What Is Cryptocurrency And How Does It Work?   What is cryptocurrency? Cryptocurrency  is a form of currency that exists digitally or virtua...

What Is Cryptocurrency And How Does It Work?

 

What is cryptocurrency?

Cryptocurrency  is a form of currency that exists digitally or virtually and uses cryptography to secure transactions. There is no authority to keep transaction records and issue new units or regulate it, instead it uses a decentralized system. It is backed by a decentralized peer-to-peer network called a blockchain.

What is Blockchain Technology?

Blockchain technology ensures that all transactions in cryptocurrencies are recorded in a public financial transaction database.  Bitcoin, Ethereum, Ripple are some examples of cryptocurrencies. Blockchain takes its name from digital databases or ledgers where information is stored in the form of "blocks" which together form a "chain". It offers a unique combination of permanent record-keeping, real-time transactions, transparency and auditability. An exact copy of the blockchain is available to many computers or users that are linked together in a network. Any new information added or changed through the new block is verified and approved by more than half of the total users.

Importance of Blockchain:

Blockchain technology can facilitate innovations in many processes and applications that require data management, storage, security of vast and critical information. These include the management of information relating to financial transactions, electoral voting, medical records, educational lessons, property ownership records and professional testimonials. A decentralized framework like a blockchain makes the system and the information stored in it fraud-protected, transparent and reliable.

Bitcoin: 

It is a type of digital currency that enables anyone to make instant payments. Bitcoin is based on an open-source protocol and is not issued by any central authority.

History:

The origins of bitcoin is unclear, such as who founded it. An individual or a group of people, known by the identity of Satoshi Nakamoto, is said to have introduced the concept of this accounting system after the 2008 financial crisis.

Uses: 

Bitcoin was originally intended to provide an alternative to fiat money or currency and to become a universally accepted medium of direct exchange between the two parties involved. Fiat money is government-issued currency that is not backed by a commodity like gold. It gives central banks more control over the economy because they can control how much money is printed or printed. Most modern paper currencies, such as the US dollar and the Indian rupee, are fiat money.

Key points

Current Scenario: Currently the total number of cryptocurrencies are 17,697 and the total number of crypto exchanges is 462. There is currently no regulation or any restriction on the use of cryptocurrencies in India.

RBI stand: 

The Reserve Bank of India (RBI) had earlier prohibited banks from supporting crypto transactions, however the RBI order was reversed by a March 2020 Supreme Court order. RBI has repeatedly underlined its strong stance against cryptocurrencies, saying they pose a serious threat to the country's macroeconomic and financial stability.

Government stand on crypto: 

The Indian government is working on making laws to regulate this sector.

What is the current status of crypto in India?

The Union Budget 2022-2023 also proposes to introduce a digital currency in the coming financial year. There is currently no legislature covering cryptocurrencies in India, although owning cryptocurrencies is no longer illegal. Now a 30% tax on income from virtual assets was announced. China has declared all cryptocurrency transactions illegal and effectively banned outright, while El Salvador allows bitcoin as legal tender.

Why is there a need for regulation of crypto?

Since crypto is not a legal tender, it should be treated as a separate category, so the government needs a separate regulation for crypto. According to the RBI, if people start considering crypto as a currency, there will be an opportunity for peer-to-peer lending which clearly requires regulation. Regulation is necessary to prevent serious problems and to ensure that cryptocurrencies are not misused, as well as to protect investors from extreme market volatility and potential scams.

Why should crypto be classified as an asset rather than a currency?

The main advantages of cryptocurrencies are that the transaction is cheap and its execution is fast because the transaction is not handled by a chain of middlemen before reaching the destination and it is not possible to reveal that utility within India. However the rest of the world will use crypto for the main purpose for which it was created and considering it as a digital asset the Indian government will only be able to monetize it by increasing in value.

What are the concerns associated with cryptocurrencies?

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The crypto market is seen as a way to make quick profits. Due to this, both online and offline advertisements are being flooded to entice people to bet in this market. However, there is concern that attempts are being made to mislead the youth through such "over-promising" and "non-transparent advertising".

Counter-productive utility: 

Unregulated crypto markets can become an easy route for money laundering and terror financing.

Macroeconomic and Financial Stability: 

The extent of investment exposure of Indian retail investors in this unregulated asset class poses a risk to macroeconomic and financial stability.

Blockchain Technology: 

Since crypto works on blockchain technology, there are many concerns about as well.

Low Scalability: 

Blockchains work well for a small number of users. However, as the number of users on the network increases, the transition takes longer to process. As a result transaction costs are higher than usual. This restricts more users to the network.

Security Challenges: 

Blockchain networks are vulnerable to attacks because they were not originally designed for network protocols. As blockchain services continue to develop, challenges arise to contain malware files and objectionable content. This raises issues of privacy violations, potentially illegal files, copyright violations, malware, etc.