India plans to ban private cryptocurrencies

 Government is considering to ban all the private cryptocurrencies in upcoming budget session of parliament on 1st February, 2021

Is Government looking to develop national digital currency issued by RBI?

In these blog we will see what is cryptocurrency, how does it works and why India wants to ban private cryptocurrencies.

What is Cryptocurrency?

Cryptocurrency is a kind of digital currency that is intended to act as a medium of exchange. Cryptocurrency has become popular in the last decade, in particular, with Bitcoin becoming the most widely tracked alternative currency. Typically, cryptocurrency is electronic-only and does not have a physical form.

You can use crypto to buy regular goods and services, although many people invest in cryptocurrencies as they would in other assets, like stocks or precious metals. While cryptocurrency is a novel and exciting asset class, purchasing it can be risky as you must take on a fair amount of research to fully understand how each system works.

The global economy is inevitably moving towards a digital eco-system. From investment to money transfer, everything is going paperless. The newest and most promising addition to the digital payment sector is cryptocurrency.

How does it works?

Cryptocurrency markets are decentralised, which means they are not issued or backed by a central authority such as a government. Instead, they run across a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’ .

Unlike traditional currencies, cryptocurrencies exist only as a shared digital record of ownership, stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet. The transaction isn’t considered final until it has been verified and added to the blockchain through a process called mining. This is also how new cryptocurrency tokens are usually created.

Cryptocurrency mining

It is the job of a miner in cryptocurrency network to confirm transactions. They take transactions, mark them as legitimate, and allow them to be spread all over the system. When a transaction is confirmed by the miner, every intersection of the transaction has to become a part of the database - in turn, becoming a part of the blockchain. Miners are then rewarded within the existing domain of cryptocurrency through whatever type of currency is being used. For example, if it's bitcoin, a miner will be rewarded with a said particular number of bitcoins as there are no specifications attached to becoming a miner.

Government on banning cryptocurrencies

The law will create a facilitative framework for creation of the official digital currency to be issued by the central bank, according to the agenda published on the Lok Sabha website on Friday.

The proposal to ban cryptocurrency is among the 20 bills to be considered at the Budget session of parliament.

In a recent note, the Reserve Bank of India (RBI) mentioned that it was working on developing its own digital legal tender that has the backing of the state.

This is not the first time that the central bank has spoken about such an effort. In the past, statements have been made about putting in place RBI’s very own cryptocurrency. But nothing substantial has taken place on that front, apart from periodic remarks made by the bank’s top executives.

Why India wants to ban cryptocurrencies?

The ban on Bitcoins is troubling enough. But what is worse is the committee’s recommendation to criminalize any form of dealing in an asset class that is fast becoming a global phenomenon. The report suggests a fine of up to rupee 25 crore or imprisonment of up to 10 years. This is both regressive and repressive. The committee believes that the use of a non-official digital currency can have serious implications for money supply in the economy. The promise of anonymity that trading in these currencies afford could also open the doors to money laundering and terrorist financing. Since there is a clear transactional trail, this argument looks a little wishy-washy. 

But the immediate problem is this: digital currency exchanges like Coin-base continue to operate in India even though the Reserve Bank of India has barred all regulated entities, including banks, from dealing with them. One of the suggestions thrown up during the committee’s deliberations was that these crypto exchanges should be given two to three months to close down before the ban is enforced. The government representative shot down the suggestion, arguing that such a transitional arrangement would provide a legal cover to something that was unlawful. This has created a piquant situation: Coin-base will continue to operate in the shadows till the axe falls. This is so silly and totally undesirable.

In 2018, an Indian government panel recommended banning all private cryptocurrencies and proposed up to 10 years of jail time for offenders. The panel also suggested the government to explore a digital version of the fiat currency and ways to implement it.

At the time, RBI said the move was necessary to curb “ring-fencing” of the country’s financial system. It had also argued that Bitcoin and other cryptocurrencies cannot be treated as currencies as they are not made of metal or exist in physical form, nor were they stamped by the government. The 2018 notice from the central bank sent a panic to several local startups and companies offering services to trade in cryptocurrency. Nearly all of them have either since closed shop, or pivoted to serve other markets.

Types of cryptocurrencies

There are now more than 3000 cryptocurrencies in existence, with each falling into one of the three major categories: altcoins, tokens, and Bitcoin.

Three main types of currencies 

1) Bitcoin: 

Bitcoin (BTC) was the first cryptocurrency to be created and remains the world’s leading cryptocurrency by market cap. Bitcoin is a global peer-to-peer electronic payment system that allows parties to transact directly with each other without the need for an intermediary such as a bank.

The Bitcoin whitepaper, which outlined how this revolutionary new currency would work, was released in 2008, and the Bitcoin network launched in 2009. Since its launch Bitcoin has experienced no downtime, allowing anyone to transfer value at any time and from anywhere.

Bitcoin’s creator goes by the pseudonym Satoshi Nakamoto, their real identity remains unknown to this day. It is also unclear whether Nakamoto represents a single person or a group of individuals who worked on the Bitcoin project.

2) Altcoin:

Altcoin refers to all digital cryptocurrency launched following the success of Bitcoin; hence the name, which means “alternative to Bitcoin”.  There are over 900 Altcoin currencies that have been created since Bitcoin.

Each altcoin has its own, unique offering, from faster payment times to more efficient cross-border transactions,  providing a diverse array of benefits that could be better suited to individuals’ needs than the popular head of the family, Bitcoin - depending on what you’re after.

