About Crypto Currency

Context

Bitcoins were in news recently after a massive global ransom ware attack ‘WannaCry’ hit systems in over 100 countries. The cyber criminals demanded a fee of about $300 in crypto-currencies like bitcoin for unlocking affected devices.

In October this year, billionaire Warren Buffet had described Bitcoin as a “real bubble”, and said that one couldn’t value it considering it was not a value-producing asset.

Why the interest in virtual currencies?

Bitcoin saw its value trading at above $10,000 (about ₹6.43 lakh) per bitcoin, up by about 900% from its value on January 1, 2017. At a time when the Indian government is in the process of determining the legality of crypto currencies, it is important to understand what exactly a virtual currency means for the layman.

How it all started?

The origin of Bitcoin is unclear, as is who founded it. A person or a group of people, that went by the identity of Satoshi Nakamoto are said to be the one/s who conceptualised an accounting system in the aftermath of the 2008 financial crisis. Nakamoto published a white paper about a peer-to-peer electronic cash system, which would “allow online payments to be sent directly from one party to another without going through a financial institution”.

What is blockchain?

The transactions and the value of money would be recorded digitally on a publicly available and open ledger that contains all the transactions ever made, albeit in an anonymous and an encrypted form. This ledger is called blockchain. Considering the public and open nature of the ledger, proponents of this currency system believe, it could help weed out corruption and inefficiencies in the system.

However, in December 2013, the Reserve Bank of India issued a warning that cautioned the users about the potential risks of virtual currencies, including Bitcoin.

What is bitcoin?

Bitcoin is one of many cryptocurrencies that have gained popularity across the world.

• A cryptocurrency is a basically a digital asset that has been created to function as a medium of exchange, like cash.
• It uses cryptography to ensure the security of transactions — authentication and prevention of duplicate transactions — and to control the creation of new units of currency.
• This is different from cash in that cryptocurrencies have no physical form. These blur the boundaries between fiat and non-fiat currencies. They are simply numbers on a screen and there is no central bank that issues new currency. However, bitcoin has emerged as the popular face of cryptocurrencies.

Fiat and Non-fiat currency

A fiat currency is any currency that has no intrinsic physical value, but whose value is established by government decree. For example, most national currencies around the world, including the Rupee and the Dollar, are fiat currencies as their values are dictated by the government.

Non-fiat currencies such as the Gold Standard have more or less been effectively phased out, as they require adequate physical stockpiles to maintain their value.0

 However, the new breed of digital cryptocurrencies such as Bitcoin blurs the boundaries between fiat and non-fiat – they don’t have any physical value as such, but are also not government-controlled. This has created uncertainties about their role in the modern financial system.

What are the regulations?

While some of the countries such as Nepal, Bangladesh, Kyrgyzstan have declared Bitcoins as a means of payment illegal and in violation of the state law, a majority are yet to take a stand on it. In December 2013, RBI issued a warning with caution to users, holders and traders of virtual currencies, including Bitcoins, about the potential financial, operational, and legal, customer protection and security related risks that they are exposing themselves to.

Bitcoins are currently unregulated in India. There are no specific legal frameworks for Bitcoins and cryptocurrencies in India yet.

Can you use bitcoin as currency?

At the moment, the Reserve Bank of India has banned transactions in India using cryptocurrencies. In other words, while you can buy and sell cryptocurrencies on online exchanges, you can’t use them to pay for goods and services within the country.

In April, the government had constituted an inter-disciplinary panel to look into the legality of cryptocurrenciesand suggest a way forward, which included a having a regulator if they are legalised.

The panel, which included officials from the Department of Economic Affairs, Department of Financial Services, Department of Revenue, Ministries of Home Affairs and Electronics and Information Technology, the Reserve Bank of India, NITI Aayog, and the State Bank of India, submitted its report in August and it is being examined.

Pros and cons

It is possible to send and receive bitcoins from any part of the world irrespective of traditional hurdles like national borders and banking regulations.

• Bitcoin does away with the need for a regulator.
• By making everything public, bitcoin negates the need for a middleman.
• According to bitcoin.org, no individual or organisation can manipulate Bitcoins because it is cryptographically secure and do not contain customers’ personal information.

However, not being backed by any government entity is Bitcoin’s biggest disadvantage and affects its adoption by people.

• With less Bitcoins in circulation and the number of businesses using Bitcoin still very small, relatively small events, can significantly affect the price.
• One of the biggest problems that cryptocurrencies face is acceptance.

However, many businesses have started accepting Bitcoins. One of the largest PC companies in the US, Dell, started accepting Bitcoin in 2014. Travel website Expedia allows you to pay with Bitcoins. Tech giant Microsoft also embraced bitcoins in December 2014. In India too, the adoption has started. Bengaluru-based exchange Unocoin has a growing list of merchants on its website that includes e-commerce firms, web-hosting companies and even schools.

What do the experts say?

Experts and central banks across the world are slowly arriving at the conclusion — written about in various research papers but not yet implemented in policy — that cryptocurrencies are here to stay.

The only way to regulate their value and quantity is for central banks to issue their own digital currencies. While the value of digital currencies such as bitcoin are market-determined, depending on what somebody is willing to pay, a central bank-backed digital currency will have its value controlled to an extent by the central bank itself, much like any other major currency in the world.

RBI’s research arm Institute for Development and Research in Banking Technology put out a paper in favour of the blockchain technology.

There is still a lot of analysis to be done regarding the effect of such a central bank-backed digital currency on factors such as inflation and price levels.