This article has been written by Partha Pratim Sen, pursuing a Diploma in US Tax Compliance and Paralegal Work from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
Cryptocurrency, one of the most popular forms of digital currency, is a kind of decentralised block chain technology that ensures a secure mode of transactions in the current scenario. One of the most popular mediums of transactions, cryptocurrency adds pace to the business by ensuring flexibility for investors in the purchase of goods and services. Being one of the decentralised forms of currency, cryptocurrency is outside the ambit of any financial bodies or governments. The details of all transactions are completely recorded based on a systematic procedure for computer networks, making them less susceptible to manipulation by systems.
Technology related to cryptocurrency
One of the popular forms of virtual currency based on the BlockChain technology capable of encrypting codes helps to remain safe against online fraud and breaches. It has been seen that most countries are devoid of accepting cryptocurrency as a legal form of transaction, despite the fact that cryptocurrency is one of the financial assets, which implies that cryptocurrency can hardly be used for the process of purchasing or selling, irrespective of the fact that crypto currency is a form of financial asset. Although cryptocurrency is not created by a single entity, it cannot be considered a legal form of tender, thus making it difficult to use for any form of transaction.
Block chain technology explained
One of the improved forms of financial transactions that crypto currency refers to is the list of transactions that happened in the past that have been recorded systematically in the network, which ensures the authenticity of the recorded information in the network. The process demands the activity of all the participating members to work with the same information that is assumed to be derived from a single source of fact. The most notable feature of this technology is that recorded information cannot be deleted from the network, making communication more authentic and fact and ensuring a secure mode of transactions.
Types of crypto currency
The various practices of different forms of cryptocurrencies in the present scenario are created at regular intervals. The following are some of the popular forms of cryptocurrency available on the market.
- Bitcoin (BTC): One of the widespread currencies generated in 2009 is commonly used by the masses.
- Ethereum (ETH): The second largest cryptocurrency after Bitcoin was generated in 2015 by Vitalik Buterin. One of the decentralised applications, Ethereum, is known for its smooth contract.
- Litecoin (LTC): Charlie Lee, a former Google Engineer who generated this form of crypto currency in 2011, is considered a substitute of Bitcoin
- Ripple (XRP): Ripple Labs, which was generated in 2012, is widely used as the payment mode for cross border transactions to speed up the cost of international transactions, making it more effective.
- Bitcoin Cash (BCH): Once generated in 2017, this has solved the problems of scalability associated with Bitcoin crypto currency.
- Cardano (ADA): Once created in 2015 by Charles Hoskinson, one of the co founders of Ethereum, is mainly used for academic research and peer review.
- Dogecoin (DOGE): It was created by Billy Markus and Jackson Palmer in 2013 and is one of the playful substitutes for Bitcoin.
These were some of the examples of various types of crypto currency available in today’s world, each with its own unique features and prices that can turn out to be highly volatile.
Are cryptocurrencies legal
The legitimacy of cryptocurrencies differs from country to country, and there is no global harmony regarding their legal status. Some countries have fully embraced cryptocurrencies and have sanctioned laws to standardise them, while others have banned them altogether. Here are some examples of the legal status of cryptocurrencies in different countries:
United States- Cryptocurrencies are legal and treated as property for tax purposes
China– Cryptocurrencies are illegal, and the government has banned cryptocurrency exchanges and initial coin offerings.
Japan- Cryptocurrencies are legal and controlled under the Payment Services Act.
India- Cryptocurrencies are not prohibited, but the Reserve Bank of India has debarred banks from providing services to cryptocurrency exchanges.
Russia- Cryptocurrencies are legal, but the government has proposed guidelines to control their use.
South Korea- Cryptocurrencies are legal, but the government has introduced regulations to control illegal activities of money laundering, fraud, etc.
It is important to remember that even in nations where cryptocurrencies are acceptable, their parameters might be complicated and their use may be controlled. As the government and financial sectors continue to consider the ramifications of cryptocurrencies, the lawful position of these technologies is continuously changing, and authorities are adjusting their rules accordingly.
Are cryptocurrencies a safe investment
Cryptocurrencies are highly volatile and speculative investments, and their safety as investments may be a matter of debate. Here are some of the factors that need to be considered while assessing the safety of investing in cryptocurrencies:
Volatility: Cryptocurrencies are well known for their wildly fluctuating prices, which can be influenced by a variety of causes, including market mood, breaking news, and legislative changes. There is risk involved with this investment because of its volatile nature, as its value might fluctuate quickly and unexpectedly.
