What is cryptocurrency?

  • Cryptocurrency or crypto is a form of currency that exists virtually or digitally and uses cryptography to secure transactions.
  • It  is a digital payment system that doesn’t rely on any central bank or banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments.
  • Cryptocurrency payments systems exist purely on a digital database describing specific transactions. When any transactions take place then it is recorded in a public ledger.
  • Cryptocurrency is stored in digital wallets.
  • When a cryptocurrency is minted or created or issued by a single issuer, it is generally considered centralized. When implemented with the decentralized control system, it works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
  • The first decentralized cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. As of March 2022 there were more than 9,000 other cryptocurrencies in the marketplace.
  • Recently, the Central African Republic (CAR) became the second country after El Salvador to adopt Bitcoin as legal tender.

How does cryptocurrency work?

  • Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
  • Each unit of cryptocurrency is created through a process called mining, (It means by using computer power to solve complicated mathematical problems that generate coins). Users can also buy the cryptocurrencies from brokers, then store and spend them using cryptographic wallets.
  • If any person has cryptocurrency, then s\he don’t own anything tangible. What s\he owns is a key that allows to move a record or a unit of measure from one person to another without a trusted third party.
  • Bitcoin developed in 2009, afterwards cryptocurrencies and applications of blockchain technology are still emerging in the financial sector, and this technology will also be expected to develop in the future. Transactions including shares, bonds, stocks, and other financial assets could eventually be traded using the technology.

Cryptocurrency examples

As of March 2022 there were more than 9,000 other cryptocurrencies in the marketplace. Some of the best known include:

  • Bitcoin:- Founded in 2009, it was the first cryptocurrency and is still the most commonly traded. It was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
  • Ethereum:- Developed in 2015, it is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency in the world after Bitcoin.
  • Litecoin:- This currency is almost similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
  • Ripple:- It was developed in 2012. It is a distributed ledger system  and can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Advantages of cryptocurrency.

  • Transactions with cryptocurrencies are cheaper and faster money transfers.
  • It is a decentralized system that does not collapse at a single point of failure.
  • Transaction between two parties is easy, as there is no involvement of third parties like credit/debit cards or banks.
  • Payments are safe and secured as this system is based on blockchain technology.
  • There is also the concept of “wallet” or account address which is accessible by a public key and pirate key. But the private key is only known to the owner of the wallet.
  • Transactions of cryptocurrencies  are completed with minimal processing fees.

Disadvantages of cryptocurrency.

  • High energy consumption for mining activities of cryptocurrencies.
  • Security Issues like criminal activities, money laundering, terrorism etc
  • Cryptocurrencies do not have any sovereign guarantee and hence are not legal tender.
  • It is believed that cryptocurrency will disrupt markets, industries, including finance and law.
  • The market price of cryptocurrencies is also volatile or not stable. Their prices fluctuate very high.
  • All over the world, the central bank of any country cannot regulate the supply and price value of cryptocurrencies in the economy. As a result this enhances  a risk of financial instability of the country if their use becomes widespread.

Cryptocurrencies in India: 

  • In 2018, Reserve Bank of India issued a circular preventing all banks from dealing in cryptocurrencies. But later in May 2020 the Supreme Court declared this circular as null and void.
  • Recently, the government has announced to introduce a bill; Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to create its own sovereign digital currency and also simultaneously ban all private cryptocurrencies.
  • The Union Budget 2022-2023 of India has proposed to introduce a digital currency in the coming financial year.
  • It was also announced that  any income from transfer of any virtual digital asset shall be taxed at the rate of 30%.

plutus ias current affairs eng med 8th August 2022



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