BITCOINS

BITCOINS

 

Context

  • Recently, Bitcoin, the cryptocurrency, has breached an important psychological barrier against the US dollar — the $20,000 mark — after having fallen just short during its 2017 rally. 
  • As of December 2020, Bitcoin was trading above $23,000. The rally to these levels, which has sustained over the last four months, has also seen various stakeholders taking steps towards legitimising the cryptocurrency.

Basics about cryptocurrency

  • Cryptocurrency: is a digital / virtual currency created & stored using blockchain technology.
  • Blockchain: A secured decentralized database that maintains a continuously growing list of records / transactions. Old entries can’t be deleted; new entries will be visible to all. Mainly used for running cryptocurrency network.
  • Origin –  Anarchist groups lost faith in FIAT MONEY because Subprime Crisis (2007) eroded the purchasing power of US Dollar. They also dislike BANK MONEY / DEPOSIT MONEY because of transaction charges on e-banking, card payments, MDR, interoperability issues.
  • 2009: An anonymous user Satoshi Nakomoto launched a cryptocurrency ‘Bitcoin’, total 21 million coins, wherein 1 Bitcoin (BTC) = 10^8 Satoshi
  • Ethereum, Litecoin, Digicoin, Laxmicoin, Ripple etc. are also cryptocurrencies

3 ways to obtain Cryptocurrency 

  1. Mining of the blockchains using powerful computers
  2. Selling of Goods and services
  3. Exchange of legal tender to buy cryptocurrency

Challenges posed by Bitoins/Cryptocurrency

  • Graphics cards demand & price hike: 2x-4x times due to bitcoin mania. E-waste generation. Thermal Electricity wastage worth 20 megaton CO2
  • If quantum computer invented it’ll solve blockchains in seconds, thus crashing the value of Bitcoins
  • Bitcoin wallets have “public address” (like an email) & private key (like a password). Unlike Paytm wallet, possible to create a Bitcoin wallet without any phone number or email id. So, difficult to trace by law enforcement agencies. Misuse in Narcotics, Illegal trade, Terror finance.
  • Selling goods/services in exchange of Bitcoins= Government deprived of GST, Custom duty, Income tax on merchant’s profit.
  • For traditional Rupee to Dollar exchange, Forex dealers have to register with RBI under FEMA Act. They’re monitored with KYC, PMLA, Enforcement Directorate.
  • If ₹ or $ exchanged with Bitcoin = terror finance, sending black money to tax havens.

Legitimacy of Bitcoins (or cryptocurrencies) in India

  • In the 2018-19 budget speech, the Finance Minister announced that the government does not consider cryptocurrencies as legal tender and will take all measures to eliminate their use in financing illegitimate activities or as a part of the payment system.
  • In April 2018, Reserve Bank of India (RBI) notified that entities regulated by it should not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies.

 

  • However, the Supreme Court struck down the ban on trading of virtual currencies (VC) in India, which was imposed by the RBI.

 

  • The Supreme Court has held that cryptocurrencies are in the nature of commodities and hence they cannot be banned.

Possible Reasons for the Rise in the Value of the Bitcoin

  • Increased acceptance during the pandemic.
  • Global legitimacy from large players like payments firm PayPal, and Indian lenders like State Bank of India, ICICI Bank, HDFC Bank and Yes Bank.
  • Some pension funds and insurance funds are investing in Bitcoins.

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