Cryptocurrency

Cryptocurrency is decentralized digital money, based on blockchain technology. You may be familiar with the most popular versions, Bitcoin and Ethereum, but there are more than 5,000 different cryptocurrencies in circulation, according to CoinLore.

Blockchain is the technology that enables the existence of cryptocurrency (among other things). Bitcoin is the name of the best-known cryptocurrency, the one for which blockchain technology was invented. A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds.

 

What is blockchain technology?

A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades,
voting, and many other issues.

A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.

“Imagine a book where you write down everything you spend money on each day,” says
Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax. “Each
page is similar to a block, and the entire book, a group of pages, is a blockchain.”

With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. Software logs each new transaction as it
happens, and every copy of the blockchain is updated simultaneously with the new
information, keeping all records identical and accurate.

To prevent fraud, each transaction is checked using one of two main validation techniques: proof of work or proof of stake.

 

Proof of Work vs Proof of Stake

Proof of work and proof of stake are two different validation techniques used to verify transactions before they’re added to a blockchain that reward verifiers with more
cryptocurrency. Cryptocurrencies typically use either proof of work or proof of stake to verify transactions.

Proof of work. “Proof of work is a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers race to solve,” says Simon Oxenham, social media manager at Xcoins.com.

Each participating computer, often referred to as a “miner,” solves a mathematical puzzle that helps verify a group of transactions—referred to as a block—then adds them to the blockchain leger. The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts.

This race to solve blockchain puzzles can require an intense amount of computer power and electricity. In practice, that means the miners might barely break even with the
crypto they receive for validating transactions, after considering the costs of power and computing resources.

Proof of stake. To reduce the amount of power necessary to check transactions, some cryptocurrencies use a proof of stake verification method. With proof of stake, the
number of transactions each person can verify is limited by the amount of
cryptocurrency they’re willing to “stake,” or temporarily lock up in a communal safe, for the chance to participate in the process. “It’s almost like bank collateral,” says Okoro. Each person who stakes crypto is eligible to verify transactions, but the odds you’ll be chosen to do so increase with the amount you front.

“Because proof of stake removes energy-intensive equation solving, it’s much more efficient than proof of work, allowing for faster verification/confirmation times for transactions,” says Anton Altement, CEO of Osom Finance.

If a stake owner (sometimes called a validator) is chosen to validate a new group of
transactions, they’ll be rewarded with cryptocurrency, potentially in the amount of
aggregate transaction fees from the block of transactions. To discourage fraud, if you
are chosen and verify invalid transactions, you forfeit a part of what you staked.

Both proof of stake and proof of work rely on consensus mechanisms to verify transactions. This means while each uses individual users to verify transactions, each
verified transaction must be checked and approved by the majority of ledger holders.

For example, a hacker couldn’t alter the blockchain ledger unless they successfully got at least 51% of the ledgers to match their fraudulent version. The amount of resources necessary to do this makes fraud unlikely.

Cryptocurrency	Market Capitalization
Bitcoin (legal in japan, south korea,usa, germany,australia etc)	$563.8 billion
Ethereum (Japan, UK, Switzerland, Netherlands etc)	$142.9 billion
Tether	$25.2 billion
Polkadot	$13.9 billion

Who sets the Bitcoin Price

Bitcoin is like a commodity. The price of bitcoin is determined by the market in which it trades. In other words, its price is determined by how much someone is willing to pay for that bitcoin. The market sets the price of bitcoin as same as Gold, Oil, Sugar, Grains, etc. is determined. Bitcoin, like any other market, is subject to the rules of supply and demand. i.e. No one, in particular, sets the bitcoin’s price nor we can trade it in one place. Each market/exchange determines its price based on supply and demand. Traders can buy and sell bitcoin on the Luno Exchange.

If you want to buy and selling bitcoin, you must have to choose a particular exchange. For example, the Luno exchange sets a specific price at a specific time for a specific market. Here, you have not confused that Luno exchange fixes the bitcoin price. Instead, the traders who are buying and selling on Luno exchange sets the price. The price of bitcoin can fluctuate at the moment, which is depending on who you talk to, and it is often different from country to
country.

 

Why does the price of bitcoin change so often?

It is because the price of a bitcoin is very volatile. Since the number of bitcoins is limited in circulation, new bitcoins are created at a decreasing rate. It means that demand must follow this level of inflation to keep the price stable. The bitcoin market is still relatively small as compared to other industries. Therefore it does not take significant amounts of money to move the market price up or down. Thus, the price of a bitcoin is still very volatile.

