Syllabus: GS3/ Economy
Context
- Bitcoin, the world’s largest cryptocurrency, has soared to an all-time high after Donald Trump’s historic win in the US presidential elections.
What is Cryptocurrency?
- Cryptocurrency is a type of digital or virtual currency that uses cryptography for security, making it difficult to counterfeit or double-spend.
- It operates on decentralized networks based on blockchain technology—a distributed ledger enforced by a network of computers.
- Cryptocurrencies are typically not controlled by any central authority, which makes them theoretically immune to government interference or manipulation.
Key Features of Cryptocurrency
- Decentralization: Most cryptocurrencies operate on decentralized blockchain networks, ensuring that no single entity has control over the entire network.
- Security: The use of blockchain technology also adds a layer of protection through consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS).
- Transparency and Anonymity: Blockchain technology allows for transparent record-keeping of transactions that are visible to all participants on the network.
- Despite this, cryptocurrencies often offer a degree of user anonymity.
- Global Accessibility: Cryptocurrencies can be transferred across borders quickly and efficiently without the need for currency conversion or significant fees.
- Ownership: Cryptocurrency holders have full ownership of their digital assets, which are stored in digital wallets secured by private keys.
| Blockchain technology – Blockchain technology is a decentralized, distributed ledger system that records transactions across many computers in a way that ensures security and transparency. – Blockchain networks rely on consensus algorithms to validate transactions and maintain network integrity. These mechanisms ensure that only legitimate transactions are added to the chain. |
Challenges with Cryptocurrency
- Regulatory Uncertainty: The lack of clear, consistent regulation stifles innovation, leads to fragmented markets, and leaves investors vulnerable.
- Market Volatility: Cryptocurrencies are known for their price swings, which can result in substantial financial loss.
- Lack of Consumer Protection: Most cryptocurrency transactions lack consumer protections. This absence led to fraud, scams, and loss of funds with limited recourse for victims.
- Environmental Impact: The energy-intensive nature of proof-of-work mining, especially in Bitcoin, raises concerns about its sustainability and environmental footprint.
India’s Cryptocurrency Landscape
- Taxation Policies: The Indian government imposed a 30% tax on income from transfers of virtual digital assets in 2022, along with a 1% tax deducted at source (TDS) on each transaction.
- These stringent measures have dampened domestic enthusiasm for cryptocurrency trading.
- Regulatory Uncertainty: In 2018, the Central Board of Direct Taxes proposed a ban on cryptocurrencies, and the Reserve Bank of India (RBI) restricted banks from facilitating cryptocurrency transactions labeling it as a “macro-economic risk.”
- This decision was overturned by the Supreme Court in 2020.
Way Forward
- Comprehensive Regulation: Clear, balanced policies that delineate the legal status of cryptocurrencies while addressing security concerns.
- Investor Education: Initiatives to inform investors about the risks and benefits of digital assets.
- Collaborative Frameworks: International partnerships for coordinated regulation and technical expertise.
Source: IE
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