Cryptocurrency: its future in India

Introduction

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology-a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs and hashing functions.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all ecommerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers.

Blockchain

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node or computer maintaining a copy of the ledger. Experts say that blockchain technology can serve multiple industries, such as supply chain and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co.(JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.

Types of Cryptocurrency

Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the market today. Each cryptocurrency claims to have a different function and specification. For example, Ethereum:-  ether markets itself as gas for the underlying smart contract platform. Ripple’s XRP is used by banks to facilitate transfers between different geographies.

Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency.  As of November 2021, there were over 18.8 million Bitcoins in circulation with a total market cap of around $1.2 trillion. Only 21 million bitcoins will ever exist.

In the wake of Bitcoin’s success, many other cryptocurrencies, known as “altcoins”, have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.  They include Solana, Litecoin, Ethereum, Cardano and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion-Bitcoin represented approximately 41% of that total value.

Legality of Cryptocurrency

Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve.

But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn’t help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.

As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for Monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction. Japan’s Payment services Act defines Bitcoin as legal property. Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.

Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to quantify as “financial instruments.”  In June 2021, the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies. Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and exchange commission (SEC) has said that Bitcoin and Ethereum are not securities. Although cryptocurrencies are considered a form of money, the Internal Revenue Services (IRS) treats them as a financial asset or property.

Advantages of Cryptocurrency

  • Cryptocurrency represents a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank setting off a cascade of crisis around the world, such as the one that was triggered in 2008 by the failure of institutions in the United States.
  • Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company.
  • Because they do not use third party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfer. Flash loans in decentralized finance are a good example of such decentralized transfers.
  • Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2trillion.
  • The remittance economy is testing one of cryptocurrency’s most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders.

Disadvantages of Cryptocurrency

  • Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that agencies such as the Federal Bureau of Investigation (FBI) can decipher. This opens up possibilities of government of federal authorities tracking the financial transactions of ordinary citizens.
  • Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.
  • In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated.
  • One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billion of dollars.
  • Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over years, sometimes resulting in millions of dollars worth of “coins” stolen.
  • Cryptocurrencies traded in public markets suffer from price volatility. Bitcoin has experienced rapid surges and crashes in its value, climbing as high as $17738 in December 2017 before dropping to $7575 in the following months.

Cryptocurrency in India

Between 2012 and 2017, the popularity of cryptocurrency in India grew immensely. In India, cryptocurrency exchanges such as Zebpay, Coinsecure, Unocoin, Koinex and Pocket Bits have sprung up during this time. Several other cryptocurrencies were also introduced in the global digital economy throughout this time period. It is also Introduced in the global digital economy throughout this time period. It is also essential to note that Bitcoin, the most popular cryptocurrency, had risen from roughly $5 at the start of 2012 to almost $1000 by the end of 2017, which genuinely reveals the growth of popularity of cryptocurrency.

In 2013 and 2017, the Reserve Bank of India stated on cryptocurrency in two press announcements that expressed its concerns on cryptocurrencies. The announcements very clearly indicated that the virtual currency is not backed by them as well as disallowed commercial banks from accepting it as a deposit or a medium of exchange. This statement was set aside by the Supreme Court in 2017 due to two PILs filed, one for banning crypto and other for regulating crypto.

It is impressive to understand that crypto has never been banned in India, and neither has crypto mining. At the same time, it is not completely legal to trade in crypto either since there is no law governing it; it lies in the ‘grey’ areas of the law. The crypto bill that the Cabinet is currently working on is unlikely to outright ban cryptocurrencies, but it will regulate them. As per a report, India’s cryptocurrency exchanges would be regulated by the Securities and Exchange Board of India (SEBI). Citizens of India would be compelled to keep their cryptocurrencies on Indian exchanges solely the new legislation is said to make it illegal for users to maintain their funds on worldwide exchanges or in private wallets. People would have a set length of time to move their funds when the law is implemented, after which they might be penalized in the range of 5 to 20 crore. According to our Finance Minister, Mrs.Nirmala Sitharaman, the government is aggressively scrutinizing the hazards that cryptocurrencies pose to the Indian economy. The future of cryptocurrency in India is still uncertain, owing to the fact that the central government wants further consultations on the subject before making a final decision about its crypto bill.

Conclusion

There appears to be no end to the uncertainty in India’s cryptocurrency industry, as the nation seems to have put off creating legislation that will indicate its regulatory approach to the quickly developing business for yet another time.  According to reports, the central government is considering revising the new crypto bill. For over a year, the legislation has been in the developing stage. The necessity for broader consultation owing to developing cryptocurrency laws throughout the world was stated as one of the reasons for the delay.

Reference

  1. Mohammed Mubarak, A study on cryptocurrency in India, 8 IJRAR 435,435(2021)
  2. Mohanish Verma , Cryptocurrency- a new dimension in the global economy, FINANCIAL EXPRESS (Dec 19, 2021)
  3. INVESTOPEDIA, https://www.investopedia.com/ (last visited Mar,20,2022)

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