It is not only the bitcoin exchange rate seems to change from day-to-day. There is also
the price of many things, such as stocks, currencies, gold and many other products can
be volatile. It can be moving up and down a lot against a base currency (such as the US
dollar).

 

Advantages of Cryptocurrency :

1. Protection from inflation –

Inflation has caused many currencies to get their value declined with time. Almost every cryptocurrency, at the time of its launch, is released with a fixed amount. The source code specifies the amount of any coin; like, there are only 21 million Bitcoins released in the world. So, as the demand increases, its value will increase which will keep up with the market and, in the long run, prevent inflation.

2. Self-governed and managed –

Governance and maintenance of any currency is a major factor for its development.
The cryptocurrency transactions are stored by developers/miners on their hardware,
and they get the transaction fee as a reward for doing so. Since the miners are getting paid for it, they keep transaction records accurate and up-to-date, keeping
the integrity of the cryptocurrency and the records decentralized.

 Secure and private –

Privacy and security have always been a major concern for cryptocurrencies. The blockchain ledger is based on different mathematical puzzles, which are hard to decode.
This makes a cryptocurrency more secure than ordinary electronic transactions.
Cryptocurrencies, for better security and privacy, use pseudonyms that are unconnected to any user, account or stored data that could be linked to a profile.

4. Currency exchanges can be done easily –

Cryptocurrency can be bought using many currencies like the US dollar, European euro,
British pound, Indian rupee or Japanese yen. With the help of different cryptocurrency
wallets and exchanges, one currency can be converted into the other by trading in cryptocurrency, across different wallets, and with minimal transaction fees.

5. Decentralized –

A major pro of cryptocurrency is that they are mainly decentralized. A lot of cryptocurrencies are controlled by the developers using it and the people who have a
significant amount of the coin, or by an organization to develop it before it is released
into the market. The decentralization helps keep the currency monopoly free and in
check so that no one organization can determine the flow and the value of the coin,
which, in turn, will keep it stable and secure, unlike fiat currencies which are controlled
by the government.

6. Cost-effective mode of transaction –

One of the major uses of cryptocurrencies is to send money across borders. With the
help of cryptocurrency, the transaction fees paid by a user is reduced to a negligible or
zero amount. It does so by eliminating the need for third parties, like VISA or PayPal, to verify a transaction. This removes the need to pay any extra transaction fees.

7. A fast way to transfer funds –

Cryptocurrencies have always kept itself as an optimal solution for transactions. Transactions, whether international or domestic in cryptocurrencies, are lightning-fast. This is because the verification requires very little time to process as there are very few barriers to cross.

Disadvantages of Cryptocurrency :

1. Can be used for illegal transactions –

Since the privacy and security of cryptocurrency transactions are high, it’s hard for
the government to track down any user by their wallet address or keep tabs on their
data. Bitcoin has been used as a mode of exchanging money in a lot of illegal deals
in the past, such as buying drugs on the dark web. Cryptocurrencies are also used
by some to convert their illicitly obtained money through a clean intermediary, to hide
its source.

2. Data losses can cause financial losses –

The developers wanted to create virtually untraceable source code, strong hacking defenses, and impenetrable authentication protocols.

3. This would make it safer to put money in cryptocurrencies than physical cash or bank vaults. But if any user loses the private key to their wallet, there’s no getting it back. The wallet will remain locked away along with the number of coins inside it. This will result in the financial loss of the user.

4. Decentralized but still operated by some organization –

The cryptocurrencies are known for its feature of being decentralized. But, the flow and amount of some currencies in the market are still controlled by their creators and some organizations. These holders can manipulate the coin for large swings in its price. Even hugely traded coins are susceptible to these manipulations like Bitcoin, whose value doubled several times in 2017.

5. Some coins not available in other fiat currencies –

Some cryptocurrencies can only be traded in one or a few fiat currencies. This forces the user to convert these currencies into one of the major currencies, like Bitcoin or
Ethereum first and then through other exchanges, to their desired currency. This applies to only a few cryptocurrencies. By doing this, the extra transaction fees are added in the process, costing unnecessary money.

6. Adverse Effects of mining on the environment –

Mining cryptocurrencies require a lot of computational power and electricity input, making it highly energy-intensive. The biggest culprit in this is Bitcoin. Mining Bitcoin
requires advanced computers and a lot of energy. It cannot be done on ordinary
computers. Major Bitcoin miners are in countries like China that use coal to produce
electricity. This has increased China’s carbon footprint tremendously.

