The Importance of Virtual Currency In India

Before the invention of currency, people used to transact goods through barter system, but as technology advanced, the methods of trade also changed. One of the most important changes of the 21st century is the ever-increasing trend of virtual currency. The Ministry of Economic Affairs has recently passed an order regarding virtual currency that people should avoid investing in Bitcoin and other crypto-currency.

What is crypto-currency?

  • Crypto-currency is a virtual currency or online currency based on a cryptography program. It is a peer-to-peer cache system.
  • Crypto-currency can be kept in digital wallet only. Actually, banks or any other financial institution is not required to use crypto-currency.

What is fiat and non-fiat crypto-currency?

  • Governments along with the Reserve Bank of India, from time to time, continue to issue advisories regarding “non-fiat” cryptocurrency.
  • A ‘non-fiat’ crypto-currency such as bitcoin is a private crypto-currency. Whereas ‘fiat crypto-currency’ is a digital currency issued by the country’s central bank.
  • All kinds of apprehensions are being expressed about “non-fiat” crypto-currency and this technological upgrade could prove disastrous.
  • If a virtual currency is issued by the Reserve Bank of India, it will be called a fiat crypto-currency.
  • Notably, not all crypto-currencies are bitcoins, while not all bitcoins are crypto-currencies. Bitcoin, ethereum and ripple are some of the popular cryptocurrencies.

Due to the popularity of crypto-currency

  • Helpful to maintain privacy:

⇒ Pseudonym and identity are communicated during the transaction through crypto-currency. In such a situation, highly sensitive people find this medium suitable for their privacy.

  • A cost-effective option:

⇒ The transaction cost in crypto-currency is extremely low. The cost of any transaction, whether domestic or international, is the same.
⇒ ‘Third party certification’ is not required in transactions done through crypto-currency. Hence both money and time are saved.

  • There are no entry barriers:

⇒ Significantly, from opening an account in a bank, almost all transactions require different types of certificates, which is not the case with crypto-currency.
⇒ There are many types of formalities to be done for international transactions as well, whereas these things are not taken into account in transactions related to crypto-currency.

  • An alternative to the traditional banking system:

⇒ Government has strict control over banking systems and international transactions.
⇒ Whereas crypto-currency provides users with a reliable and secure means of exchange of funds outside the direct control of the national banking system.

  • Open Source Method:

⇒ Significantly, most crypto-currency platforms are based on the open source method. The software codes of these platforms remain publicly available.
⇒ This has the effect that the crypto-currency platform has the potential for continuous improvement.

  • Protection from financial penalties:

⇒ Be aware that governments have the right to freeze or seize bank accounts, but they cannot do so in the case of crypto-currency.
⇒ Hence crypto-currency is also being used as an effective alternative to avoid government control.

Why is the prevalence of crypto-currency dangerous?

  • An insecure currency:

⇒ With the entire system of crypto-currency being online, its security is weakened and there is a risk of getting hacked.
⇒ The biggest problem of crypto-currency is its going online and that is why crypto-currency is being considered as an unsecured currency.

  • Country’s security concerns:

⇒ It works outside the ‘main financial system’ and ‘banking system’. This is why serious questions about its source and safety continue to arise.
⇒ This digital currency has been referred to as fraud, hawala money, and currency for terrorist activities.

  • Control and management problems:

⇒ A major problem related to crypto-currency is also its control and management. Many countries like India have not yet approved it as currency, so its management is a big problem.
⇒ Economic experts also believe that investing in it without knowing its technicalities can have huge consequences.

  • Environmental Concerns:

⇒ Significantly, each bitcoin transaction consumes about 237 kW of electricity and emits about 92 kg of carbon per hour.

What is the current situation?

  • Despite all these concerns, crypto-currencies like Bitcoin and Ethrom are becoming increasingly popular and governments are unable to control them even if they want to.
  • The world’s top central banks are beginning to realize that the attempt to control crypto-currency is meaningless and they are moving towards issuing their own crypto-currency.
  • Significantly, the name will be named “Lakshmi”.
  • India’s own crypto-currency fiat will be known as crypto-currency, which we have mentioned earlier in this article.

