Cryptocurrency

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  • In recent times, Bitcoin and its peer cryptocurrencies are criticised for failing to deliver the promises they have made.

The promises and the criticisms:

  • Anonymity and untraceability:
    • Bitcoin proponents’ claim of supposed anonymity and untraceability has been falsified in multiple instances in which governments have tracked criminal activity and recovered stolen Bitcoins.
  • Bitcoin as a medium of exchange:
    • For a currency to be a viable medium of exchange, the primary requirement is for it to be relatively stable in value.
    • Bitcoin has spectacularly failed in this respect, falling more than 56% over six months.
    • Moreover, it has also been unable to weather an interest rate increase of merely 1.75%.
  • Bitcoin as a financial asset and comparing it with gold:
    • Bitcoin is promoted as a financial asset that can be used as value similar to gold.
    • Like Bitcoin, gold also derives a significant portion of value from the price people place on it.
    • But Gold has been a mainstay in human society for millennia and gold has the edge because of more established ways of trading it.

Other challenges surrounding cryptocurrencies:

  • Security Risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
    • They are prone to issues like Hijacking, Routing Attacks, and Distributed Denial of Service (DDoS) attacks.
  • Shield to Crime: Used for illicit trading, criminal activities and organised crimes. 
  • Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
  • Price Volatility: Prone to price fluctuations and waste of computing power.
  • Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.
  • Consumer protection and enforcement: Due to the decentralised nature of digital instruments of bitcoins, any regulatory regime over crypto assets is challenging.
    • There is a great likelihood of execution of unauthorised trades not in consonance with any regulatory framework.

What is a Cryptocurrency?

  • It is a digital currency that can be used in place of conventional money.
  • In cryptocurrencies, cryptography is used to secure and verify transactions. It is also used to control the supply of cryptocurrencies.
  • It is supported by a decentralized peer-to-peer network called the blockchain.
  • The first cryptocurrency: Bitcoin, was launched in 2009 by Satoshi Nakamoto.

Blockchain technology: 

  • A blockchain is a database that stores encrypted blocks of data then chains them together to form a chronological single-source of truth for the data.
  • Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset
  • The asset is decentralized, allowing full real-time access and transparency to the public
  • A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
  • Blockchain’s inherent security measures and public ledger make it a prime technology for almost every single sector.

 

Features of Cryptocurrency

  • Cheaper to transfer: 
    • Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means. 
    • Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
  • No physical form: 
    • Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. 
    • However, it can be and many governments are working to create a crypto coin version of its respective fiat currency.
  • Decentralised: 
    • Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency. 
    • When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.

Position of the Indian government on Cryptocurrency

  • Definition for crypto assets:
    • The government in the Union Budget for 2022-23 has for the first time provided a definition for crypto-assets and set out a list of proposals on the taxation of this new asset class.
  • Coverage:
    • The tax proposal covered all emerging digital assets, including non-fungible tokens (NFTs), assets in the metaverse, digital currencies and tokens, among others.
  • Tax deducted at source:
    • The Budget also said a 1% TDS (tax deducted at source) will be applicable on payments made on the transfer of digital assets.
    • Loss from the transfer of virtual digital assets
    • It will not be allowed to be set off against the income arising from the transfer of another VDA in the proposed amendments.
  • 30 per cent tax on income:
    • The government will define virtual digital assets with a view to levying a 30 per cent tax on income from all transfers of such assets.
  • Infrastructure cost:
    • Incurred in the mining of virtual digital assets including cryptocurrencies will not be allowed as a deduction by the taxman.
  • Penalty:
    • Deduction of surcharge and cess, which has been claimed and allowed to the taxpayer, will be deemed to be under-reported income and will attract a 50 per cent penalty.
    • They can voluntarily declare such classification and avoid the penalty.

Source: TH