Crypto Currency

In News

• The Reserve Bank of India (RBI) Governor said that crypto currencies are a threat to the financial stability of the country and have no underlying value.

About

• Recently, the Government proposed a 30 per cent tax on private crypto currencies and non-fungible tokens.
  • Additionally, tax deducted at source (TDS) of one per cent is to be levied on every digital asset transaction.
• Central Bank Digital Currency (CBDC): RBI said that the digital currency would be like the paper currency but in virtual form.
  • It can be used digitally to make payments.
  • The CBDC is backed by the RBI, while any other crypto currency is privately created.

Features of Cryptocurrency

• Anonymous: Cryptocurrencies make it possible to lend, sell, buy, or borrow without an identity, credit score, or even a bank.
• Highly secure: All records of its creation and when it’s sent or received are stored in a sort of big digital book that anyone can access, keeping it honest. It can’t (easily) be stolen or seized and can be used anywhere in the world.
• Cheaper to transfer: Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means. Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
• Illegal and highly volatile: However crypto is NOT just used for illegal purposes. In fact, due chiefly to its price fluctuation and other reasons it has fallen out of favor on the black market.
• No physical form: Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. However, it can be and many governments are working to create a crypto coin version of its respective fiat currency.
• Decentralized: Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency. When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is considered centralized. When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.
• Blockchain technology used: A blockchain is a database that stores encrypted blocks of data then chains them together to form a chronological single-source-of-truth for the data.
  • Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset
  • The asset is decentralized, allowing full real-time access and transparency to the public
  • A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
  • Blockchain’s inherent security measures and public ledger make it a prime technology for almost every single sector.

Benefits of Cryptocurrency

• Inherent security:  Use of pseudonyms and ledger systems conceals the identities.
• Low transaction cost: Very low fees and charges for transactions.
• Lack of interference from the banking system: Outside ambit of banking systems.
• Lower Entry Barriers: No entry barriers, unlike conventional banking systems.
• Universal recognition: Lots of cryptocurrencies and acceptable in many nations.

Concerns/Challenges

• Security risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
• Shield to Crime: Used for Illicit Trading, Criminal Activities, & organized crimes. 
• Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.
• Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
• Price Volatility:  Prone to price fluctuations & waste of computing power.
• Lack of Consumer Protection: No Dispute Settlement Mechanisms and control of Securities and Exchange Board of India (SEBI). 

Way Forward

• Cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21^st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology. 
• Establishing safeguards, measures and regulations after taking inspiration from developed countries.
• Some of the cryptocurrencies have seen a massive dip in their per-unit trading prices lately, leading to erosion of investor wealth. Some investors have been looking at cryptocurrencies as an attractive investment class.

Source: TH