Kolkata, March 24, 2021: Various cryptocurrencies are in news around the globe. It has become a parallel option for investment and exchange of goods and services.
Popular investors and entrepreneurs are betting big, in what is envisaged as the future of transactions.
Govt yet to decide course of action on cryptocurrencies
However, governments around the world are still at a loss to decide their course of action. Many have come up with a ban on these cyptocurrencies, some other mooted idea to have their own and few more has opted to take pseudo control and tax the earnings and exchanges.
Although time will be our best judge.
We can atleast start by understanding what it is.
Concept of cryptocurrencies
Before defining cryptocurrencies, it is better to grasp what it is in simplistic terms.
Let us presume that we are playing a very popular online game. If we are winning at levels, the game rewards us with coins, which are stored in a predefined wallet. Else, we are allowed to purchase coins by using actual currency.
Winning these coins means either we become members of an elite group who in turn gets a stake in the organization creating the game or has certain iota of influence in issuance of future coins to other new players.
Since the issuance of coins follows a certain cryptic logic (better known as ‘block chain’ technology) , the new players need to pay a premium to get it issued in their names or are required to purchase from the existing holders in defined exchanges (who off course holds their coins in high security wallets).
The supply of the coins is limited and transactions are recorded in digital ledgers.
In addition to this feature it allows the members to use these coins in various online outlets to buy, sell/exchange host of goods and services.
There are a group of speculators/first movers who believe in a borderless, state control less futuristic currency.
You have got a mix of Hollywood blockbuster and the thought process behind cryptocurrencies.
A cryptographer called David Chaum developed a cryptographic system called eCash in 1983. Twelve years later, he developed another system, DigiCash, which used cryptography to make economic transactions confidential.
However, the first time the idea or term “cryptocurrency” was coined was in 1998.
Year 2008 saw severe economic crisis and what many people faced was shortage of hard currency to pay for goods and services.
In 2009, the Satoshi Nakamoto (identity unknown), created the first cryptocurrency, Bitcoin to create a new way of payment that could be used internationally, decentralized and without having any financial institution behind it.
The factor which might have driven him to make people see that there is another type of money, which is not the conventional one that you can also use and benefit from it.
What makes cryptos work?
Political independence and essentially impenetrable data security, cryptocurrency users enjoy benefits not available to users of traditional currencies.
The virtual coins also provide low cost online peer to peer transaction.
A government can easily freeze or even seize a bank account located in its jurisdiction, it is very difficult for it to do the same with funds held in crypto currency – even if the holder is a citizen or legal resident.
On the other hand, cryptocurrencies come with a host of risks and drawbacks, such as illiquidity and value volatility. Additionally, cryptocurrencies are frequently used to facilitate grey and black market transactions, so many countries view them with distrust or outright animosity. And while some proponents say cryptocurrencies as potentially lucrative alternative investments, only handful of serious financial professionals view them as suitable for anything other than pure speculation.
Crypto currency and India
Section 26 of the RBI Act states that, ‘every banknote shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government’. The virtual currency is not guaranteed by the Central Government, so, in order for any virtual currency to be declared legal tender, it will have to be expressly guaranteed by the Central Government. In that case, parties are legally bound to accept it as a mode of payment. So, privately issued cryptocurrencies would not be safe.
The government of India and RBI are not in great favour to introduce alternative currency options. Although, a Supreme Court ruling has not exactly barred these transactions.
There is concern that government may ban these options or tax them in a way to take away trading profits.
Investments in cryptocurrency even after knowing all the risks, most important thing one should bear in mind is that that crypto is a high risk, high reward investment option.
Purchase of such instruments should be on risk appetite, after due diligence on the project. Use legitimate exchanges that follow KYC and AML guidelines. Do not be swayed by the riches as the downside fall may equally be true.
As of now there is no regulation in India to control the transactions. Time will only show how lucrative these investments are going to be.
However, till then although Bitcoin and other equal currencies will be in news and will definitely be objects of interest and speculation. But small and medium investors should take extreme caution before betting on their hard earned money.