An analysis of Crypto currencies and associated concepts

Benefits of blockchain technology
• As a public ledger system, blockchain records and validate each and every transaction made, which makes it secure and reliable.

• All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.

• Blockchain technology discards the need of any third-party or central authority for peer-to-peer transactions.

• It allows decentralization of the technology.

• Some telecom firms in places such as India and Kenya are already using their networks to help people settle cash transactions, but these are proprietary and meant largely for poor and underbanked areas with considerable mobile penetration.

Concerns associated

• Blockchain is still a (relatively) new technology and is not without its problems. For a start, there are ongoing concerns about privacy in the settlement and storage of securities – blockchain providers are working hard to address.

• Banks are also at threat with blockchain, since more and more firms (using their IT service providers from India and elsewhere) will build systems that can create and exchange ‘blocks’ with one another completely legally, without ever having to use the banks as a financial intermediary.

Applications of this technology

• There are applications for blockchain outside financial services as well. A ‘block’ could be defined as anything—a unit of services, products, raw materials—the list is endless.

Know about Bitcon

• Virtual currency in BITCOIN system was created in 2009 by an unknown named satoshi Nakamato.

• It is a distributed network system, an alternative to electronic transfer.

• Also called as crypto currency as cryptography is used to make it more secure.

• It is an attempt to replace money transactions with a digital medium of exchange using peer-to-peer networking.

• Bitcoin network shares public ledger called the "block chain" which contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction.

• The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses.

• In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called "mining".

• Bitcoin mining programs compute an encryption function called a "hash" on a set of random numbers.

• Coins are awarded every 10 minutes to whichever miner happens to compute a number below a certain threshold.

• As the Network gets larger, hash becomes more complex and in turn, miner gets fewer bitcoins.

Features

• Not owned by Individual but by Bitcoin users. Bit coin Network can work correctly with users having complete consensus.

• Don’t need banks.

• Decentralized Network.

• There is no physical currency, balances associated with only Public key and Private Key (These balances are kept on a public ledger, along with all Bitcoin transactions, that is verified by a massive amount of computing power.

• Anonymous currency

Advantage Associated with Bitcoin

• Low transaction cost

• Freedom of payment: No limit on transaction and can send and receive money anywhere.

• Information is transparent. With Block chain each user has access to finalise. transaction.

• Fewer risks for merchants - Bitcoin transactions are secure, irreversible, and do not contain customers’ sensitive or personal information. This protects merchants from losses caused by fraud.

Problems

• Limitation of 21 M bit coin currency that will last till 2040

• It is possible to launder money and buy illegal products. Since Bitcoins can be spent on the Internet without the use of a bank account, they offer a convenient system for anonymous purchases.

• Money laundering

• No regulation

• Possibility of Hacking

• Degree of acceptance - Many people are still unaware of Bitcoin.

• Ongoing development - Bitcoin software is still in beta with many incomplete features in active development.

• Volatility - The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small compared to what they could be. Therefore, relatively small events, trades, or business activities can significantly affect the price.

Crypto currencies are gaining popularity for the following reasons

Privacy Protection

•The use of pseudonyms conceals the identities, information and details of the parties to the transaction – perquisites for privacy enthusiasts.

Cost-effectiveness

• They have single valuation globally, and the transaction fee is extremely low, being as low as 1% of the transaction amount.

• Crypto currencies eliminate third party clearing houses or gateways, cutting down the costs and time delay. All the transactions over crypto currency platforms, whether domestic or international, are equal.

Lower Entry Barriers

• Possessing a bank account or a debit/credit card for international usage requires documented proofs for income, address or identification.

• Banks or financial institutions might have their own set of eligibility criteria for these facilities.

• Crypto currencies lower these entry barriers, they are free to join, high on usability and the users do not require any disclosure or proof for income, address or identity.

Alternative to Banking Systems and Fiat Currencies

• Governments have a tight control and regulation over banking systems, international money transfers and their national currencies or monetary policies.

• Crypto currencies offer the user a reliable and secure means of exchange of money outside the direct control of national or private banking systems.

Open Source Methodology and Public Participation

• A majority of the crypto currencies are based on open source methodology; their software source code is publicly available for review, further development, enhancement and scrutiny.

• The ecosystem of crypto currencies is primarily participation based, as software development, bug reporting and fixing, testing etc. are driven by the wider user base, rather than a closed set of individuals or an institution.

Immunity to Government led Financial Retribution

• Governments have the authority and means to freeze or seize a bank account, but it is infeasible to do so in the case of crypto currencies.

• For citizens in repressive countries, where governments can easily freeze or seize the bank accounts, crypto currencies are immune to any such seizure by the state.

