INTRODUCTION
Cryptocurrencies have gained a lot of hype in recent years, with Bitcoin becoming the most widely used alternative money. While blockchain technology is not rocket science, it is fairly technical. In this article, YLCC attempts to simplify the concept and more. Read on!
WHAT IS CRYPTOCURRENCY?
To understand the literal meaning of the word ‘cryptocurrency’ we can break the term into two terms: Crypto and Currency. Crypto refers to an encrypted key, and currency, as we all know, is a medium of exchange for buying and selling goods and services.[1] It is defined as “a digital asset meant to function as a means of exchange that uses cryptography to protect transactions and manage the generation of extra units of the currency.” [2]
Cryptocurrency is a type of digital currency designed to be used as a means of exchange. Cryptocurrency transactions are secured by encryption and stored in a public ledger using blockchain technology. Cryptocurrency is decentralised, unlike traditional currency, where the latter is held by a central bank and managed by regulating financial organisations. Every crypto transaction is verified and facilitated by the parties involved.
Cryptocurrency has emerged as a strong encryption currency in which new coins or tokens are mined or generated using complicated mathematical equations.[3] While purchasing cryptocurrency, investors speculate that there will be a rise in the value of the asset in the future, similar to how stock market investors purchase securities in the hopes of seeing the company’s value rise.[4]
BASIC TERMINOLOGY
Before we comprehend how cryptocurrency works, we must first acquaint ourselves with the basic terms that are associated with the field such as the following:
Blockchain Technology– Blockchain is a distributed, irreversible ledger that makes registering transactions and managing assets in a corporate network much easier. Assets can be tangible (Car, House) or intangible (Intellectual Property). On a blockchain network, virtually anything of value may be recorded and sold, lowering risk and costs for all parties involved.[5]
The transactions associated with cryptocurrency are all stored on a blockchain database. Information is divided into “blocks” that are sequentially related and chained together to store data. Blockchain, unlike traditional currency, is not managed by a central authority. A distributed ledger is a technology that allows each Bitcoin user to study data from the ledger at the same time. In order to develop and approve novel blocks, a procedure known as “proof of work” or “proof of stake” is often crucial to the system’s functionality.
Cryptography– Cryptography is a technique for securing the blockchain. The blocks are linked together using cryptographic algorithms, often known as “hashes,” which make them impenetrable to hackers. These hashes are similar to secure passwords in that they are simple to construct but nearly impossible to guess by a stranger.[6]
Cryptocurrency Mining– Crypto mining is the method of obtaining cryptocurrency through the use of high-powered computers to solve cryptographic equations. Identifying data blocks and adding transaction records to a public record (ledger) referred to as a blockchain are part of the solution process. Complex encryption techniques are used to protect this information.[7]
Hash– Blocks are identified by a unique string of numbers and letters that are linked to crypto buyers and sellers.[8]
Private Key– To transmit and receive coins or tokens, a user is normally given a public address and a private key when dealing with cryptocurrencies. The payments are placed and accepted at the public address. However, even if a user has assets placed at their address, they will be unable to withdraw them unless they have the unique private key.[9]
Public Key– You can accept cryptocurrency transactions using a public key. It’s a private key that’s linked with a cryptographic code. Although anybody can make transactions using the public key, you’ll still require private key to “unlock” them and show that you own the bitcoin that was received. An address, which is merely a contraction of your public key, is generally the public key that can accept transactions.[10]
HOW DOES CRYPTOCURRENCY WORK?
A distributed ledger, such as blockchain, is used to create, track, and administer digital currencies. The movement of the currency is handled by computers in a decentralised network in a distributed ledger, which ensures the integrity of the financial data and ownership of the cryptocurrency. Consider it a gigantic, never-ending receipt of all the system’s transactions, which is constantly verified by anybody who has access to it.
Cryptocurrencies are usually characterised by a central authority and this decentralised method is common among them. The fact that cryptocurrencies such as Bitcoin keep governments and central banks out of the monetary system, limits their influence and political manipulation. As a result, certain cryptocurrencies have a finite number of currency units. Bitcoin’s infrastructure is designed in such a way that only 21 million bitcoins can be created.[11]
So how did cryptocurrency come into existence in the first place? The major approach is through mining, to use a metaphor akin to the ancient monetary system based on gold or silver. Miners are extremely powerful computers that do calculations and process ledger transactions. By doing so, they win a unit of currency, or at least a portion of a unit. These calculations need a significant amount of expensive processing power, as well as, in many situations, a significant amount of electricity.
The money can be kept in a cryptocurrency wallet, which is a computer programme that lets users send and receive it. To complete a transaction, users must first get a “key,” which allows them to write in the public ledger and record the funds transfer. Despite the fact that this key is associated with a specific person, the transaction is not attached to that person’s identity.[12]
WHAT MAKES CRYPTOCURRENCIES SO POPULAR?
In recent years, thousands of new currencies have emerged, particularly since Bitcoin’s worldwide adoption in 2017. Bitcoin, Dogecoin, Ethereum, Tether, and XRP are some of the most popular cryptocurrencies. The fact that it may be used anonymously has created much fascination of people towards cryptocurrencies. It appeals to crypto enthusiasts because they may be used for a variety of things. Supporters of cryptocurrency believe that it will be the currency of the future. In fact, proponents of the cryptocurrency industry appreciate that this technology eliminates central banks’ role in managing the money supply, because banks have a tendency to depreciate money over time through inflation.[13]
ARE CRYPTOCURRENCIES LEGAL?
