Cryptocurrency is a form of digital currency that uses cryptography to secure transactions and control the creation of new units. Bitcoin, launched in 2009, was the first widely adopted cryptocurrency. Unlike regular currencies which are issued by central banks, cryptocurrencies operate independently of any central authority. The transactions are recorded on a decentralised public ledger called the blockchain.
Types of Cryptocurrencies
Cryptocurrencies can be categorized based on their purpose and functionality. The main types include:
Bitcoin (BTC)
The first and most well-known cryptocurrency. Primarily used as a digital store of value and a medium of exchange. Often referred to as “digital gold.”
Altcoins (Alternative Coins)
Cryptocurrencies other than Bitcoin, often developed to improve or offer different features. Examples include:
Ethereum (ETH): Focused on smart contracts and decentralized applications (dApps).
Litecoin (LTC): Known for faster transaction speeds than Bitcoin.
Ripple (XRP): Designed for fast, low-cost international payments.
Stablecoins
Cryptocurrencies pegged to stable assets like fiat currency or commodities (e.g., USD or gold) to reduce price volatility.
Examples: Tether (USDT), USD Coin (USDC), DAI.
Utility Tokens
Used within specific platforms to access services, pay fees, or participate in network governance.
Examples: Binance Coin (BNB), Chainlink (LINK).
Security Tokens
Represent ownership of an asset, such as real estate or stocks, and are subject to securities regulations.
Examples: Tokens issued during security token offerings (STOs).
Privacy Coins
Focus on anonymous transactions by concealing user identities and transaction details.
Examples: Monero (XMR), Zcash (ZEC).
Meme Coins
Cryptocurrencies inspired by internet memes or jokes, often speculative and community-driven.
Examples: Dogecoin (DOGE), Shiba Inu (SHIB).
Governance Tokens
Allow holders to vote on decisions regarding the development and management of a blockchain or decentralized application.
Examples: Uniswap (UNI), Aave (AAVE).
Central Bank Digital Currencies (CBDCs)
Digital currencies issued by central banks, representing fiat currencies in a digital format.
Examples: Digital Yuan (China), e-Krona (Sweden).
Impact
Bringing the next level of globalisation as the cryptocurrency is digital currency and easily available across the international borders.
Emergence of one currency for the countries of the world which are decentralised and not related to any country. This may make fiat money redundant in the future.
It has made it easier for entrepreneurs to reach international markets rather than strictly sticking to the national markets.
Fast and Cheap Transactions: Cryptocurrencies are way cheaper to use to execute international transactions making transactions faster and accurate, there are less chances of fraud.
However, it takes away the sovereign power of issuing currency. Thus, making economic policy of the government ineffective. It also makes capital more volatile posing risk to macroeconomic stability.
New Investment Destination: There is a limited supply of cryptocurrency – partially like gold. Moreover, the last few years have seen the price of cryptocurrencies rising faster than other financial instruments.
Due to this, cryptocurrencies can become a preferred investment destination. People are investing more here than keeping in banks.
Use of cryptocurrency by terrorist organization, drug cartels etc negatively impacts the global society and the anonymity of its use has potential to increase crime.
Blockchain Technology: The transactions are recorded in encrypted ‘blocks’ that are chained together chronologically and distributed across the network.
This creates an immutable, transparent ledger of all transactions validated by consensus algorithms.
Cryptocurrency Limitations
Cryptocurrencies, while offering numerous benefits, also come with certain limitations, including high volatility, susceptibility to criminal activities, and potential threats to energy security.
High volatility: Cryptocurrencies, due to the lack of a central regulatory agency, are subject to high fluctuations.
For instance, the Reserve Bank of India has warned against cryptocurrency transactions, citing potential risks to financial stability.
Financial instability: The widespread adoption of cryptocurrencies and large volume of anonymous transactions could undermine monetary policy effectiveness, exacerbate fiscal risks, and threaten global financial stability.
The IMF, for example, has warned El Salvador, which has adopted Bitcoin as legal tender, about the risks associated with unregulated assets.
Cyber threats: Cryptocurrency platforms are vulnerable to hackers and malicious use, leading to potential issues such as system trading manipulation and other fraudulent activities.
For instance, private keys stored by wallet service providers are often prone to malware or hacking.
Criminal activities: The anonymous nature of transactions raises concerns about potential misuse for activities like terror financing and money laundering.
A global framework has been suggested for dealing with crypto assets, which includes licensing crypto service providers and implementing anti-money laundering and counter-terrorist financing standards.
The legal status of cryptocurrencies in India
It has been a topic of considerable debate and regulatory scrutiny. Cryptocurrencies are not illegal in India, meaning individuals can buy, hold, and trade cryptocurrencies. However, the Indian government and regulatory bodies have expressed concerns over the risks associated with cryptocurrencies and have been working towards establishing a regulatory framework.
Regulatory Developments:
1. Supreme Court Ruling (2020): The Supreme Court of India lifted the Reserve Bank of India’s (RBI) ban on cryptocurrency transactions. The RBI had initially imposed restrictions that prevented banks and financial institutions from providing services related to cryptocurrencies. The Supreme Court’s decision was seen as a significant victory for the Indian crypto industry.
2. Taxation: In the 2022 budget, the Indian government announced a 30% tax on income from cryptocurrency transactions, along with a 1% tax deducted at source (TDS) on such transactions. This move was interpreted as a step towards recognizing and regulating the crypto market, even though cryptocurrencies have not been given legal tender status.
3. Regulatory Proposals: The Indian government has been considering the introduction of a specific legislative framework for cryptocurrencies. There have been discussions about a bill that aims to regulate digital currencies, which might include provisions for the creation of an official digital currency issued by the RBI, and for the regulation or banning of certain private cryptocurrencies.
4. RBI’s Stance: The Reserve Bank of India has maintained a cautious stance towards cryptocurrencies, citing concerns over financial stability, investor protection, and the potential for misuse for illicit activities. The RBI has also been exploring the possibility of launching an official digital currency (Central Bank Digital Currency – CBDC).
At present, El Salvador and the Central African Republic (CAR) are the only two countries in the world where Bitcoin functions as a legal currency.
Cryptocurrency represents a revolutionary shift in finance, offering decentralized, secure, and transparent transactions. While challenges like volatility and regulation persist, its potential to enhance financial inclusion and foster innovation is undeniable. As adoption grows, cryptocurrencies may reshape economies, enabling a more accessible, efficient, and borderless digital financial ecosystem.
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