What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a distinct 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.
Understanding Cryptocurrencies
Cryptocurrencies are systems that allow for secure payments online which are denominated in terms of virtual "tokens," which are represented by ledger entries internal to the system. "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 face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.
The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable cryptocurrency till date. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or branches of Bitcoin, while others are new currencies that were built from scratch. Bitcoin was launched in 2009 by an individual or group known by the pseudonym Satoshi Nakamoto. As of March 2021, there were over 18.6 million bitcoins in circulation with a total market cap of around $927 billion. Some of the competing cryptocurrencies procreated by Bitcoin’s success, known as "altcoins," include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all the cryptocurrencies in existence is around $1.5 trillion—Bitcoin currently represents more than 60% of the total value.
Interesting Fact :- Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.
The most important thing to understand here is that a currency is just a place to park money. The currency itself is not an investment. When was the last time you bought loads of dollar, yen or even Indian rupee, kept it in your locker (within permitted limits) and told your friends that you have invested in dollar, yen, or Indian rupee? You don’t invest in a currency; you just park your money in it.
- A currency which has been issued against some commodity. For example, when the world followed a gold standard, the central banks used to hold gold and issue currencies against that gold.
- Fiat money, which is declared as legal tender by the government.
If the world someday decides to ban the use of gold as a currency, people still might be able to use gold for making jewelry, sheets, wires, etc. Though one might argue that the usage value of gold would be much lower than its market value, the point here is that it would be still of some use to the holder.
Now, do cryptocurrencies like Bitcoin have any intrinsic value? No. So, if tomorrow the central banks decide to ban Bitcoin, the owner would not be able to use it for any other purpose.
Though the fiat currency also does not have any intrinsic value but is backed by central banks. So tomorrow if the Rs 500 & Rs 2000 currency notes are not considered as a legal tender, you would still be able to take those currency notes to the central bank and get the new legal tender currency notes. If in the near future cryptocurrencies like Bitcoin are banned, they would neither have any intrinsic value nor will they be backed by any central agency. So, there is a big risk of losing all your capital.
But in the future, if the cryptocurrency is issued by a central bank, I think they would be safe, but as an instrument to park money, not as a great investment.
What About Investing In Cryptocurrency?
As we have already established, just like any other currency, cryptocurrency is simply a place to park money. It cannot be considered an investment. I think it will be helpful for readers if we define investment. That is anything that you buy or hold today that has the ability to generate cash flows in the future, even if you don’t sell it in the market.
Few examples: You buy a house, never sell it, but it keeps generating rental. You buy a farm, never sell it, but you keep generating cash by selling the farm produce. You buy a company, never sell it, but it keeps generating profits. When you buy gold, fiat currency or cryptocurrency, their prices just fluctuate in the market. These fluctuations give an impression that they are good or bad investments. But they themselves do not produce anything.
Also, it is worth understanding that a currency should never be a good investment, else people would not use it for buying things. When you know that if you don’t use cryptocurrency (bitcoin) to buy a laptop and hold it with you, bitcoin will appreciate much more than what you could have made by using the laptop, you would never use bitcoin to buy anything. For people to accept anything as a currency it should be very stable. Many argue that someday in the future bitcoin will be stable and would have the characteristics of a good currency.
Even if we assume that cryptocurrencies such as bitcoin will become stable, we are ignoring the fact that the central banks would not be able to control the supply of bitcoin in the market. Unless the central banks have control over the supply of a currency in the market, they would not be able to control inflation and deflation during an economic ups and downs which will be damaging the economy.
Central banks fight inflation by decreasing the supply of money in the market and overcome deflation by increasing the supply of money. Any alternative currency whose supply is not controlled by central banks would either lead to limiting its supply or be banned in the future by central banks.
ADVANTAGE
Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.
In modern cryptocurrency systems, a user's "wallet," or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.
DISADVANTAGES
The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under brutal governments. Some cryptocurrencies are more private than others.
Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities arrest and prosecute criminals. More privacy-oriented coins do exist, such as Dash, Monero, or ZCash, which are far more difficult to trace.
Is India Banning Cryptocurrency?
