In the present modern era, where everything is being digitalized to facilitate the system, Cryptocurrency is one of them. We all have heard about it but what is it literal meaning? What is its mechanism? How it is used? What is its legal status in India? This article endeavors to answer these questions.
What is Cryptocurrency and how did it originate?
It is a virtual or digital currency made to function as a mode of exchange. The technology used to secure and verify transactions is cryptography. Fundamentally, no one can tamper with these currencies unless some particular conditions due to the limited entries in a database.
In the early 90s, with the prosperity of technology, many attempts were made to digitalize the currency through the system like Flooz and Digicash but failed. There are many reasons for their failures, such as fraud, financial problems, the conflict between employees and their employers. In particular, all of those systems used a reliable third-party system, which means that the companies behind them have verified and facilitated transactions. Due to the failures of these companies, the creation of a digital cash system has long been considered lost. Then, in early 2009, Bitcoin was introduced by an anonymous programmer or a group of programmers under alias Satoshi Nakamoto.
Satoshi describes it as a “peer-to-peer electronic cash system”. It is fully decentralized, which means that there is no server involvement and no central control authority. This concept is similar to peer-to-peer networks for file sharing. In a decentralized network like Bitcoin, every partner must do this. This is done through the Blockchain (a public account of all transactions that ever took place over the network). Therefore, everyone on the network can view the balance of each account. A file containing the public keys (wallet addresses) and the number of coins transferred to each transaction. The sender of the transaction is required to sign his / her private key. All this is just a basic cryptography. Eventually, the transaction will be transmitted over the network but must be verified first.
In the Cryptocurrency network, only miners can verify transactions by solving a cryptographic puzzle. They carry out transactions, identify them as legitimate, and spread them across the network. Next, each node of the network attaches to its database. Once the transaction is confirmed, it becomes unforgivable and irrevocable, and the miner receives a reward and transaction fee.
Kinds of Cryptocurrency
The blockchain brings together the three main types of cryptocurrency. Bitcoin was the first blockchain. After Bitcoin, many new blockchains were created, these are called Altcoins. NEO, Litecoin, and Cardano are solid examples of Altcoins. The third main type of Cryptocurrencies, examples of these include Civic (CVC), BitDegree (BDG), and WePower (WPR).
It is a digital currency that you can send to other people. This could be in the form of a gift, for services or a product. This is like money used in our bank accounts. Indeed it is digital, not physical. It is also decentralized, meaning thereby it does not have to rely on a bank or third party to manage it. With Bitcoin, every transaction takes place directly between users. This is called a peer-to-peer network.
Bitcoin grew significantly in 2013-14. Then, it gradually slowed down, but in the year 2017, Bitcoin market has moved up. In December 2017, the price of it reached $ 20,000 per Bitcoin. So, if someone owns 50 bitcoins or more, he can become a millionaire. In January 2015, the cost of 50 bitcoins was $ 10,000. This is a profit of 90,990,000.
Over a thousand altcoins exist, wherein most altcoins are only alternate versions of bitcoin with minor modifications. Therefore it is named as ‘altcoins’. However, not all altcoins are alternate versions of bitcoin. Bitcoin has very different goals and objectives. Some altcoins use different algorithms for bitcoins. For example, Factum is an altcoin that uses pose (proof of steak). In the pose, there are no miners. Instead, there are stackers, they are people who verify transactions for rewards, such as miners. But instead of racing to validate the blocks before committing to someone else, they choose one by one to take their turn. It consumes very little electricity because thousands of miners do not allow their electricity to be tried and verified. Instead, each block has only one ‘stacker’.
In fact, Ethereum and NEO are examples of altcoin, which are different from super, bitcoin Morever, Ethereum and NEO are not designed to be used as a digital currency. Whereas, they are designed as massive platforms for building applications on the blockchain.
Tokens (for dApps)
The third major type of Cryptocurrency is the token. Of the three main types of Cryptocurrency. Compared to the other two main types of cryptocurrency, they are completely unique that they do not have their blockchain.
