Cryptocurrency: A Brief Introduction
Cryptocurrency has been in talk for quite a while, however, not many people are aware of what it actually is and how it works as many tend to be sceptical about digital currency.
In simple terms, cryptocurrency is a digital currency designed to work as a medium of exchange that is encrypted and decentralised. What makes it different is that this network is not reliant on any government, bank or central authority for maintenance. It does not have an actual physical form and is not issued or valued by authority. Rather, it is a system of value that exists on servers or blockchains whose value can fluctuate at any given time.
Why Investors Prefer Cryptocurrency
Cryptocurrency is unique and appealing to investors and there is a reason for it. When an investor buys a cryptocurrency, they are basically betting that the value of that asset will increase in the foreseeable future. It is similar to when stock market investors buy securities with the belief that share prices will increase and the company will grow. It is a peer-to-peer system that enables anyone to send and receive payments anywhere in an easy way using a digital address. It, therefore, creates unique opportunities and aims towards expanding people’s economic freedom all around the world.
How It Works
Cryptocurrency uses decentralised control as opposed to central bank digital currency. It received its name because it uses encryption to verify transactions. This means that advanced coding is involved in storing and transmitting cryptocurrency data from wallets to the ledger. It runs on a distributed public ledger aka blockchain. Units of cryptocurrency are created through a process known as mining. Users can simply buy them from brokers and spend them using cryptographic wallets.
How Cryptocurrency Is Regulated
Individual coin ownership records are stored in a digital ledger. It is a computerised database that uses strong cryptography in order to secure transaction records. It controls the creation of additional coins and verifies ownership. India is yet to introduce a bill on cryptocurrency regulation.
The Reserve Bank of India (RBI) has resisted crypto for a long time due to concerns related to financial stability. In 2020, the Supreme Court of India lifted the ban on cryptocurrency that was imposed by the RBI and it was clarified that ‘no prohibition exists’ on banks servicing the cryptocurrency sector. The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 seeks to create a facilitative framework for the creation of official digital currency to be issued by the RBI.
It aims to prohibit all private cryptocurrencies unless to promote underlying technology. RBI Governor Shaktikanta Das has reiterated his views against allowing cryptocurrencies, saying they are a serious threat to any financial system since they are unregulated by central banks. In March of 2021, the Supreme Court set aside an RBI circular from 2018, prohibiting banks and entities regulated by it from providing services related to virtual currency. Currently, there is no legislative regulation on the use of cryptocurrencies in India.
According to the monthly Bulletin for February 2020 released by RBI, three articles were provided, out of which the third was titled ‘Distributed Ledger Technology, Blockchain and Central Banks.’ This article provides salient features and issues regarding Distributed Ledger Technology (DLT) and its applications by central banks.
Its highlights are as follows:
- Some central banks have undertaken pilot projects to study and understand DLT and explore the potential benefits for their operations and financial systems.
- So far, most of these projects have been experimental in nature to explore the viability of conducting inter-bank settlements, settlement of digital assets and tokens and cross-border payments across DLT platforms with functionalities of the existing system.
- These projects, with their consequential benefits, add to the ability of central banks and regulators in guiding the development of DLT-based financial market infrastructure.
- In the Indian context, the thrust on digital transactions and increasing support from the RBI and the Government of India for innovations and emerging technologies through the regulatory sandbox and various other schemes would pave the way for the new economy.
The RBI issued another notification on May 21, 2021, titled ‘Customer Due Diligence for transactions in Virtual Currencies (VC)’.
The text provided under this is as follows:
‘It has come to our attention through media reports that certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular DBR.No.BP.BC.104/08.13.102/2017-18 dated April 6, 2018. Such references to the above circular by banks/regulated entities are not in order as this circular was set aside by the Hon’ble Supreme Court on March 4, 2020, in the matter of Writ Petition (Civil) No. 528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India). As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgment, and therefore cannot be cited or quoted. Banks, as well as other entities addressed above, may, however, continue to carry out a customer with due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act (PMLA), 2002, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.’
Existing Cryptocurrency Available Worldwide
There are as many as 8,000 cryptocurrencies in existence as of January 2022. The first cryptocurrency was Bitcoin, which was founded in 2009 and is known to be the best to date. It has a market cap of over $730 billion. According to Economic Times, the eight best cryptocurrencies to invest in this year are:
- Lucky Block: It is bringing blockchain tech to a billion-dollar lottery sector using smart contract technology. It is up by 1,000%.
- BNB: It is a large-cap cryptocurrency backed by Binance Exchange.
- Ethereum: It is a top-rated smart contract blockchain. It is up by 22,000%.
- Dogecoin: It is cheaper than other cryptocurrencies.
- The Graph: It is the most promising cryptocurrency to buy this year.
- Shiba Inu: It is the most popular cryptocurrency. It has a market cap of over $11 billion.
- XRP: It is used by banks to transact internationally.
- Cardano: It has a market cap of $35 billion and is ranked sixth in the cryptocurrency sector.
Other cryptocurrencies that are available and gaining popularity include Tether (market cap: $78 billion), USDC (market cap: $50 billion), Solana (market cap: $33.5 billion), Terra (market cap: $21 billion) and Polkadot (market cap: $29 billion).
What Holds For Cryptocurrency After The 2022 Budget?
The Government of India recently announced the Union Budget for 2022-23. Finance minister Nirmala Sitharaman brought much-needed clarity to crypto investors. The government has imposed a 30% fixed tax rate on all crypto trading while also aiming to introduce Digital Rupee in our country.
