Why in News

• Recently, Bitcoin, the cryptocurrency, has crossed 30,000 US dollars in value. Bitcoin's price has always been volatile, and there is no clear explanation for its current rise.

 

Cryptocurrency

• A cryptocurrency is a digital or virtual currency that uses cryptography for security.
• Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank.
• They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.
• The most common cryptocurrencies are Bitcoin, Ethereum, Ripple, and Litecoin.

 

What are the present regulations in India with respect to cryptocurrencies?

• In December 2017, the Ministry of Finance issued a statement which clarified that virtual currencies are not legal tender and do not have any regulatory permission or protection in India.
• In the 2018-19 budget speech, the Finance Minister announced that the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate their use in financing illegitimate activities or as a part of the payment system.
• In April 2018, RBI notified that entities regulated by it should not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies
• Recently, SC held that Cryptocurrencies are in the nature of commodities and hence they can not be banned. RBI approached the SC for reviewing this judgement.

 

The proposed Draft bill

• Cryptocurrency cannot be used as legal tender or currency at any place in India.
• The bill prohibits everyone to mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency in the territory of India.
• The use of Distributed Ledger Technology for creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency is not prohibited.
• Direct or indirect use of Cryptocurrency shall be punishable with fine or imprisonment of 1 year which may be extended to 10 years or both.

 

Why has the Committee recommended banning cryptocurrencies?

• Fluctuation in prices: Cryptocurrencies are subjected to market fluctuations and the lack of centralised authority makes it difficult to regulate them. For instance, in December 2017, the value of Bitcoin cryptocurrency was around USD 20,000 per coin, which reduced to USD 3,800 per coin by November 2018.
• The risk to consumers:There are several vulnerabilities in the design of cryptocurrencies which leave consumers open to the risk of fraud.  These include phishing cyber-attacks and Ponzi schemes. Further, cryptocurrency transactions are irreversible, which means once a transaction is done, there is no way to remedy it.
• Impact on power consumption :Validating transactions in a distributed network involves high electricity consumption and requires high computation power.
• The Committee noted a study which estimated that 19 households in the USA can be powered for one day by the electricity consumed in a single transaction of the bitcoin cryptocurrency.
• Potential use for criminal activity: The Financial Action Task Force, an intergovernmental organisation to combat money laundering, in its report (2014) observed that virtual currencies provide greater anonymity than traditional payment methods. This makes them more vulnerable to money-laundering and illicit funding for terror financing.  The Committee noted that the decentralised nature and the anonymity which cryptocurrencies provide makes it difficult for law enforcement authorities to track down people involved in illicit activities.

 

Risks associated with the use of cryptocurrencies

• Digital currencies, being in electronic format, are prone to losses arising out of hacking, loss of password etc.

• lack of any authorized central agency to regulate the payments or to turn to for redressal of grievances.
• There is no underlying of asset for Cryptocurrencies, making the value a matter of speculation.
• The exchanges are located in various parts of the world, making the law enforcement a tricky thing for the multiple jurisdictions available.
• Trading may subject the user to illicit and illegal activities since the cryptocurrencies, can easily be used for illegal activities anonymously.

 

About Bitcoin : 

• Bitcoin is a type of digital currency that enables instant payments to anyone. Bitcoin was introduced in 2009. Bitcoin is based on an open-source protocol and is not issued by any central authority.
• The origin of Bitcoin is unclear, as is who founded it. A person, or a group of people, who went by the identity of Satoshi Nakamoto are said to have conceptualised an accounting system in the aftermath of the 2008 financial crisis.

 

Possible Reasons for the Rise in the Value of the Bitcoin:

Use of Bitcoins :

• Bitcoin was intended to provide an alternative to fiat money and become a universally accepted medium of exchange directly between two involved parties.
• Fiat money is a government-issued currency that is not backed by a commodity such as gold.
• It gives central banks greater control over the economy because they can control how much money is printed.
• Most modern paper currencies, such as the US dollar and Indian Rupee are fiat currencies.
• All the transactions ever made are contained in a publicly available, open ledger, although in an anonymous and an encrypted form called a blockchain.
• Transactions can be denominated in sub-units of a Bitcoin, Satoshi is the smallest fraction of a Bitcoin.

 

About Blockchain Technology:

• Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.
• Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.
• A simple analogy for understanding blockchain technology is a Google Doc.

• When one creates a document and shares it with a group of people, the document is distributed instead of copied or transferred.
• This creates a decentralized distribution chain that gives everyone access to the document at the same time.
• Other usage and applications of Blockchain technology have emerged in the last few years.
• The government of Andhra Pradesh and Telangana have put the land records on the blockchain technology owing to its easy traceability feature.
• Election Commission (EC) officials are exploring the potential of using blockchain technology to enable remote voting.

 

Acquiring Bitcoins:

• One can either mine a new Bitcoin if they have the computing capacity, purchase them via exchanges, or acquire them in over-the-counter, person-to-person transactions.
• Miners are the people who validate a Bitcoin transaction and secure the network with their hardware.

• The Bitcoin protocol is designed in such a way that new Bitcoins are created at a fixed rate.
• No developer has the power to manipulate the system to increase their profits.
• One unique aspect of Bitcoin is that only 21 million units will ever be created.
• A Bitcoin exchange functions like a bank where a person buys and sells Bitcoins with traditional currency. Depending on the demand and supply, the price of a Bitcoin keeps fluctuating.

 

Bitcoin Regulation:

• The supply of bitcoins is regulated by software and the agreement of users of the system and cannot be manipulated by any government, bank, organisation or individual.
• Bitcoin was intended to come across as a global decentralised currency, any central authority regulating it would effectively defeat that purpose.
• Multiple governments across the world are investing in developing Central Bank Digital Currencies (CBDCs), which are digital versions of national currencies.

 

Legitimacy of Bitcoins (or cryptocurrencies) in India:

• In the 2018-19 budget speech, the Finance Minister announced that the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate their use in financing illegitimate activities or as a part of the payment system.
• In April 2018, Reserve Bank of India (RBI) notified that entities regulated by it should not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies.
• However, the Supreme Court struck down the ban on trading of virtual currencies (VC) in India, which was imposed by the RBI.
• The Supreme Court has held that cryptocurrencies are in the nature of commodities and hence they cannot be banned.