good for the maximum people. That perhaps explains why an unregulated crypto market faces its biggest crisis yet. Tumbling crypto prices and a collapse of some exchanges beg the question: do investors and traders, in India and across the world, really needs cryptos?

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Why cryptos are losing relevance

Cryptos were introduced to the world by the mysterious Satoshi Nakamoto in 2008 after the Lehman bankruptcy triggered global financial market turbulence. Cryptos represented a disenchantment with the existing system and sought to create a parallel one. They were intended to be independent, decentralized financial instruments that bypassed the existing system. Built on a stable blockchain platform, they were more representative and participatory, leading many to believe that they would not have the imperfections of the traditional banking system. That faith has been shown to be naivete, and a market lacking the regulation of the conventional banking system – or even the stock market – has descended into chaos. Many crypto exchanges have collapsed, leaving investors helpless - and in the process, yet again exposing the imperfections of a unregulated market. The traditional financial system works under the gaze of the government and institutions, but cryptos can only hope that private entrepreneurs, who control the exchanges, follow the rules. That hope has been belied as we saw most recently in the collapse of FTX, and the subsequent run on its token FTT. Eventually, any system must hope to promote the maximum good for the maximum number of people, marrying the best of socialism with capitalism.

Cryptos don’t serve any defined purpose

At the moment, it's not very clear whether cryptos serve any defined purpose at all. They are certainly not a storehouse of value as the collapse in crypto prices demonstrates. And they are certainly not a currency or a medium of exchange either. They are far too volatile to serve that purpose as well. For speculation, there already exist a number of instruments, from equities to lotteries and casinos.

It’s a chaotic market

While the blockchain technology which powers cryptos is considered relatively safe, crypto exchanges have been under the spotlight for irregularities from alleged money laundering to price manipulation of tokens. They have been extremely volatile too – Bitcoin has shed over 60% this year so far, swings which would make any regulator uncomfortable. A stock market kind of regulatory framework may have served cryptos well. Stocks, for instance, have circuit filters to check big swings in prices. And stock exchanges have surveillance systems and caps on stock positions to keep the markets stable. The inherent problem is that crypto exchanges run on global platforms and it's difficult for any one country to regulate the market. But as India's experience with stocks, lotteries and betting shows, regulatory oversight can be crucial in tamping down on unbridled speculation.

Emergence of digital currencies

Uncomfortable with the volatility in cryptos, many countries are considering ways to regulate or even ban them altogether. South Africa, Canada, Japan, Thailand, Singapore and many more have begun exploring digital currencies to rein in speculative instruments like cryptos. The Reserve Bank of India, one the strongest critics of cryptos, is also among them. The RBI has already begun pilot projects of its digital rupee, which could possibly change the fintech landscape in India, emerging as an alternative to digital wallets like Paytm and Google Pay over the next few years. Many institutional investors hold crypto assets, and these markets may deepen and become more predictable over time. Indeed, for retail investors, the markets may become safer eventually if cryptos survive. But, for the moment, the relevance of cryptos is under a cloud.

CRYPTO'S BIG CRISIS

* Tumbling prices: Bitcoin has plunged 60% this year

* Troubled exchanges: FTX, second-largest crypto exchange, has collapsed

* Unregulated market: Difficult to regulate cryptos run on global exchanges

* The challenge from digital currencies: Many central banks are testing digital currencies

* Losing relevance: They are neither a storehouse of value or a medium of exchange

Elsewhere in Mint

In Opinion, Himanshu explains the puzzle of vanishing inequality but rising poverty. Ajit Ranade tells how the RBI's digital currency will help economy. Indira Rajaraman writes on the troubling return of the old pension scheme. Long Story pans the Hindi heartland where Bollywood has gone bust.

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