The legality of cryptocurrencies not yet been fully determind in India. In 2018, the Reserve Bank of India (RBI) issued a circular urging all financial institutions to stop offering support to cryptocurrency operations. Subsequently, a writ petition was filed in India’s Supreme Court, which ruled that the RBI circular is invalid since the RBI lacks the power to regulate digital money trade.[14]
In India, Cryptocurrency is not recognised as fiat currency, hence it is not part of the country’s credit facility. The court determined that such restrictions would violate people’s fundamental freedom to engage in any constitutionally permitted trade. As a result of the preceding debate, we may infer that, while cryptocurrency trade is allowed in India, cryptocurrency is not legal money in and of itself. That is, unlike many Western countries, India does not allow the sale or purchase of cryptocurrencies. [15]
FUTURE AHEAD
The Indian government is considering introducing a new bill titled “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” (the “New Bill”), which, while similar in spirit to previous versions, intends to ban private cryptocurrencies in India with certain exceptions in order to promote the underlying technology and trading of cryptocurrency and provide a framework for creating new cryptocurrencies. The New Bill recognises the ambiguity related to cryptocurrency regulations and wants to outlaw all private cryptocurrencies in their entirety. However, it is uncertain whether all types of cryptocurrencies will be considered private cryptocurrency.[16]
ADVANTAGES OF CRYPTOCURRENCY
Following are the benefits of cryptocurrency[17]:
- Cryptocurrencies make it easier to transfer money between two people eliminating the use of a bank or credit card provider.
- These transfers are secured using public and private keys, as well as several types of incentive providers such as Proof of Work and Proof of Stake.
- In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is only known by the owner and is used to sign transactions.
- Fund transfers can be made with very low processing fees.
DISADVANTAGES OF CRYPTOCURRENCY
Following are the disadvantages of cryptocurrency[18]:
- It is well-suited for unlawful operations due to their semi-anonymous transactions.
- It can be used to evade paying taxes and money laundering.
- While the privacy of a user may not be jeopardised on the front end, data can be easily exploited.
CONCLUSION
Through this article, we primarily comprehended what cryptocurrency is and how it functions. We looked at a variety of aspects of cryptocurrencies. It has the potential to bring additional good improvements to the e-Commerce and e-Payment industries. However, cryptocurrency has yet to gain widespread acceptance. Many cryptocurrency platforms have numerous concerns, obstacles, and issues. Users should use cryptocurrencies with extreme caution until they are adequately regulated and supervised. Cryptocurrency trading may be both risky and rewarding.
[1] All you need to know about cryptocurrency, TAXGURU (Sept 22, 2021), https://taxguru.in/income-tax/cryptocurrency.html.
[2] L Praveena, A study on Cryptocurrency in India- Boon or Bane- With special Refernce to Bitcoin, 22 IOSR-JBM, 28-30, 28, (2020).
[3] How can you invest in Cryptocurrency and how does Trading Work? GADGETS 360 (Sept 23, 2021), https://gadgets.ndtv.com/cryptocurrency/features/how-can-you-invest-in-cryptocurrency-and-how-does-trading-work-2498641.
[4] John Hyatt, Decoding Crypto: What it is, How it works and How to get started, NASDAQ (Sept 22, 2021), https://www.nasdaq.com/articles/news-and-insights/what-is-cryptocurrency-and-how-it-works .
[5] What is blockchain Technology? IBM (Sept 24, 2021), https://www.ibm.com/topics/what-is-blockchain.
[6] Cryptocurrency Explained: How does Cryptocurrency Work?, MASTERCLASS (Sept 22, 2021), https://www.masterclass.com/articles/cryptocurrency-explained#what-is-cryptocurrency .
[7] Harsh Kumar, An introduction to crypto mining, OUTLOOK MONEY (Sept 24, 2021), https://www.outlookindia.com/outlookmoney/cryptocurrency/an-introduction-to-crypto-mining-8446.
[8] Ryan Haar, Cryptocurrency Terms to know before you invest: A beginner’s guide, NEXT ADVISOR (Sept 25, 2021), https://time.com/nextadvisor/investing/cryptocurrency/crypto-terms-you-should-know-before-investing/.
[9] Jake Frankenfield, Private Key, INVESTOPEDIA (Sept. 26, 2021), https://www.investopedia.com/terms/p/private-key.asp.
[10] What are Public and Private Keys? CRYPTOPEDIA (Sept. 26, 2021), https://www.gemini.com/cryptopedia/public-private-keys-cryptography.
[11] James Royal, What is cryptocurrency? BANKRATE (Sept 24, 2021), https://www.bankrate.com/investing/what-is-cryptocurrency/
[12] Ibid.
[13]Vedanti, Cryptocurrency: What is Cryptocurrency, How it works, MPNRC (Sept 24, 2021), https://www.mpnrc.org/how-cryptocurrency-works/.
[14] Internet and Mobile Association of India v. RBI, Writ Petition (Civil) No. 528 of 2018.
[15] Supra Note 1.
[16] Rajeev Kumar, investing in Cryptocurrency? Risks, Safety Legal Status, Future in India- All you need to Know, FINANCIAL EXPRESS (Sept 22, 2021), https://www.financialexpress.com/money/investing-in-cryptocurrency-risks-safety-legal-status-future-in-india-all-you-need-to-know/2195319/.
[17] Tulika Tandon, what is cryptocurrency? Know all about Bitcoins and others here, JAGRAN JOSH (Sept 25, 2021), https://www.jagranjosh.com/general-knowledge/what-is-cryptocurrency-know-all-about-bitcoins-here-1608641536-1.
[18] Ibid.
YLCC would like to thank Mili Kanoujiya for her valuable insights in this article.