7. Susceptible to hacks –

Although cryptocurrencies are very secure, exchanges are not that secure. Most
exchanges store the wallet data of users to operate their user ID properly. This data can be stolen by hackers, giving them access to a lot of accounts.
After getting access, these hackers can easily transfer funds from those accounts. Some exchanges, like Bitfinex or Mt Gox, have been hacked in the past years and Bitcoin has been stolen in thousands and millions of US dollars. Most exchanges are highly secure nowadays, but there is always a potential for another hack.

8. No refund or cancellation policy –

If there is a dispute between concerning parties, or if someone mistakenly sends funds
to a wrong wallet address, the coin cannot be retrieved by the sender. This can be used
by many people to cheat others out of their money. Since there are no refunds, one can
easily be created for a transaction whose product or services they never received.

 

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

In 2019, a draft bill was prepared by Finance Ministry committee on virtual currencies
which banned crypto-currency issuance, trading, investment and other activities in India a punishable offence with fine of up to ₹25 crores or with an imprisonment term of one to ten years, or both. However, this legislation was never approved by the Indian Parliament.

The Central government has finally revealed that it will bring a new bill on cryptocurrencies
(The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021) in the ongoing Budget session in the Parliament. Finance Minister Nirmala Sitharaman has said that an inter-ministerial committee (IMC) has suggested a ban on private cryptocurrencies in India, like Bitcoin, in India. Additionally, the same committee has pitched for the introduction of an official digital currency that will be appropriately regulated by the Reserve Bank of India.

It must be noted that the Reserve Bank of India (RBI) had banned banks from processing transactions relating to cryptocurrency in 2018. However, the Supreme Court, vide judgment dated March 4, 2020,  lifted the ban. Since then, cryptocurrency has been operating in the country.

‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’. “To create a facilitative framework for creating the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,” the government booklet read.

 

How India’s new bill on cryptocurrencies will impact Bitcoin investors?

Analysts have speculated that the new cryptocurrency bill might impact some existing investors who are already investing in private digital currencies like bitcoin in the country. This is because if the Centre goes by the recommendation of the Inter-Ministerial Committee (IMC) then private cryptocurrencies will be banned in the country which will understandably cause a loss to the existing crypto investors of the country. However, it is still not clear if the new legislation will include Bitcoin or Ethereum under the list of banned private cryptocurrencies.
Speculation is also rife that the proposed cryptocurrency bill may allow holders of such
currencies to exit the asset class before its anticipated ban but may put a heavy penalty on its conversion to a legal asset.

Since the detailed provisions of the bill are not yet known, so there’s a lot of ambiguity whether those holding Bitcoins or other cryptocurrencies should sell them or not. As per the official estimates, around seventy lakh Indians hold cryptocurrencies worth more than $1 billion.

If the bill proposes a complete ban on crypto – however unlikely – the government has to come up with a path to help over 7 million people who currently hold assets worth over $1 billion, on how to reimburse them for this. Erasing such a large wealth would likely lead to an economic crisis in the country.

What is Central Bank Digital Currency (CBDC)?

Digital currencies or cryptocurrencies are gaining popularity across the world. This has made most central banks look at launching a digital currency controlled by them to address their shortcomings while hastening the shift towards a cashless society.

The Central Bank Digital Currency (CBDC) is a legal tender and liability of a nation’s central bank in the digital form. It is denominated in a sovereign currency and appears on the balance sheet of a nation’s central bank.

 

Benefits of CBDC:

At present, central banks of various nations are currently examining the positive implications that a digital currency contributes to financial inclusion, economic growth,  technology, innovation and increased transaction efficiencies.

1- Real-time money transfer: Money transfers and payments can be made in real-time from the payer to payee without relying on intermediaries such as banks.

2- Easy tracking of currency: With the introduction of CBDC in a nation, its central bank would be able to keep a track of the exact location of every unit of the currency.

3- Income Tax: Tax avoidance and tax evasion will be near to impossible as methods such as offshore banking and unreported employment cannot be practised to hide financial activities from the central bank.

4- Curbing Crime: Criminal activities can be easily spotted and ended such as terror funding, money laundering, and so forth.

5- Alternative to physical cash: Digital currencies issued by central banks would provide for a modern alternative to physical cash.

6- Seigniorage income: Issuance of digital currency would avoid a reduction of seigniorage income for governments in the event of the disappearance of physical
cash. Seigniorage income refers to the difference between the value of money and the cost to produce and distribute it.

7- Volatility: CBDCs will be pegged to assets such as gold and thereby will not witness any volatility as in the case of cryptocurrencies.