They are used in DAP (decentralized applications); These are applications that can be built on blockchains such as Ethereum and NEO. DAP is built to use smart contracts, which is why they use tokens. The token does not need to refer to a physical object, such as electricity or a house. On the flip side, they can be used to buy things in DAP. Either that or they can be used to get some benefits – such as discounted fees and voting fees.
Tokens always have a price, it can be sold. Which is why some people buy them. Some people sell the tokens to DAP instead of buying them, and then sell them for a higher price. Because DAPs are built on other blockchains (such as Ethereum and NEO), the token transaction is still validated by nodes in the Ethereum or NEO blockchain. Transaction fees are still paid with Ether or NEO, not with tokens. Therefore, to handle a transaction in a DAP (i.e. to use a token), you must have some Ether or NEO (or DAPP created) to pay the transaction fee.
How Crypto Currency affects the Economy?
Cryptocurrencies have the potential to initiate social and economic development globally, in developing countries, with easy access to capital and financial services. Crypto is particularly beneficial in currencies and Bitcoins, although it is gradually damaging, the traditional economy is constantly interfering with the way it works. There is a whole industry around Cryptocurrencies and it is run by companies dedicated to monitoring all digital coin exchanges. The rising rate of the Cryptocurrency industry is shredding the land and the early adopters have become wealthy overnight and have opportunities to grow economically.
More than one-third of the world’s population does not have access to basic banking services to assist them in the event of a personal financial crisis – going through loans, checking accounts, and inventory. In most cases, these financially disadvantaged people usually resort to questionable and dangerous lending practices. The interest rate of these methods is not affordable, but there is greater volatility among the people requesting loans. This is where Cryptocurrencies fall due to their high volatility and ease of use. There are now many applications and programs that simplify the use of Cryptocurrencies and make them available to a wider audience. An added benefit of using Cryptocurrency is that it is fully decentralized, so it can be traded freely across borders.
Since Cryptocurrencies and blockchains do not require a real brick and mortar buildings to exist, their transaction costs are low. Employees don’t have to pay salaries, utility bills, or rent, so these savings naturally translate into lower transaction fees. This will encourage more people to trust these new financial instruments and initiate transactions, allowing the global economy to intervene more closely. And depending on the broker you choose, you can also trade with minimum deposit requirements – for example by offering cryptocurrency.
Since all blockchain and cryptocurrency transactions are automated and digitized, they are all tracked in a distributed ledger. The best thing about it is that it is not changed by individuals or organizations, it reduces the risk of fraud and corruption. This means that developing countries are also likely to enter the game of economic transactions and increase their economic and social opportunities.
Is there any substantive law in respect of Crypto Currency in India?
Criminals use Crypto Currencies such as Bitcoin for various purposes: laundering dirty money, scamming victims out of funds, defrauding investors, monetizing ransomware, or buying illicit goods.
A high-level government panel on virtual Cryptocurrencies has recommended a ban on all virtual Cryptocurrencies in India. It includes a government-controlled Bitcoin. The Committee submitted its report on 23 July 2019 with the regulation of the proposed draft Bill, Cryptocurrency Ban, and the Official Digital Currency Bill, 2019.
However, the move was not a surprise. The Reserve Bank of India (RBI) has written on the wall of Cryptocurrencies since April last year when it prevented banks and financial institutions from dealing with Cryptocurrencies. This report and the draft bill have now made this matter even deeper. However, the committee is in favor of launching an official digital currency. Although the virtual currency and its underlying technology are still in development, the group has proposed that the government can reopen the issues outlined in the report and set up a standing committee if necessary.
The ban on virtual currencies comes with a penalty of up to 10 years for any activity related to virtual currencies, which are committed by individuals or corporations.
From contemplating the concept of Cryptocurrency it is evident that it upgrades the economy to a great extent. It eases the transfer of money so is being used primarily by businessmen and investor. Although, there is another scenario that it is dread by thieves and hackers. So, in order to ascertain the security and investigation in cases of theft and hacking a proper code is needed.
- Crypto Currency Law Enforcement-
2. What are crypto currencies – For Beginners
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