Finance Minister Nirmala Sitharaman made two announcements in Union Budget 2022-23 significant for the crypto asset industry of India. The Indian government will levy a 30% tax on crypto assets profit. The Digital rupee will be introduced in the fiscal year 2022-23. After being apprehensive and reluctant to adopt Cryptocurrency, the Indian government has finally decided to open up to the virtual form of money. There is still confusion about the future of Cryptocurrency. Still, these announcements have signaled to crypto aficionados that crypto is one step closer to being legal in the country.
Cryptocurrencies have been in circulation since 2009, but this asset class has seen unprecedented growth over the last couple of years. Crypto assets are prevalent among younger investors who have a better appetite for risk and are enthusiastic about acquiring adequate financial education to reap the benefits of the ever-changing landscape of digital finance. According to a report by The Economic Times, around 20 million Indians are dealing in Cryptocurrency.
As per the 2021 Global Crypto Adoption index issued by Chainalysis, a company specializing in blockchain analysis, the world witnessed an 880% jump in crypto adoption. An index score of 0.37 garnered India second place behind Vietnam. The Indian crypto market saw a growth of 641% in a year. Clearly, the crypto market world over is showing great potential and is emerging rapidly. It seems to be a promising industry for India too.
The concept of Cryptocurrency was shared with the world by Satoshi Nakamoto, a pseudonym, more than a decade ago in 2008. Nakamoto published a white paper called “Bitcoin: A peer-to-peer electronic cash system” on the internet. The first Cryptocurrency known as Bitcoin came into existence in the following year. The basic idea behind digital currency was to exclude the third party from the electronic transaction and let the sender and receiver have complete control over their money.
Since the inception of Bitcoin, many cryptocurrencies have surfaced in the digital financial system. There are around 9000 different cryptocurrencies around the world like Ethereum, Tether, Dogecoin, Solana, etc. Among all these cryptocurrencies, Bitcoin remains the most famous and valuable one.
Cryptocurrency is a virtual currency that is encrypted by codes using Blockchain technology. The encryption process makes money secure against counterfeit. At the moment, cryptocurrencies are legal financial assets. Still, they are not recognized as legal tender by countries except El Salvador, meaning these assets hold value but cannot be used for the sale or purchase of commodities yet. Finance Minister Nirmala Sitharaman clarified in an interview that since a centralized authority does not issue Cryptocurrency, it does not have the intrinsic value that makes a currency accepted as a medium of exchange. So, Cryptocurrency is an asset, not a currency.
Feasibility of Financial Transactions
Conventional financial transactions need several intermediaries besides the payee and the recipient of the money, such as the financial institutions holding both parties’ bank accounts, the platform used for the transaction, etc. All these players charge fees for providing their services, making transactions expensive for customers. A more significant number of intermediaries involved in the transaction process gives hackers more chances to steal people’s sensitive personal information.
Financial transactions over the internet involving cryptocurrencies happen through a peer-to-peer network without any interference from a third party such as a state or financial institutions. With the help of Blockchain technology, the sender and receiver freely do a financial transaction. Elimination of intermediaries makes the transfer of Cryptocurrency cost-effective and safer.
The currency of any country remains valid through the promise made by the country’s central bank. People trust the central bank to be a guarantor while making transactions. This trust fuels economic activities. In the case of crypto transactions, cryptographic proof generated by advanced technology replaces the trust. It eliminates the need for any centralized authority making the process completely decentralized.
The decentralization of Cryptocurrency makes it acceptable to users across the web. The process is democratic and transparent as every transaction gets recorded and distributed through blockchain. The blockchain acts like a distributed ledger system having all the records of every cryptocurrency user in code.
Crypto transactions involve public and private keys. The public key gets updated with each transaction, and the related information like details of payee and receiver, amount of marketing, etc., gets stored in the blockchain. The private key is unique for each user. All this information is secured by encryption.
How secure is Cryptocurrency?
The security that cryptographic proof provides to digital asset transactions is not easy to break. Every transaction initiated in the crypto-financial system needs to be verified by the majority of the ledger network distributed across the internet. The trade gets rejected if this does not happen. Also, transactions are verified through mining, a process of solving complex algorithms. This process consumes much energy making it expensive, and takes a significant amount of time to get noticed if anything is fishy.
Any user from any part of the world able to access the web can transfer crypto. There is no geographical barrier or conversion fee. The world has recently witnessed the utility of digital money amid the ongoing Russia-Ukraine war. People from all around the world extended their support to Ukraine by making cryptocurrency donations. Ukraine’s Deputy Digital Transformation minister, Alex Bornyakov, confirmed that the country had raised around $100 Million to withstand the Russian invasion.
The supply of the currency is limited because new money only comes into circulation when blockchain miners verify any transaction. The demand for Cryptocurrency is increasing each passing day because more people are becoming aware of this asset’s potential. Limited supply and more demand for Cryptocurrency make the crypto market highly volatile and risky.
Skepticism surrounding Cryptocurrency
The state and the central bank of India remained skeptical about the crypto market for many reasons. One such reason was that crypto-assets could enable money laundering and terrorist activities. Cybercrimes have put a challenge before the system. The crypto industry’s virtual nature makes one think it would be vulnerable to hacking and scamming. The advancement of technology has provided better security features, but the virtual landscape is not immune to exploitation.
Reserve Bank of India, in 2013, cautioned traders about the virtual risk currency carries with it. In April 2018, the central bank banned crypto assets and directed banks to stop any transaction related to virtual currency. The Internet and Mobile Association of India (IAMAI) challenged the Supreme Court’s decision. The ban on Cryptocurrency was declared unconstitutional because it interfered with Article 19 (1)(g) of the Indian Constitution, which guarantees every citizen of India the freedom to practice any legitimate profession to earn a living.
Crypto transactions inherently eliminate the state from the equation. The stability of the crypto-based financial system thrives on decentralization, making it secure and less vulnerable to manipulation. Thus, the character of Cryptocurrency is opposite from the current monetary system exercised across nations that depends on a centralized authority responsible for its regulation.
The Digital rupee, also known as Central Bank Digital Currency (CBDC), is in the pipeline to be launched in the fiscal year 2022-23. It seems beneficial for the global remittance economy. It would effectively reduce the time consumed during international transactions. Besides this, it is early to predict the relevance of CBDC.
Acceptance of the digital currency system by the Indian state is a prudent move considering the pace at which the crypto financial system is expanding. Although, it would be challenging for the state to devise a mechanism that lets cryptocurrency function without losing its essence.