Advantages

• Cryptocurrencies do offer some notable advantages. Till now, the biggest advantage is in the form of Bitcoin’s blockchain technology, which holds tremendous promise for ensuring property rights. Transactions like property transfers and ownerships cannot be manipulated or changed easily since these are backed by complex coding.

For countries where records can be easily manipulated (making enforcement of property rights difficult), this has tremendous value. Honduras, in fact, requested a technology firm to help implement blockchain to arrest this very problem, and the US state of Georgia is already using it to digitise its records.

• Quick and Cheap Transactions-The transaction costs of operating crypto-currencies are also lower than regular payment systems.

• No Paperwork-Anyone, from any country, of any age can accept Bitcoins within minutes. There is no ID card, passport or proof of address that all conventional banks required to open an account. All you need to do to start sending and receiving Bitcoins is to download a Bitcoin Wallet program and generate a Bitcoin Address.

• Low inflation risk-One of the biggest problems with our current dollars and other currencies used around the world is inflation. Over time all currencies lose purchasing power at a rate of few percents per year mainly because governments keep printing more money. This process is basically a small tax on your accumulated wealth.

With Bitcoin you don't have this problem because the system is designed to make Bitcoins to be finite. Only about 21 milion Bitcoins will ever be released (mined). The release of new Bitcoins is slowing down and it will stop completely within a few decades.

Associated concerns

• Despite these numerous advantages and user friendly processes, crypto currencies have their own set of associated risks in the form of volatility in valuation, lack of liquidity, security and many more.

• Crypto currencies are being denounced in many countries because of their use in grey and black markets. There are two sets of interconnected risks; one being to the growth and expansion of these platforms in the uncertain policy environment, and the other being the risks these platforms pose to the users and the security of the state.

• They also have the potential use for Illicit Trade and Criminal Activities and can be used for Terror Financing.

• They also have the Potential for Tax Evasion.

• Another problem is that crypto currencies lack stability in value. Put another way, it fails the sound money test — one of the qualities of which is the absence of drastic changes in value (relative to other monies).

• While relative valuations do change (as in rupee vs dollar), the percentage change is typically minor. Bitcoin, in contrast, has gone through wild swings in valuation. In 2012, its value was zero per dollar.

• By mid-2013, its value shot to more than $1,100 per Bitcoin; by mid-2015 it collapsed to $300; now it’s up again at $1,000. Such swings render it as a poor store of value — a risky bet for increasing one’s wealth.

• Last, but not least, the internet and computers are probably some of the most unsafe places on earth. It takes just one person to create malicious software that can destroy data and wreak havoc on the web.

• There will never be guarantees against such breaches; the internet’s history is awash with such episodes. In 2016, $81 million were ‘stolen’ from the account of the Bangladesh government through a cyberattack.

Regulation of these currencies

• The acceptability of crypto currencies as a legal instrument currently varies from country to country; while some are in the process of formulating laws and measures, others are yet to respond to this disruptive change.

• The burgeoning use of crypto currencies in terror financing, ransomwares, illicit drugs or arms trade and cybercrime has also raised red flags among the security and law enforcement agencies.

• They may well have the potential to displace the existing financial systems which enable electronic flow of money across different political boundaries.

• The Reserve Bank of India has been keeping a tab on the increasing use of crypto currencies and it had issued an advisory in this regard in 2013, cautioning users, holders and traders of virtual currencies to its potential financial, legal and security related risks.

• The Ministry of Finance also held a public consultation on regulating virtual currencies in May 2017.

What can be done?

• If authorized as an electronic payment system or designated a legal instrument, crypto currencies will fall under the purview of the RBI; capital gains and business transactions will be liable to tax, and foreign payments are also going to fall under the auspices of Foreign Exchange Management Act.

• Regulated crypto currencies will enshrine robust consumer protection provisions.

• In terms of benefits, this could be a force multiplier in India’s quest for financial inclusion, parallel to the electronic payment modalities such a digital wallets and Adhaar Enabled Payment System.

• It could further reduce the cost associated with remittances, which brings annual earnings of close to 62 billion USD to India.

• It would also attract future business entrepreneurs, leading to innovation, generation of job and wealth creation in the due process of payments processing, e-commerce and taxation.

Conclusion

The future and further success of crypto currencies depends upon the way regulatory frameworks are devised.
Different countries have approached this innovation in different ways, and therefore the regulatory environment remains uncertain.

The government will have to take considered steps, given the risks from possible use of crypto currencies in terror financing, money laundering and tax evasion.

By Gudipati Rajendera Kumar