Lack of regulation: With no central body in charge of overseeing cryptocurrencies and no government-backed insurance or security available for investors, it may be challenging for investors to value the risks associated with investing in cryptocurrencies.
Risks associated with cyber security: Cryptocurrencies are vulnerable to cyber-attacks that could result in the loss of money or personal data. Because cryptocurrencies are decentralised with no central authority regulations, it is difficult to resolve any issues in the event of a security breach.
Market liquidity: Cryptocurrencies are still quite a new and niche asset class, and their liquidity can vary broadly depending on the specific cryptocurrencies and the government regulations. This lack of liquidity can make it difficult for investors to buy or sell cryptocurrencies at a desired price.
Overall, the well-being of investing in cryptocurrencies depends on individual circumstances and the risk tolerance of the investors. While some investors have made significant gains from investing in cryptocurrencies, others may have suffered losses due to market volatility or security breaches. As with any investment, it’s important to carefully consider the risk and benefits before making a decision.
Advantages of cryptocurrency
Cryptocurrencies are a decentralised method of payment; hence, many centralised intermediaries like banks and financial organisations lack the power to implement trust between the two parties and regulate business dealings between them. Thus, the cryptocurrency system avoids the chance of a single point of failure, such as a bank failure, triggering a chain reaction of crises around the globe, similar to the 2008 financial crisis, which was caused by an institutional failure in the United States.
- Security: Cryptocurrencies are safer than conventional payment methods because they utilise sophisticated cryptography to secure and verify transactions.
- Accessibility: Cryptocurrencies may be manageable by anybody with an internet connection, wherever they may be, making them location-neutral.
- Cheaper transaction fees: Transaction fees are typically low-priced than those associated with standard payment methods. This is especially true when transactions involve foreign currency.
- Speed: Transaction times can be greatly reduced by using cryptocurrency because transactions can be handled rapidly without the use of intermediaries.
- Transparency: Because cryptocurrency transactions are recorded on a public ledger, they are more transparent and accountable.
- Possibility of huge returns: Since cryptocurrencies are a volatile class of investments, their prices are susceptible to big swings in a short period of time. For those prepared to take the risk, this volatility may offer the potential for large profits.
Overall, most individuals and businesspersons are attracted to cryptocurrencies as they offer several advantages. However, it is also important to evaluate the risks associated with investing in cryptocurrencies before making any investment decisions.
Disadvantages of cryptocurrency
The disadvantages of cryptocurrencies are:
- Volatility: Being highly volatile, cryptocurrency prices/value and values fluctuate considerably in a short period of time, which makes them a risky mode of investment, and this can lead to significant losses for investors.
- Zero regulation: Because any government or financial organisation does not rule cryptocurrencies, they are more susceptible to fraud and swindles.
- Limited acceptability: Although more companies are beginning to accept cryptocurrencies as payment, their utility as a medium of exchange is still constrained by their limited acceptance.
- Complex technology: Using and investing in cryptocurrencies can be challenging for some people due to the complexity and difficulty of the technology that underlies them.
- Security risk: The vulnerability of cryptocurrencies to hacking and other security flaws might lead to money loss.
- Environmental impact: The mining process for some cryptocurrencies requires significant amounts of energy, which can have a negative impact on the environment.
- Irreversible transactions: Once a transaction has been made with a cryptocurrency, it cannot be reversed. This can be problematic in the case of fraudulent or mistaken transactions.
Cryptocurrency from an Indian perspective
In order to get the correct perspective, we need to have an overview of the boarding of crypto currency in the Indian ecosystem since 2008 and its journey thereafter.
2008- The very concept of cryptocurrency was introduced in the Indian financial and legal system during this period through the journal in the paper titled “Bitcoin: A Peer to Peer Electronic Cash System,” written by Sir Satoshi Nakamoto, a pseudonymous developer.
2010- Two years later, the first Bitcoin transaction was recorded, in which a good was purchased using Bitcoin. As soon as this monetary value was tied to the cryptocurrency, it gained popularity, and the emergence of other cryptocurrencies like Litecoin, Namecoin, and Swiftcoin started to appear.
2013- As cryptocurrency investments began to gain popularity, the market showed the emergence of new exchanges, including ZebPay, Pocket Bits, Coinsecure, Koinex, and Unocoin. The RBI has to circulate a circular warning the stakeholders of the potential inherent risk involved with virtual money as a safety measure. This was the RBI’s first cryptocurrency-related circular.