Government’s efforts in this regard

  • To determine the status of bitcoin in the country, the Finance Ministry has set up an inter-disciplinary committee, which will suggest the future direction of bitcoin in India.
  • It is noteworthy that recently the Income Tax Department had conducted a survey on the possibility of tax evasion in large bitcoin exchanges of the country and in view of this, another committee on bitcoin has been set up by the government.
  • Reserve Bank Deputy Governor B.P. Kanungo and Sebi chairman Ajay Tyagi are included in this committee set up by the Ministry of Finance.
  • However, earlier in March 2017 a committee on bitcoin was formed, which failed to make any concrete suggestion.

Road ahead

  • Central Bank’s own digital currency:

⇒ In the year 2007, Subhash Chandra started the Indian cricket league. The situation here was almost the same as bitcoin.
⇒ The BCCI, duly responsible for the activities related to cricket in the country, could not stop it.
⇒ In such a situation, BCCI started its own T20 league in the name of IPL and ICL came to an end.
⇒ Central banks around the world should do the same, they should issue their own crypto-currency. India has already started its exercise.

  • Diagnosing the problem of double spanding:

⇒ If the country’s own central bank issues its own virtual currency, then the problem of double spending will have to be dealt with first.
⇒ Actually, crypto-currency will be a digital currency and given that whatever is digital it can be easily copied.
⇒ In such a situation, how can anyone prevent anyone from using the same unit of currency again (double)?
⇒ Blockchain technology is used to deal with the problem of double spanding. Still additional efforts will have to be made to make it hack-proof.

What is blockchain?

·         Blockchain is a technology to operate crypto-currency like bitcoin. In simple words, it is a digital ‘public ledger’, in which a record of every transaction or transaction is recorded.

·         Once any transaction is entered into the blockchain, it can neither be removed nor modified from there.

·         Under this, the details of each transaction are recorded in ledger accounts after being verified by networked devices (mainly chains of computers, called nodes).

·         Actually, blockchain can also be compared to the state of internet in the year 1990. It is important to note that in the last two decades, there has been a significant change in our society due to ‘Internet of Information’.

·         Also, we are now entering an era where blockchain will also be able to do the same thing through the ‘Internet of Trust’ and ‘Internet of Value’.

  • Regulation of crypto-currency:

⇒ If crypto-currency is authorized as an electronic payment system and then legalized, RBI will have to carry out its regulation.
⇒ Tax will have to be arranged on capital gains and business transactions.
⇒ Also, payments made abroad have to be brought under the Foreign Exchange Management Act.
⇒ Regulation of crypto-currency will strengthen consumer protection.

  • Need to link crypto-currency with social development:

⇒ Crypto-currency can be used for social development. However, it also requires some precautions.
⇒ Crypto-currency can be given to non-profit organizations and private organizations after the completion of the work of the particular social development and after checking its completeness by the experts.
⇒ This will increase participation and competition for social development among non-profit organizations.
⇒ If participation and competition in the field of social development increases, it will attract foreign investors as well as corporate organizations.
⇒ Hence the use of crypto-currency will promote accountability, transparency and ease of doing business as well as innovations in the process of social development.

potential benefits

  • India has the most cash operations, at 12.42% of GDP in 2014, while the figures for China and Brazil were 9.47% and 4% respectively.
  • It is worth noting that the annual expenditure of the Reserve Bank of India and commercial banks in cash operations is Rs 21,000 crore. In such a situation, promoting crypto-currency can prove to be important for the cashless economy.
  • Crypto-currency can also be instrumental in promoting financial inclusion. It should be noted that the biggest reason for the 2008 economic downturn was the bank bankruptcy and this could happen in future.
  • In these circumstances, if different from banking system but a regulated currency such as fiat crypto-currency can prove to be important.

Conclusion

  • Further success of crypto-currency depends on the nature of its regulatory framework. Actually different countries have adopted different approaches towards this innovation.
  • Significantly, a few days ago, Venezuela started operating a crypto-currency called Petro, but recently the parliament has declared Petro as illegal.
  • This is why there is an atmosphere of regulatory uncertainty in this regard.
  • Therefore, the government will have to formulate policies keeping in mind the possible use of crypto-currency in terror financing, money laundering and tax evasion.

 

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