Cryptocurrencies, especially Bitcoin, have been grabbing headlines every day for the past few years, which speaks volumes about its growing popularity. However, it is crucial to first understand and classify the cryptos.
Cryptos can be classified under four specific used cases:
1. Asset: These are stores of values, deflationary in nature. Bitcoin is a perfect example of this.
2. Currencies: These are equivalent to digital currencies, inflationary in nature. A digital fiat currency will fit into this category. For example, China has recently announced that its Central Bank will launch its own digital Yuan.
3. Utility: These are blockchains that are used to run various different programs and smart contracts. For example: Ethereum is a blockchain used to run different blockchain programs and Ether is the token used to run these programs.
4. Security: This is when the blockchain is used to back real world securities like stocks and properties.
What is blockchain
Before going ahead and debunking some of the myths associated with cryptos, it is essential to clarify that Blockchain is the underlying technology that maintains the transaction ledger for cryptocurrency (e.g. Bitcoin) transactions. In other words, Blockchain is at the heart of Bitcoin and other crypto assets and currencies. While it is the most secure and safest decentralised technology that cannot be tampered with, cryptocurrencies are often misunderstood by several banking regulators across the world.
India and RBI
For example, there was a negative perception around cryptocurrencies in India way back in 2018 when the banking regulator, the Reserve Bank of India, put a banking ban on crypto transactions. The move was contested in the highest court and the ban was lifted. While the skepticism around cryptocurrencies still prevails, the Central government is planning to set up a fresh panel to study the various used cases of cryptocurrencies with a possibility of regulating it in the country. The idea is to regulate it as an asset and not as a legal tender or currency.
Cryptocurrencies and its origins
In layman's terms, cryptocurrency means a digital currency. It combines two words --crypto (encrypted data) and currency (meaning cash). Thus, a cryptocurrency is a medium of exchange in the digital world that uses encryption to ensure that the transactions are safe and secure. It is a type of virtual money and an alternative form of payment, just like cash or credit cards. However, unlike fiat currencies such as rupees, dollars, pounds, euros, and others, a cryptocurrency does not require a third party (read bank) to make a transaction. A transaction can be done from one person to another directly in an electronic form.
Types of cryptos
Cryptocurrencies are created or mined by running complex codes. They are decentralized and not controlled or owned by any government. There are about 4,000 different types of Cryptocurrencies at present, of which only 20 are essential and they own 90 percent of the market.
Cryptocurrency is like software, where the code dictates everything from how a function is recorded to how data is stored. The regulations for all cryptocurrencies are public and allows anyone to check how coins are created, which means it is entirely transparent. Bitcoin is the oldest and most valuable cryptocurrency at present.
Myths around cryptocurrencies
The massive surge in the value of Bitcoin over the last few years has garnered attention not only from ordinary individuals but also governments around the world. Many governments fear that Cryptocurrencies, especially Bitcoin, have the potential to destabilise central banks. Hence, from time to time, they float theories around the risks associated with Cryptocurrencies.
Debunking a few theories
Illegal to transact and hold crypto assets
It is not at all illegal to buy or sell any kind of crypto assets. There are several crypto exchanges globally and in India that allow trading in cryptocurrencies. Under Indian laws, it is absolutely not illegal to hold or possess any of these assets but they are liable to taxes under Income Tax laws. The Indian government introduced new cryptocurrency rules for companies this year and mandates, starting from April 1, all Indian firms dealing with cryptocurrencies must report all their cryptocurrency transactions and holdings while filing taxes.
Cryptocurrencies can be used to circumvent capital controls and money laundering and are untraceable
Cryptocurrencies have been existing for over a decade now. They have survived two global recessions and this itself is a proof that it is not a money laundering instrument. . The fact that cryptocurrencies are created through mathematical codes makes them safe, secure, and traceable. Hence, they are unsuitable for transactions related to money laundering, tax evasion, drug trafficking, and other illegal activity.
Cryptocurrencies don't have any value is a myth
Cryptocurrencies have been gaining prominence and popularity across the globe as the new asset class. Investors, on the basis of their risk appetite, are investing in these high return investment instruments. A few currencies, especially Bitcoin, have been placed in the category of hedges, like digital gold, that can be used to store value through inflation. Many countries have started recognising it as a mode of exchange for goods and services.
Cryptocurrency trading legalised
Today, there are about 13 developed nations including Japan, USA, Germany, Singapore, Russia, Vietnam, Malta and Canada that have legalised cryptocurrency trading and for payment processes. Japan is considered as the hub for cryptocurrency trading/exchange in the Asia Pacific region. India has already legalised cryptocurrency and has taken a positive step to study and regulate cryptocurrencies in the country. Which speaks volumes that we are headed towards a positive direction to truly harness the power of this revolutionary technology.
(The writer is co founder and COO, WazirX--an India-based bitcoin and cryptocurrency exchange)