What is Cryptocurrency ?

(Arslan Akbar, Islamabad)

Widely seen as a disruption for the traditional banking and financial institutions, cryptocurrencies have gained significant traction over the last half a decade, at the same time creating a regulatory nightmare for banking regulators across the globe. At present, there are around 969 cryptocurrencies in existence across the globe, with a total market capitalization close to 116 billion US$.

A cryptocurrency is a digital currency created and stored electronically. Unlike monetary currency, the supply of cryptocurrency is not determined by any central bank or authority and the network is completely decentralised.

A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units and to verify the transfer of assets. Cryptocurrencies are a type of digital currency, alternative currency and virtual currency. Cryptocurrencies use decentralised control as opposed to centralised electronic money and central banking systems. The decentralised control of each cryptocurrency works through a block chain, which is a public transaction database functioning as a distributed ledger.

The validity of each cryptocurrency’s coins is provided by block chain. A block chain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.

It is transferred directly between peers and the transactions are confirmed in a public ledger, accessible to all the users. The process of maintaining this ledger and validating the transactions, better known as mining, is carried out in a decentralized manner. The underlying principle of the authenticity of the present to historical transactions is cryptographic proof, instead of trust; different from how it happens in the case of traditional banking systems.



The first decentralized cryptocurrency was Bitcoin, created in 2009. Since then numerous other cryptocurrencies have been created as already mentioned. Cryptocurrencies are gaining popularity; they provide privacy protection, cost effectiveness, lower entry barriers; can be used as alternative to banking systems and fiat currencies, open source Methodology and public participation and also immunity to government led financial retribution. Every transaction is transparent, autonomous and secure. Due to these benefits, cryptocurrency started to gain acceptance worldwide.

Despite these numerous advantages and user friendly processes, cryptocurrencies have their own set of associated risks in the form of volatility in valuation, lack of liquidity, security and many more. Cryptocturrencies are being denounced in many countries because of their use in grey and black markets. There are two sets of interconnected risks: one being 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.

The acceptability of cryptocurrencies 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 cryptocurrencies in terror financing, ransom wares, 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.

Slowly, cryptocurrencies are coming under the regulatory net in order to check misuse. Japan recently became the first country to regulate cryptocurrencies, the US is quickly laying down regulatory guidelines. The UK and Australia continue to work on the formalities while China has recently banned Initial Coin Offerings (ICO) due to various reasons, including various ICO scams around the world. Though India plays a relatively small role in the global cryptocurrency market, with only about 2 % of the global cryptocurrency market cap.

The Reserve Bank of India has been keeping a tab on the increasing use of cryptocurrencies and it had issued an advisory in this regard in 2013, cautioning users, holders and traders of virtual currencies about its potential financial, legal and security related risks. The Ministry of Finance also held a public consultation on regulating virtual currencies in May 2017.

While presenting the Union Budget, Finance Minister Arun Jaitly again declared cryptocurrency as an illegal tender in India and emphasised that government will take every possible step to eliminate the use of cyptocurrency in financing illegitimate operations.

If authorized as an electronic payment system or designated a legal instrument, cryptocurrencies 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 cryptocurrencies 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 as 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 US$ 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.

Owing to this unstable and nascent phase of cryptocurrencies and less realisation of its worth due to limited use, it is foreseen that while people of India are eager and looking forward to transparent, quick and high returns currencies, the Indian Government has its own stand which believes in knowing and exploring more about the cryptocurrency.

The future and further success of cryptocurrencies 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 cryptocurrencies in terror financing, money laundering and tax evasion.

Arslan Akbar
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