Cryptocurrency

Introduction

• It is a virtual or digital currency that is created, stored, and transacted using block chain technology. 
• The word ‘Cryptocurrency’ is derived from an encryption technique cryptography. It is used to secure the decentralized network. 
• The most important characteristic of Cryptocurrency is that it is not controlled by any central authority (like the central banking system) instead it uses decentralized control. 
• Examples of cryptocurrency are Bitcoin, Digicoin, Litecoin, SOV etc.

Advantages of Cryptocurrencies

• Easy to use: Since cryptocurrency uses modern technology like the Internet, smartphones etc. Funds can be transferred directly between the parties without the involvement of third parties like banks. 
• Low transaction cost: Since cryptocurrency removes the third party like banks in the transaction its lower transaction cost in comparison to the conventional banking system. 
• Transparency: In cryptocurrency, every transaction is recorded on the blockchain. Blockchain keeps the information about every transaction. 
• Decentralization: Since blockchain does not store any information in a central location. Information is distributed across networks of computers making it difficult to tamper with.

Disadvantages of Cryptocurrencies

• Lack of knowledge: Most people do not know what cryptocurrency is and how to use cryptocurrency. 

• Volatility: Since cryptocurrency is not regulated. Hence, its prices vary greatly from one day to another. 
• Technology Cost: Cryptocurrency saves transaction cost, but for the transaction to happen it requires a computer, electricity making its adaptability difficult for a country like India.

Major Cryptocurrencies

• Bitcoin: Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency 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, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

• Litecoin: This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.

• Ripple: Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

India and Cryptocurrency

• India is necessarily a cash-based economy, but the ‘Digital India’ initiatives of the government have increased emphasis on digital currency.
•  In 2017, the Indian government formed a committee headed by Subhas Chandra Garg to study issues related to virtual currencies. The committee recommendation is as follows: 

1. Banning of cryptocurrency: Due to risk and volatility associated with cryptocurrency. 
2. Digital Ledger Technology: The Report highlighted the positives of Digital Ledger Technology (DLT). DLT based systems can be used by banks and other financial firms for the process like fraud detection, loan issuance, etc. 
3. Other proposals: Committee suggested that the government should keep an eye for ‘official digital currency’ as RBI Act 1943 permits the government to approve Digital Currency. 

• The reasons as stated by the Subhash Committee for banning cryptocurrency are as follows:

1. Volatile nature of cryptocurrencies (however, other investments are also volatile, and this should be left to the investors). 
2. These are used for transactions between criminal groups and for criminal activities. 
3. No government backing