Generally, alternative payment methods outside of traditional currencies, including altcoins, are on the rise. Altcoins (and Bitcoin) combine properties of modern money and the likes of gold into a new type of asset which makes it both scarce (like gold) yet easily transferable (like fiat currencies). They can be easily stored, not taken from its holder without their consent, and are accessible to everyone, everywhere.

3) Tokens:

Unlike Bitcoin and Altcoins, tokens are not able to operate independently and are dependent on the network of another cryptocurrency. That means they do not have their own underlying DLT or blockchain, but instead, are built on top of an existing cryptocurrency’s blockchain.

Data from Coin Market-Cap shows that there are at least 1496 tokens in existence, which are deployed on the blockchain platforms of 24 cryptocurrencies. Some prominent examples of different types of cryptocurrencies that host tokens include:

Ethereum

Launched in 2015, Ethereum is an open-source, blockchain-based, decentralized software platform used for its own cryptocurrency, ether. It enables Smart Contracts and Distributed Applications to be built and run without any downtime, fraud, control, or interference from a third party.

Omni

Omni is a decentralised, peer-to-peer, and distributed trading platform built on top of the Bitcoin blockchain, from a team that calls itself the Omni Layer. in order to facilitate peerless, trustless, and effortless exchange of assets or value between parties without involving middlemen.

NEO

NEO is a smart contract platform, similar to Ethereum, that was created by a team of developers in China and was formerly known as Antshares. It was designed to utilize “blockchain technology to digitize assets using smart contracts and common programming language”. The platform was created by Da Hongfei and Erik Zhang. It has the ability to process 10,000 transactions per second. 

Tokens are much easier to create as you do not need to build a blockchain from scratch. You may have heard the phrase “tokenise the world,” which refers to the ability for tokens to represent almost any asset.

Pros and Cons of Cryptocurrency

There has been a steady growth of interest when it comes to cryptocurrency. As it becomes more integrated into different levels of our lives, it’s no surprise that increased awareness is driving the growing financial revolution. While there are both positives and negatives to the digital currency, the truth is that there are enough big businesses and corporations looking at ways to integrate the technology and make the most of its advantages, so the notion of digital currency is not going away anytime soon. 

 With fluctuations in value creating an ever-changing market for bitcoins and other, less popular, examples of cryptocurrency, you may be looking at the best ways that you can take advantage of the growing market and influence of this digital powerhouse. If you have been looking for good investment opportunity and therefore considering investing in a cryptocurrency, or if you are simply curious how you can use it to manage your finances more securely, then you need to be aware not only of the potential benefits, but also of the negatives as well. This will give you the options with a clear view of what to expect, and will improve your chances of having a positive interaction with cryptocurrency yourself.

Pros:

1)It’s Easy

Many people mistakenly think that cryptocurrency is too difficult a subject to learn and work with. The truth is, anyone can learn to use cryptocurrency. Even with no tech skills or knowhow, you can easily set up a wallet, get a bitcoin address, and start buying, spending, sending, and receiving cryptocurrencies like Bitcoin and Lite coin.

2)Transfer With Ease, Swiftness, and Security

The process of transferring funds is straightforward. You just need to click on a few buttons and confirm the transaction. The payment can also be received in real-time because there are thousands of miners that process these computations.

3)Anonymity

While each transaction’s address, hash, blockchain number, and miner name are recorded in the ledger for all to see, the process of trading and transferring your digital assets is anonymous.

4)Low Transaction Costs

One of the most important pros of cryptocurrencies is that they generally have low transaction costs. Unlike other Electronic Payment Systems (like PayPal and money transfers with banks), which tend to have expensive fees, cryptocurrencies generally have very low transaction costs.

5)Fast, Permanent Transactions

Cryptocurrency transactions generally process quicker than checks and bank-facilitated money transfers. Also, all transactions are final as soon as they are recorded in the permanent Transaction Block Chai

Cons:

1)Cybersecurity issues

As a digital technology, cryptocurrencies will be subject to cybersecurity breaches, and may fall into the hands of hackers. Mitigating this will require continuous upkeep of security infrastructure, but we are already seeing many players dealing with this directly, and using enhanced cybersecurity measures that go beyond those used in the traditional banking industries.

2)Price volatility and lack of inherent value

Price volatility, tied to a lack in inherent value, is a major problem, and one of the specifics that Buffet referred to specifically a few weeks ago when he characterized the cryptocurrency ecosystem as a bubble. It is an important concern, but one which can be overcome by linking the cryptocurrency value directly to tangible and intangible assets.

3) Scalability

Probably the biggest concerns with cryptocurrencies are the problems with scaling that are posed. While the number of digital coins and adoption is increasing rapidly, it is still dwarfed by the number of transactions that payment giant, VISA, processes each day. Additionally, the speed of a transaction is another important metric that cryptocurrencies cannot compete with on the same level as players like VISA and Mastercard until the infrastructure delivering these technologies is massively scaled.

4)Volatility

Volatility can be a disadvantage if you want to trade with low risks and gain considerable rewards in the long-term. However, you can look at it positively since this characteristic allows you to take advantage of the times when the price goes very low and buy lots of assets, which you can sell when the value increases after a short period.

5)Recovery Problem

If something goes wrong with a transaction or if a coin is lost there is no way to recover it. If someone does steal coins there is no way to rectify the issue.