The Union government will present a new cryptocurrency bill during the winter session of Parliament, which is due to start on November 29.
The bill, titled “The Cryptocurrency and Official Digital Currency Regulation Bill, 2021,” aims to create India’s official digital currency to be issued by the Reserve Bank of India. He also seeks to ban all private cryptocurrencies in the country, but promises to provide certain exceptions to “promote the underlying technology of the cryptocurrency and its uses.”
Cryptocurrency has also made the headlines for the wrong reasons.
Earlier this month, Kerala police arrested four people in connection with a Rs 100 crore cryptocurrency fraud in Kannur. They apparently collected money from investors promising huge returns through cryptocurrency trading.
Cryptocurrency is a new class of asset. It is also a speculative investment. But experts believe the technology behind cryptocurrency has a great future ahead of it. In this context, Cryptocurrency expert Sunil Raveendran, who works with a Technopark MNC in Thiruvananthapuram, explains what cryptocurrency is, how its value is decided, how important it is and what is Bitcoinm
What is cryptocurrency?
Cryptocurrency is a “native digital asset class” independent of government control whose value is derived within the network. It does not have a sole owner. It is governed by an encrypted database network called a Blockchain and secured by cryptographic techniques (the science of encoding and decoding information) – hence the name cryptocurrency. Bitcoin is the first and most popular cryptocurrency.
How important is cryptocurrency?
To better understand it, let’s first explain the characteristics of fiat money. As you know, each country has its own currency, which is issued by the central bank of that country. The value of fiat money comes from government support and the trust people have in government. It can be paper based or coin based. Commercial banks, such as SBI, ICICI, etc., facilitate currency transactions. On the contrary, banks play the role of trusted intermediary.
Over the past decade, physical currency has almost given way to digital payment. However, this digital money is not truly digital or “digital native”. It is simply the digitally converted form of physical money and a facilitated direct payment method between two parties via the Internet. Due to its ease of use, the digital payment method has become very popular. The digital payment method is also fully controlled by the government.
In the aftermath of the 2008 financial crisis, there was an interest in creating a digital asset class independent of government and public banks. (An asset class is a group of securities that share similar characteristics, comparable market performance, and are governed by the same laws and regulations. The major asset classes include currency, gold, oil and actions.) The wait ended in 2008 when an anonymous entity, Satoshi Nakamoto, published an article about the possibility of building a currency without government support. We still do not know where the author is.
What is Bitcoin?
After the publication of Nakamoto’s article, the first “native digital currency” or cryptocurrency, Bitcoin, saw the light of day.
Bitcoin was born digital (digital native) without government control. It does not have a sole owner. Instead, it is governed by a network of private, encrypted databases called the Blockchain (a distributed ledger of all transactions that is decentralized and cannot be changed once written). Its value is derived within the network. The maximum number of bitcoins that can exist is 21 million
Is Bitcoin the only cryptocurrency on the market?
No, there are many cryptocurrencies available in the market. Ethereum and Ether are among them. But Bitcoin holds the record for being the first cryptocurrency. Each cryptocurrency has different use cases. Let’s borrow an analogy from the automotive market to better explain it. Different cars are available in the market, such as sedan, hatchback, SUV, etc. Each segment is designed for specific purposes. Likewise, cryptocurrencies serve different purposes as well.
How is the value of a cryptocurrency decided?
Its value is attributed by speculation and the extent of community participation.
The easiest way to invest in cryptocurrency is to trade (buy and sell) a particular cryptocurrency, such as Bitcoin, Ethereum, Ether, etc. This is done through online cryptocurrency exchanges where investors open an account and start trading.
On November 25, a Bitcoin was valued at around Rs 44 lakh.
Note: Part 2 will go deeper into the details, such as what a cryptocurrency exchange is, how strong is the crypto asset class, why there is increased interest in cryptocurrency around the world, what is the status of crypto transactions in India, why crypto frauds are rampant and what is the future of cryptocurrency.
(Disclaimer: Opinions expressed by Sunil Raveendran are personal.)