2016–2020- This period witnessed demonetisation, a preference for digital payments and an unintended enhancement towards crypto investments. With banks green lighting transactions on crypto exchange, RBI had to use another circular in 2017, notifying concerned stakeholders of its apprehension. Subsequent to the end of 2017, another circular was issued by the RBI and the Ministry of Finance, stating that virtual currencies are not legal tender. In March 2018, CBDT sent a recommendation to the finance ministry to ban virtual currency. This was followed by a circular from the RBI to banks and the NBFC restraining them from dealing with virtual currency and providing services for virtual currency exchange. This dealt a heavy blow to the crypto exchanges and trade on these exchanges plummeted by 99%. However, the Internet and Mobile Association of India (IAMAI) appealed before the Supreme Court and this ban was declared unconstitutional on March 20, 2020, as it infringed Article 19(1)(g) of the Indian Constitution, which guarantees every citizen of India the freedom to practice any legitimate profession to earn a living. Towards end of 2018, founder of WazirX, started a crypto campaign by the name #IndiaWantsCrypto, this campaign subsequently gained momentum with lakhs of crypto enthusiasts joining the campaign.
2021- On January, 2021, a bill was introduced by the GOI to create sovereign digital currency and put a blanket ban on private cryptocurrency. On November 20, 2021, the committee on finance had a meeting with various cryptocurrency representatives and a decision was taken not to ban but to regulate the circulation of cryptocurrency. On December 20, 2021, Prime Minister Narendra Modi also conducted a meeting on cryptocurrency.
2023- It has been recommended that the government of India (GOI) levy a 30% tax on the profits produced by crypto assets and introduce the digital rupee in the Union Budget of FY 2022–23. A virtual currency called the “Digital Rupee” was created in response to the government of India’s hesitant and uneasy stance towards cryptocurrencies. While this has created uncertainty over the future of cryptocurrency on the one hand and among crypto enthusiasts on the other, there is a growing perception that cryptocurrency may soon be legalised in our nation. Although cryptocurrency has been around since 2009, it has only recently experienced an extraordinary increase because of its rising popularity among millennial investors who are risk-averse. According to the “Global Crypto Adoption Index” of 2021, published by the block chain analysis business “Chain Analysis,” there has been an 880% increase in crypto use globally. India came in second place in the “Global Crypto Adoption Index” of 2021, after Vietnam, as the Indian cryptocurrency market expanded by 641% in a single year.
In response to the government of India’s cautious approach towards cryptocurrencies, a notification was released on March 7th, 2023, placing transactions involving crypto assets under the Prevention of Money Laundering Act. The following types of transactions would be covered under this law:
- Exchange between virtual digital assets and fiat currencies.
- Exchange between one or more forms of virtual digital assets.
- Participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.
- Safekeeping or administration of virtual digital assets or instruments.
- Transfer of virtual digital assets.
Conclusion
In today’s dynamic world, cryptocurrencies being secured by cryptography are a relatively new technology; they are highly hypothetical, so it is essential to understand the risk involved in such assets before making an investment. Speculative risk is high when investing in cryptocurrencies and other initial coin offerings. A lot of awareness and knowledge are required before acquiring any crypto asset and it is suggested to only invest what you can afford to lose and to diversify your investment portfolio to curtail risk. The exciting prospects offered by cryptocurrencies need to be availed with caution, as this asset may not be suitable for everyone.
References
- https://economictimes.indiatimes.com/tech/tech-bytes/about-20-million-indians-jumped-on-to-crypto-bandwagon-in-2021/articleshow/88628547.cms
- https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index/
- https://www.investopedia.com/terms/s/satoshi-nakamoto.asp
- https://www.thetimes.co.uk/money-mentor/article/bitcoin-alternatives/
- https://www.legalserviceindia.com/legal/article-3912-internet-and-mobile-association-of-india-v-reserve-bank-of-india.html
- https://fairfood.org/en/blockchain/?gclid=CjwKCAiAmJGgBhAZEiwA1JZolhrXuADaHfehZHFZNEDUL-0BoW0cWw8CvVdJvLAg16DT0z6BpM0nMxoCfjkQAvD_BwE
- https://www.moneycontrol.com/msite/wazirx-cryptocontrol-articles/the-journey-of-cryptocurrencies-in-india/
- https://www.forbes.com/advisor/in/investing/cryptocurrency/crypto-bill/
- https://www.ijlmh.com/paper/status-of-cryptocurrency-in-india-a-broader-perspective/#
- https://indianexpress.com/article/explained/explained-economics/crypto-assets-pmla-explained-8486629/
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