Any gifts in virtual assets would be taxed in the hands of the recipient. It was also mentioned that losses on these crypto-assets cannot be offset to a later date, which basically means that any loss during trading will be carried on to subsequent years. It was outlined that all crypto transfers above a certain monetary threshold will be liable for a 1% TDS deduction as it will help the authorities to keep track of the movement of such currencies in the economy.
International Position Of Cryptocurrency
Every country has more or less taken action towards regulating cryptocurrency. In the USA, these regulations differ from state to state. For instance, in New York, cryptocurrency is favoured and in 2016, a licensing framework called ‘BitLicense’ was launched to govern such exchanges.
Wyoming exempted crypto developers and sellers from securities law in 2018. Singapore has set clear rules where legislation for the sector is implemented under its payment Services Act by the Monetary Authority of Singapore. China has a harsh attitude towards cryptocurrency, as it banned it completely in June 2021 which knocked off 40% of total crypto mining operations. They are currently developing ‘digital Yuan’ and have begun trials.
Earlier, China had banned initial coin offerings (ICOs) in 2017, following which it also ordered crypto-exchanges to close. In Japan, all cryptocurrency trading platforms are required to be registered with Japan’s Financial Services Agencies. Canada became the first country to approve a Bitcoin exchange-trades fund. According to a Financial Consumer Agency of Canada webpage on digital currencies:
“You can use digital currencies to buy goods and services on the Internet and in stores that accept digital currencies. You may also buy and sell digital currency on open exchanges, called digital currency or cryptocurrency exchanges.”
However, cryptocurrencies, including Bitcoin, are not considered legal tender in Canada. Canada’s tax laws and rules also apply to digital currency transactions, including those made with cryptocurrencies and digital currencies that are subject to the Income Tax Act. The Canada Revenue Agency (CRA) has characterised cryptocurrency as a commodity and not a government-issued currency.
On the issue of taxation, the Canada Revenue Agency adds that “where digital currency is used to pay for goods or services, the rules for barter transactions apply. A barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal currency. For example, paying for movies with digital currency is a barter transaction. The value of the movies purchased using digital currency must be included in the seller’s income for tax purposes. The amount to be included would be the value of the movies in Canadian dollars.”
South Korea doesn’t consider crypto as legal tender as digital transactions avoid capital gains tax. The South Korean Financial Supervisory Service oversees crypto exchange regulations. The United Kingdom does not have specific legislation on cryptocurrency, however, it is governed by the Financial Conduct Authority (FCA) that grants licenses for crypto business and exchange. They also collect taxes on cryptocurrency. The tax authority of Her Majesty’s Revenue and Customs stated that gains and losses on cryptocurrencies are subject to capital gains tax.
El Salvador was the first to officially declare Bitcoin a legal tender. They approved a law to allow crypto money to be accepted as a tender for all goods and services. The Central Reserve Bank of El Salvador issued a statement on November 6, 2017, expressing its position on cryptocurrencies, which can be summarised as follows:
- At the international and national level, there is a discussion about the use of cryptocurrencies.
- Cryptocurrencies are not legal tender in any jurisdiction; they, unlike the conventional currencies issued by a monetary authority, are not controlled or regulated and their price is determined by the supply and demand of their market.
- In accordance with Articles 36-37 of the Organic Law of the Central Reserve Bank of El Salvador, and Articles 3 and 6 of the Monetary Integration Law of El Salvador, the colón and the United States dollar are the only unrestricted legal tender that can be used for the payment of monetary obligations in the national territory.
- Any transaction made with virtual currency is the responsibility and risk of the person who carries it out.
- According to the Central Reserve Bank, as the monetary authority, regulators of the financial system and watchdog of payment systems, there is currently no legal or regulatory framework applicable to cryptocurrencies or their equivalents.
- The Central Reserve Bank will remain vigilant on this and other related issues.
Most European countries have ‘soft-touch’ frameworks but the bloc as a whole has begun considering a consolidated framework on crypto. Legislation in the European Union is a complicated matter, with some topics being dealt with by the member nations and others being dealt with at the consolidated Union level.
Cryptocurrencies have so far been regulated by each country in the EU, with most opting for a soft-touch regulatory framework. Recently, however, the EU has looked into setting up a consolidated framework on cryptocurrencies. In September of 2020, the European Commission released draft legislation which was titled ‘Markets in Crypto-Assets Regulation or MiCA’. According to this draft, cryptocurrencies will be treated as regulated financial instruments.
Similar to other such financial instruments, any firm holding, or providing investment advice regarding cryptocurrencies will need prior approval from the regulators. It also takes cognizance of the different kinds of crypto-tokens, such as crypto-assets, utility tokens and e-money token and proposes different rules for each of them. Cryptocurrencies are banned in some countries including Bangladesh, Algeria, Vietnam, Morocco, Saudi Arabia, Ecuador, Qatar, Bolivia and Macedonia.
Conclusion
The global economy is inevitably moving towards a digital ecosystem. From investment to money transfer, everything is going paperless. This is the future. Over the last couple of years, the digital currency has been rapidly gaining the public eye and there are some good reasons behind it.
Cryptocurrency is clearly more convenient than traditional banking; however, it cannot always meet the demands of the consumers at all times. Cash kept in banks are not tied up with an investment that could drop value at any given time. Cryptocurrency is not as secure as local banks. One needs to gather full information before investing as making smart decisions takes careful planning.