The uncertainty around cryptocurrencies in India continues as the government is now planning to ban digital money but will also fine anyone trading in the country or even holding such digital assets. This will impact Bitcoin, Dogecoin and other crypto money investors. The new bill proposes to criminalize possession, issuance, mining, trading and transferring crypto-assets. This is not the first-time cryptocurrency has been under the spot light over its possession or trading, the RBI had virtually banned cryptocurrency trading in 2018. The government has been planning an action against cryptocurrencies for past few months but recent comments had given some hope to investors. If the new bill is ratified into a law, it will be a point of concern for them. This will make India the first major economy to make holding cryptocurrency illegal. Even China, which has banned mining and trading, does not penalize possession.
In India, cryptocurrency gained popularity due to the ease of interaction, security, and speed of a transaction. But in 2018, the Reserve Bank of India (RBI) vide its powers granted by the RBI Act, 1934 assessed the risks of the use of cryptocurrency and banned the use of cryptocurrency for trading and investment purposes by issuing a circular. The circular detailed how dealing in virtual currencies is prohibited and although it did not entirely ban the use, RBI’s move was aimed at reducing the usage of virtual currency in India’s economic market.
The ban was criticized by regulators and the government on the ground of harsh regulation and therefore, a plea by the Internet and Mobile Association of India (IMAI case) was brought to the Apex Court. The petitioners challenged RBI’s circular as violating the fundamental rights of traders under Article 19(1)(g) of the Constitution of India and could not be seen as a reasonable restriction due to the blanket ban that it places on all entities.
Therefore, in March 2020, the Apex Court through a three-judge bench comprising of Justices Rohinton Nariman, Aniruddha Bose, and V Ramasubramanian overruled RBI’s decision and lifted the ban on virtual currencies in India. The court held that the ban was arbitrary and disproportionate while restating that the judgment does not affect the regulatory powers granted to the RBI. This was not the first time that the courts interfered in the crypto domain, as in 2017 an inter-disciplinary committee was set up to recommend legislative changes for the trade and usage of cryptocurrencies in India. In 2019, a committee under the Finance Ministry had worked on a bill that aimed at banning the trading, issuing, and investing of cryptocurrency; making it a punishable offence with a fine of up to 25 crores INR or imprisonment of up to 10 years or both. However, the bill was never passed in Parliament.
Interestingly in the recently conducted budget session of the parliament on January 29, 2021, a list of 20 new bills was introduced. One of them was the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The Bill is based on the 2019 Bill of the same name and aims at the creation of an official digital rupee. The agenda report states,
“To create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India. The bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.”
The Bill has been drafted by an inter-ministerial committee under the leadership of Subhash Chandra Garg, former secretary of the Department of Economic Affairs. The reasons given for the ban on private cryptocurrency were the risks attached to their operation.
Union Finance Minister Nirmala Sitharaman has clarified that there will not be a complete ban on cryptocurrency. The finance minister said that the government is not shutting all windows for cryptocurrencies, or blockchain, and Financial Tech as yet. She said that a Cabinet note was being readied in this regard, which will give in-depth information on the formulation of cryptocurrency in India. As per the finance minister, the call on cryptocurrencies will be taken after discussions with the Reserve Bank of India (RBI).
"A lot of negotiations and discussions are happening around the cryptocurrency with the Reserve Bank of India. RBI will be taking a call on what kind of unofficial cryptocurrency will have to be planned and how it has to be regulated. However, we want to make sure that there is a window available for all kinds of experiments which will have to take place in the crypto world, A lot of mixed messages are coming from across the world. The world is moving fast with technology, we cannot pretend that we don't want it."
Finance ministers’ stance are in lines with the central government, which has revealed by bring a new bill on cryptocurrencies (The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021). Notably, an inter-ministerial committee (IMC) on cryptocurrency has suggested a ban on private cryptocurrencies, like Bitcoin, in India. The same committee also pitched for the introduction of an RBI-regulated digital currency.
Since the Crypto Bill, it has been majorly unclear what the phrase ‘private cryptocurrencies’ actually refer to. The common cryptocurrencies like Bitcoin and Ethereum are public cryptos and therefore, the Bill shows an uncertain picture as to whether it applies to Bitcoin, Ethereum, etc. Moreover, it is also unclear whether the government plans on banning the usage, trading, and dealing in cryptocurrencies because that would infringe on the fundamental right to trade as laid down in the IMAI case. On the other hand, this Bill could be the framework that India needs to organize the outlines of the crypto sector. One reasonable option could be launching its own Central Bank Digital Currency which will overcome all the hurdles that cryptocurrencies are susceptible to and at the same time, helps in projecting India ahead in the technology arena.
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