Today crypto currencies have become a global phenomenon known to most people.
While still somehow geeky and not understood by most people, banks, governments
and many companies are aware of its importance.
Bitcoins were in news recently after a massive global ransom ware attack
‘WannaCry’ hit systems in over 100 countries. The cyber criminals demanded a fee
of about $300 in crypto-currencies like bitcoin for unlocking affected devices.
In October this year, billionaire Warren Buffet had described Bitcoin as a “real
bubble”, and said that one couldn’t value it considering it was not a
Why the interest in virtual currencies?
Bitcoin saw its value trading at above $10,000 (about ₹6.43 lakh) per bitcoin,
up by about 900% from its value on January 1, 2017. At a time when the Indian
government is in the process of determining the legality of crypto currencies,
it is important to understand what exactly a virtual currency means for the
How it all started?
The origin of Bitcoin is unclear, as is who founded it. A person or a group of
people, that went by the identity of Satoshi Nakamoto are said to be the one/s
who conceptualised an accounting system in the aftermath of the 2008 financial
crisis. Nakamoto published a white paper about a peer-to-peer electronic cash
system, which would “allow online payments to be sent directly from one party to
another without going through a financial institution”.
What is blockchain?
The transactions and the value of money would be recorded digitally on a
publicly available and open ledger that contains all the transactions ever made,
albeit in an anonymous and an encrypted form. This ledger is called block chain.
Considering the public and open nature of the ledger, proponents of this
currency system believe, it could help weed out corruption and inefficiencies in
However, in December 2013, the Reserve Bank of India issued a warning that
cautioned the users about the potential risks of virtual currencies, including
What is bitcoin?
Bitcoin is one of many crypto currencies that have gained popularity across the
# A cryptocurrency is a basically a digital asset that has been created to
function as a medium of exchange, like cash.
# It uses cryptography to ensure the security of transactions — authentication
and prevention of duplicate transactions — and to control the creation of new
units of currency.
# This is different from cash in that crypto currencies have no physical form.
These blur the boundaries between fiat and non-fiat currencies. They are simply
numbers on a screen and there is no central bank that issues new currency.
However, bitcoin has emerged as the popular face of crypto currencies.
Fiat and Non-fiat currency
A fiat currency is any currency that hasno intrinsic physical value, butwhose
value is established by government decree. For example, most national currencies
around the world, including the Rupee and the Dollar, are fiat currencies as
their values are dictated by the government.
Non-fiat currencies such as the Gold Standard have more or less been effectively
phased out, as they require adequate physical stockpiles to maintain their
However, the new breed of digital crypto currencies such as Bitcoin blurs the
boundaries between fiat and non-fiat – they don’t have any physical value as
such, but are also not government-controlled. This has created uncertainties
about their role in the modern financial system.
What are the regulations?
While some of the countries such as Nepal, Bangladesh, Kyrgyzstan have declared
Bitcoins as a means of payment illegal and in violation of the state law, a
majority are yet to take a stand on it. In December 2013, RBI issued a warning
with caution to users, holders and traders of virtual currencies, including
Bitcoins, about the potential financial, operational, and legal, customer
protection and security related risks that they are exposing themselves to.
Bitcoins are currently unregulated in India. There are no specific legal
frameworks for Bitcoins and crypto currencies in India yet.
Can you use bitcoin as currency?
At the moment, the Reserve Bank of India has banned transactions in India using
crypto currencies. In other words, while you can buy and sell crypto currencies on
online exchanges, you can’t use them to pay for goods and services within the
In April, the government had constituted an inter-disciplinary panel to look
into the legality of crypto currencies and suggest a way forward, which included
a having a regulator if they are legalised.
The panel, which included officials from the Department of Economic Affairs,
Department of Financial Services, Department of Revenue, Ministries of Home
Affairs and Electronics and Information Technology, the Reserve Bank of India,
NITI Aayog, and the State Bank of India, submitted its report in August and it
is being examined.
Pros and cons
It is possible to send and receive bitcoins from any part of the world
irrespective of traditional hurdles like national borders and banking
# Bitcoin does away with the need for a regulator.
# By making everything public, bitcoin negates the need for a middleman.
# According to bitcoin.org, no individual or organisation can manipulate
Bitcoins because it is cryptographically secure and do not contain customers’
However, not being backed by any government entity is Bitcoin’s biggest
disadvantage and affects its adoption by people.
# With less Bitcoins in circulation and the number of businesses using Bitcoin
still very small, relatively small events, can significantly affect the price.
# One of the biggest problems that crypto currencies face is acceptance.
However, many businesses have started accepting Bitcoins. One of the largest PC
companies in the US, Dell, started accepting Bitcoin in 2014. Travel website
Expedia allows you to pay with Bitcoins. Tech giant Microsoft also embraced
bitcoins in December 2014. In India too, the adoption has started. Bengaluru-based
exchange Unocoin has a growing list of merchants on its website that includes
e-commerce firms, web-hosting companies and even schools.
What do the experts say?
Experts and central banks across the world are slowly arriving at the conclusion
— written about in various research papers but not yet implemented in policy —
that crypto currencies are here to stay.
Theonly way to regulate their value and quantity is for central banks to issue
their own digital currencies. While the value of digital currencies such as
bitcoin are market-determined, depending on what somebody is willing to pay, a
central bank-backed digital currency will have its value controlled to an extent
by the central bank itself, much like any other major currency in the world.
RBI’s research arm Institute for Development and Research in Banking Technology
put out a paper in favour of the blockchain technology.
There is still a lot of analysis to be done regarding the effect of such a
central bank-backed digital currency on factors such as inflation and price
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