Syllabus: Science and Technology — developments and their applications and effects in everyday life.
Context: Iran seeks to use cryptocurrencies for trade with BRICS nations including India to bypass US and UN sanctions, despite regulatory challenges and lack of transparency.
What is Cryptocurrency?
- Cryptocurrency is a digital currency functioning as a medium of exchange through a computer network.
- It operates without any central authority, unlike governments or banks.
- Created using encryption algorithms, enabling secure digital transactions.
- Exists only digitally and is not physical money or centrally issued.
- Uses decentralised control, unlike CBDCs.
- Bitcoin (2009) was the first cryptocurrency.
- Examples include Bitcoin, Ethereum, Cardano, and Litecoin.
How Cryptocurrency Works
- All transactions are recorded on a public digital ledger called blockchain.
- Blockchain uses cryptography to secure records and verify ownership transfers.
- A global network of computers validates each transaction and adds it to the chain.
- Users require a digital wallet storing public and private keys.
- Wallets can be cloud-based, desktop or mobile applications.
- Users acquire cryptocurrency through mining, involving solving complex equations.
- Some ecosystems use validators under proof-of-stake, rewarding stakers with new tokens.
Types of Cryptocurrencies
- Utility Tokens: Used for specific functions (e.g., ETH, XRP).
- Transactional Tokens: Used for payments (e.g., Bitcoin).
- Governance Tokens: Provide voting rights in blockchain platforms.
- Platform Tokens: Support applications built on specific blockchains (e.g., Solana).
- Security Tokens: Represent tokenised ownership of real-world assets.
Legal Status
- India
- RBI has warned about risks and stated cryptos are not legal tender.
- SC struck down RBI’s banking ban in 2020.
- Budget 2022 imposed 30% tax on virtual digital asset transfers.
- March 2023 brought cryptos under money laundering provisions.
- India neither bans nor legally recognises cryptocurrency (2024).
- Global
- El Salvador and CAR accept Bitcoin as legal currency.
- Japan, South Korea regulate exchanges; Germany, Switzerland treat Bitcoin as legal payment.
- China and Russia impose restrictions.
Advantages
- Enables easy peer-to-peer transfers without intermediaries.
- Lower transaction costs and high speed.
- Ensures secure, pseudonymous payments.
- Minimal processing fees and accessible digital wallets.
Disadvantages
- Enables illicit activities like money laundering and tax evasion.
- Payments are not irreversible.
- Limited acceptance and no intrinsic value backing.
- Mining cost influences market price.
Key Challenges
- High price volatility limits adoption.
- Regulatory uncertainty creates legal risks.
- Exchanges and wallets face hacking threats.
- Low acceptance in everyday commerce.
- Scalability issues restrict transaction capacity.
- Mining causes high energy consumption, contributing to climate change.
- Cryptocurrencies have been used in frauds and criminal schemes.
Way Forward
- Provide legal clarity to ensure stable adoption.
- Consider global examples accepting cryptocurrencies under regulation.
- Leverage India’s CBDC pilot for coordinated digital policy.
- Strong regulatory framework to prevent fraud, ensure consumer protection.
- Clearly define cryptocurrency as an asset or security.
- Strengthen KYC, reporting and taxation norms.
- Promote audits, transparency, and grievance redressal.
- Encourage blockchain-based innovation and entrepreneurship in India.