 

Need for CBDCs in India:

In May 2020, China started testing its Digital Yuan– Digital Renminbi (RMB). Several other nations have also started research and pilot projects related to CBDC such as Canada, USA and Singapore. Also, China and USA are battling to gain the supremacy across markets with the introduction of new-age financial products and India may get caught up in this digital proxy war.

Furthermore, there’s a wide disconnect between the number of bank accounts and mobile phone connections in India, and CBDC can possibly bridge this gap.

1- The Digital Rupee provides India with the opportunity to establish the dominance of Digital Rupee as a superior currency for trade with its strategic partners,
thereby reducing its dependency on the dollar.

2- It will also help India in addressing the malpractices such as tax evasion, terror funding, money laundering, etc., as the central bank can keep a check on every unit of the digital currency.

3- CBDC will empower RBI to control monetary policies. These effects of monetary policies can be immediately reflected instead of relying on commercial banks to make changes when they deem fit.

4- It will also empower RBI to monitor transactions and credit flow across the Indian economy, weeding out scams, frauds instantly, thereby protecting depositors’ money.

5- CBDC will also help in distracting the investors from investing in the current crypto assets that are highly risky.

6- It will also turn every large technology company in a fintech company nullifying the
need for permission or partnership with a bank. It will create incentives for the
companies and provide financial assistance to those who have been at the mercy of
banks.

7- It will also make loans, insurance, stocks and other financial products a natural extension using programmable smart contracts.

The Digital Rupee will help RBI in achieving financial inclusion, shift to a cashless society, reducing the cost of printing and handling cash. Thus, there’s a need for the introduction of a Digital Rupee as it will not only empower the citizens but will also enable them in expanding digital economy, putting an end to the current banking system.

 

Crypto VS CBDC—What’s the Difference?

Centralized Vs Decentralized

The first and most obvious critical difference between a cryptocurrency like Bitcoin and a CBDC is one is decentralized, and the latter is very centralized. Cryptocurrencies are
supported by numerous distributed nodes that are incentivized through block rewards to maintain the network. CBDC is supported by one central network, driven to serve only the public policy of the sovereign state that issues them.

Having central banks in control will mean more central bank decisions, which is what has
brought us to this precipice of having to reconsider our global financial system. As has
been the case throughout COVID-19, central banks are likely to focus on one issue while
ignoring another, perhaps focusing on creating employment and buoying the markets while allowing their debt to pile up and without adequately dealing with inflation.

 

Privacy and Autonomy

The second point of contention between a CBDC and Bitcoin or crypto, is the idea of financial autonomy and privacy, with the former being less likely to respect your privacy
and data. Central banks are infused to regulatory bodies, while crypto remains largely
independent particularly in a peer-to-peer sense. As identified in the Bank for
International Settlements recent report, in terms of data the question is which agencies
should have access to it and how much access?

Cryptocurrencies in a peer-to-peer setting allow the user to decide how much data they choose to share about themselves, but it does seem inevitable that every transaction of a future CBDC would see chunks of data automatically shared with regulatory authorities or tax agencies.

While this may not seem like a huge issue if you aren’t doing anything illegal, as was apparent in the Department of Justice’s recent Cryptocurrency Enforcement Framework,
and highlighted by Ripple co-founder Brad Larsen—the default assumption is that people
who wish to use privacy-preserving technology are presumed to be bad actors. However,
there are many reasons for this that are not just related to criminal activity. Although
privacy is obviously a necessity for criminals, law-abiding citizens need privacy as well to
protect themselves from such criminals who are constantly on the hunt for a vulnerable
target.

 

Security

The final point of difference pertains to security, and so far cryptocurrencies have weathered this storm while central banks have not. Weaknesses in blockchains and particularly exchange security have been identified—issues with self-custody and identification of wallet addresses after reuse, the possibility of a chain-wide 51% attack and
more.

While it may not appear obvious, CBDCs present an even larger attack surface and are likely to be cyber-attacked by rival states who now have to contend with one centralized point of failure for financially motivated hackers to attack. States that issue CBDC will most likely face an onslaught of cyberattacks, particularly in the early years and as has been highlighted this year—government agencies and countries are very susceptible to coordinated hacking efforts as well.

 

The Philosophical Difference

Although the rise of CBDC development is an obvious testament to the success of cryptocurrency, the differences are numerous. CBDC will effectively compete and attempt to negate crypto, not necessarily find ways to bring Bitcoin into the fold.

While central bank digital currencies will have the speed and practicality of cryptocurrency, opposition to crypto is fundamentally why CBDC will soon exist and philosophically they are the antithesis of everything Bitcoin was created for—to escape the constraints of a broken financial system, empower individuals with financial autonomy, and to bring transparency and trust to finance.

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