Introduction:
It is a common misconception to consider the speed of light as a unit of speed rather than distance. Similarly, there is confusion among people regarding how they can be protected within the Indian jurisdiction in respect to cryptocurrency, especially after the participation in the G20 summit. Cryptocurrency, a form of digital or virtual currency secured by cryptography, operates on decentralized networks using blockchain technology. Unlike traditional currencies issued by governments and central banks, cryptocurrencies offer benefits such as decentralization, blockchain, and consensus mechanisms.
Decentralization involves operating on a decentralized network of computers that validate and record transactions on a blockchain, eliminating the need for a central authority. Blockchain is a distributed and immutable ledger containing transaction records, and consensus mechanisms, is like a Proof of Work (PoW) and Proof of Stake (PoS), ensure agreement among nodes before adding transactions to the blockchain. Cryptocurrencies rely on hash functions to secure the integrity of the blockchain, creating a tamper-resistant chain.
Cryptographic techniques are used for secure transactions, with public and private keys facilitating secure and private transactions. Examples of cryptocurrencies include Bitcoin, introduced in 2009 by Satoshi Nakamoto, and Ethereum, introduced in 2015 by Vitalik Buterin, known for its smart contract functionality. Other aspects of cryptocurrencies include mining and staking, crypto wallets, and more.
Reflection:
The G20 summit held in New Delhi shed light on the impressive technology and functionality of cryptocurrencies. However, the Indian government and financial regulators are considering stricter regulations, potentially including a complete ban on private cryptocurrencies. The International Monetary Fund and Financial Stability Board proposed a minimum regulatory threshold, but countries are free to impose higher restrictions, even a complete ban.
In contrast, Central Bank Digital Currencies (CBDCs) are seen as more eco-friendly, relying on algorithm-driven processes instead of energy-intensive mining. The Reserve Bank has introduced a digital rupee, aiming to revolutionize the financial technology sector, reduce costs related to cash handling, printing, and logistics, and catalyze India's digital economy. CBDCs offer innovation and benefits of virtual money while ensuring consumer protection and addressing concerns related to private virtual currencies. Cryptocurrencies, due to their cryptic nature, are associated with risks like terror funding, money laundering, and tax evasion, posing a serious threat to financial stability, especially in emerging economies, as emphasized by Central Bank Governor Shaktikanta Das.
Conclusion:
The inherent features of decentralization, blockchain, and cryptographic security contribute to the allure of cryptocurrencies, fostering transparency and eliminating the need for intermediaries. Yet, the same characteristics pose challenges for regulators, particularly in mitigating risks associated with illegal activities, as highlighted by concerns related to terror funding, money laundering, and tax evasion.
As we navigate this dynamic terrain, it becomes evident that the future of digital currencies lies at the intersection of innovation, regulation, and environmental consciousness. Striking a delicate balance between embracing the transformative potential of cryptocurrencies and safeguarding against potential risks will be imperative for ensuring financial stability and fostering a resilient digital economy, both in India and on the global stage.
