Cryptocurrency and Regulations

What is Cryptocurrency

Cryptocurrency is a medium of exchange just like real money, but in digital format. There is no physical form of cryptocurrency, or we can say that it is a virtual currency. All the transactions are recorded on the system. And these systems decide whether to generate new currency.

The term "cryptocurrency" is itself taken from the word encrypted. Thus, it is a currency that is encrypted and authenticated by solving cryptographic puzzles by computer through blockchain technology.

When did Cryptocurrency come into existence

The concept of cryptography gained popularity in 2009 when Bitcoin was introduced as the first cryptocurrency in the world. After the global financial crisis in 2008, Satoshi Nakamoto came up with the idea of an alternative to legal tender currency. The main purpose of introducing Bitcoin was the decentralization of the power of issuing a currency. That is why the coded currency is available in a publicly available ledger in an encrypted form. Anybody who knows coding can solve cryptographic puzzles and get a reward for solving them, which is called the mining of cryptocurrency.

How can cryptocurrencies be bought and sold

At present, there are more than 17,000 cryptocurrencies around the world that can be purchased by anyone in the following ways:

• One can buy or sell them at the exchange platforms. Coin DCX and WazirX are examples of these platforms that provide cryptocurrency wallets to their users.
• One can buy or sell cryptocurrency through peer-to-peer transactions.
• Mining new cryptocurrency can also be done and used as an exchange medium.

Types of Cryptocurrencies

Bitcoin is the largest cryptocurrency in the world. Other than bitcoin all the cryptocurrencies are known as Altcoins. Ethereum, Stellar, Tether, Dogecoin, and Shiba Inu are examples of them. These can be further classified as:

1. Stablecoins: These are backed by fiat money. So, their price fluctuates according to the backed currency value. For example, Tether is a stable coin as it claims to reserve $1 for every coin issued. As cryptocurrencies are highly volatile, people tend to use cryptocurrencies as an investment tool and speculation. They do not use it for daily transactions and prefer stable coins for this purpose.
2. Tokens: These are special types of cryptocurrencies with different functions. It can be better explained through further classification.
3. Utility tokens: These are used in apps that are based on blockchain technology. These apps have their currency but in a decentralized form. If we want to purchase or sell anything on these apps, we have to transact it in the cryptocurrency of the app. For example, Ether is the cryptocurrency of the Ethereum platform.
4. Security token or equity token: These tokens provide ownership to the person having equity shares. The only difference is that these are transacted in cryptocurrency. A company can transfer ownership to its shareholders through an initial coin offering.
5. Asset tokens: These tokens are backed by real assets like paintings or any other art or property. Non-Fungible Tokens (NFT) are an example of asset tokens.

Cryptocurrencies are gaining popularity around the world because of the following reasons:

• There are no third parties, like debit or credit cards, involved in crypto transactions.
• The details of the parties involved in transactions remain anonymous.
• Transactions done through crypto are faster than those done with regular currency.

While crypto has benefits, it also has some disadvantages.

• These are not government-backed currencies, and hence they are not accepted worldwide.
• Cryptocurrencies are vulnerable to the attacks of hackers, and these can be used for terror financing and money laundering activities.
• Mining cryptocurrency is indirectly harmful to our environment as there is high electricity consumption involved in the mining process.

Why is it needed to regulate cryptocurrency

As mentioned earlier, cryptocurrencies can be used for illegal activities like terror financing and money laundering. As per the reports, 1 lakh 95 thousand crore rupees have been transacted illegally using cryptocurrency in 2022, which is 68% higher than the previous year.

We all know that cryptocurrencies are in encrypted form and remain anonymous. Hackers take undue advantage of this technology.

Colonial Pipeline Case: It was a ransomware attack by hackers on the U.S.’ largest oil pipeline known as the colonial pipeline. Hackers blocked the systems of this pipeline and demanded ransom in the form of Bitcoin. They know that cryptocurrency cannot be traced back. Luckily, the U.S. government was able to recover it using its advanced technology. But the technology is not so advanced in other countries.

Cryptocurrency was introduced to decentralize the power of fiat money, but it is used for illegal purposes. So, there is a strong need to regulate cryptocurrency.

Regulations for cryptocurrency transactions

It is regulated in different ways in different countries. For example,

• In the U.S. it is taxed as property,
• In Australia, any profit from crypto transactions is treated as a capital gain.
• In Türkiye, it can be used in trade but cannot be used in banking transactions.
• In China, there is a complete ban on all cryptocurrency-related activities.
• El Salvador became the first country to declare crypto as a legal tender. It was followed by the Bahamas.

Cryptocurrency in India

Some countries regulate crypto, but it is not regulated by the government in India. In 2018, the Reserve Bank of India banned crypto transactions and other related activities in the country. This decision was challenged in the Supreme Court and the court lifted this ban in 2020. It gave the verdict that by banning cryptocurrency in the country business and innovation opportunities would be lost. Banning is not the solution, there should be regulations in these activities.

After this verdict, the Indian Government is trying to regulate cryptocurrencies to curb illegal activities. In her budget speech FY 2022-23, Finance Minister (FM) Nirmala Sitharaman announced that any profit from crypto transactions would attract 30% tax and 1% TDS. However, cryptocurrency cannot be used in place of government-backed currency. Now the Indian Government has come up with a digital currency known as the "e-rupee," which is available in wholesale and retail transactions through nine banks in India and is completely backed by the Indian Government.

In a recent announcement, FM said that cryptocurrency transactions will come under the Prevention of Money Laundering Act (PMLA). The Gazette of India mentioned five clauses that will come under the ambit of PMLA.

• Exchange of rupee for cryptocurrency or vice-versa.
• The exchange between different types of cryptocurrencies. E.g., Exchanging bitcoin for Ethereum or Tether.
• Transfer of virtual digital assets (VDA) from one person to another.
• Instruments for the safe keeping of cryptocurrency and VDAs will also come under the ambit of PMLA.
• Participants for providing financial services relating to the sale and purchase of VDAs and crypto.

Till the last year India had no regulation to curb money laundering and other illegal activities aided by Crypto transactions. But now these regulations will help the government trace crypto transactions. The apprehensions of the government are justified to the extent of preventing India from money laundering and terror financing activities.

Cryptocurrency is growing rapidly throughout the world, and banning these currencies may halt blockchain innovation. Therefore, it must be regulated to protect the interests of investors and tackle the various threats involved in transacting cryptocurrency.