Why in the news?
Remarks were made on a bail application where the SC highlighted the absence of a clear regime for regulating virtual currency (Cryptocurrency). It has also been said that bitcoin trading in India is similar to the Hawala system.
About Cryptocurrency
Cryptocurrency is a digital or virtual currency secured by cryptography, making it nearly impossible to counterfeit. Operating on decentralised networks using blockchain technology, cryptocurrencies eliminate intermediaries like banks. Bitcoin, the first cryptocurrency, debuted in 2009, inspiring thousands of alternatives. They enable secure, transparent, and borderless financial transactions, revolutionising traditional monetary systems.
Functioning of Cryptocurrency
(i) Blockchain Technology: They are made on a blockchain, a decentralised ledger that records all transactions. Each of them is verified and added to a chain of previous transactions, enabling transparency and inflexibility.
(ii) Decentralisation: Unlike conventional currencies controlled by central banks, Cryptocurrencies work on a peer-to-peer network. Nodes (computers in the network) operate together to validate and maintain the blockchain.
(iii) Cryptographic Security: Cryptography secures transactions and wallets. Public and private keys ensure that only the legitimate owner can access and transfer funds.
(iv) Mining/Validation: Transactions are validated through mechanisms like Proof of Work (Pow) or Proof of Stake (PoS). Miners confirm transactions and secure the network, frequently earning rewards in the form of new cryptocurrency.
(v) Digital Wallets: Users store their cryptocurrencies in digital wallets, wherein private players secure them. These wallets make sure of sending, receiving, and monitoring assets.
(vi) Transactions: When users initiate a transaction, it is broadcast to the network. Miners or validators confirm its legitimacy, getting approval, it is permanently recorded on the blockchain.
Advantages of Cryptocurrency
(i) Decentralisation: Work without any central authorities, reducing reliance on banks or dispensation and providing financial autonomy.
(ii) Security: Cryptography and blockchain technology secure transactions, making them fraud and hacking-proof.
(iii) Transparency: Blockchain’s public ledger ensures all transactions are traceable, fostering trust and accountability.
(iv) Low Transaction Costs: Cross-border transactions are quick and low-cost cost to conventional banking systems or remittance services.
(v) Accessibility: Ensure financial inclusion by permitting anyone with internet access to take part in the global economy without requiring a bank account.
(vi) Ownership: Users enjoy complete control of their finances through private keys, eliminating dependence on third parties.
(vii) Fast Transactions: Cryptocurrency transactions take a few minutes, irrespective of location or time zones.
(viii) Diversification: Cryptocurrencies provide an alternative asset class for investors seeking to diversify portfolios.
(ix) Innovation: Enables the development of decentralised applications (dApps) and smart contracts, driving innovation in several industries.
(x) Hedge Against Inflation: An Inadequate supply of cryptocurrencies like Bitcoin can work as a store of value, safeguarding against inflation.
Negatives of Cryptocurrency
While cryptocurrencies have many positives, but also come with myriad negatives that pose challenges to their widespread adoption. Major issues include:
(i) Volatility: Cryptocurrency prices fluctuate heavily, making them unpredictable and risky for investors and users.
(ii) Lack of Regulation: Operating in a largely unregulated space can result in fraud, scams, and market manipulation, creating threats for participants.
(iii) Security Risks: While blockchains are safe, users can lose their finances through hacking, phishing attacks, or not unable to access to private keys.
(iii) Irreversible Transactions: Once a transaction is complete, no reverse can happen, even if sent to the wrong address, leading to potential loss of funds.
(iv) Scalability Issues: Many blockchains face roadblocks in processing high transaction volumes quickly, leading to delays and extra fees.
(v) Environmental Impact: Mining cryptocurrencies, particularly those using Proof of Work (Pow), consumes very much energy, contributing to environmental issues.
- Internationalisation of Indian Rupee
- India’s Digital Economy will be fifth of India GDP by 2030
- Port Economy: Key to India’s growth
- Download the Mobile App of Target Defence Academy
(vi) Complexity: Understanding and using cryptocurrencies demands technical knowledge, which can act as a roadblock for beginners.
(vii) Limited Adoption: They have no universal acceptance as a payment method, restricting their practical use in daily transactions.
(ix) Potential for Illegal Activities: Anonymity in transactions has led to misuse in illegal activities such as money laundering, tax avoidance, and dark web operations.
(x) Uncertainty in Regulation: Entire global governments are still formulating regulations, creating uncertainty for businesses and investors in the cryptocurrency space.
Our Latest Selections
India’s Stand on Cryptocurrency
(i) Taxation: Tax on profits of cryptocurrencies is 30%, having no provision for offsetting losses. Also, TDS applies to transactions, asking buyers or exchanges to cut a percentage at the source and give it to the government.
(ii) Compliance Requirements: Exchanges and wallet providers should register with regulatory authorities and adhere to Anti-Money Laundering (AML) and Know Your Customer (KYC) policies.
(iii) Global Coordination: India wholeheartedly collaborates with international organisations, as was evident during its G20 presidency, promoting global cryptocurrency frameworks that ensure uniform regulation.
(iv) Blockchain Potential: Apart from regulation, India is also working on blockchain applications in governance and public services. Overall, utilising its transformative potential beyond digital currencies.
Conclusion
Cryptocurrency represents a revolutionary shift in finance, offering decentralised, secure, as well as transparent transactions. While challenges like fluctuations and regulations remain, their potential to increase financial inclusion and promote innovation is undeniable. As adoption spreads, cryptocurrencies may reshape economies, ensuring a more accessible, efficient, and borderless digital financial ecosystem.