Union Finance Minister Arun Jaitley explicitly mentioned that crypto currencies are not part of India’s payment system, in his February 2018 budget speech. Earlier this year, the Income Tax Department raided crypto-currency exchanges at various locations in India. Top banks froze assets held by crypto-currency exchanges in India in January this year. These moves came as rude shock and served as wake-up call to Indians who look for newer ways to invest and grow money, while others eye avenues to stash away funds using illegal channels.
Despite the recent brouhaha, very few Indians are aware about crypto-currencies and its various features.
Understanding crypto currencies
Crypto-currencies are not metal and paper money existing in a physical world. Instead, crypto-currencies owe their existence to the Internet and an online process called Blockchain. Their transactions occur over Blockchain, and ledgers about their movement – called ‘blocks’ – are maintained by a global network of individuals called ‘miners’.
Unlike regular or fiat money, crypto-currencies are decentralised. Meaning, they are not regulated by any bank, organisation or government. Crypto-currencies are sans collaterals like gold or derivatives that governments use to lend value to printed and minted money. The value of a crypto-currency is decided by the market demand only and hence, subject to wild fluctuations. Worse, nobody can predict whether a crypto-currency will survive or fade into oblivion at any given point of time.
Since crypto-currencies do not exist in physical form, their trade and transactions are online. Those who own crypto-currencies store them in online wallet, software wallets that can be installed on smart phones or physical hardware wallets that are similar to memory sticks.
Access to online, mobile or hardware wallets is through the Internet using complex and encrypted usernames and passwords. This precaution is necessary since nobody maintains records of crypto-currency holdings. Hence, a crypto-currency stolen or lost cannot be traced. Nor can it be recovered if an investor forgets the complex usernames and passwords of their online crypto currency wallets.
History of crypto currencies
The first crypto currency to enter the global scenario is Bitcoin. In 2008, Satoshi Nakamoto, a pseudonym for a person or a group of computer programmers floated the concept of digital assets through online posts. It spoke of a digital asset that depended upon “open-source code” programming rather than a banking or financial authority. This system was to ensure anyone could deal in crypto-currencies without interference from the government. The same year, the name Bitcoin was registered, through a domain name for its website.
In January 2009, the first cryptocurrency, Bitcoin was born when Satoshi Nakamoto announced his blockchain was functional and could accept transactions for the cryptocurrency. On January 12, computer programmer Haley Finn down loaded software required to access the blockchain and won 10 Bitcoins from Nakamoto. The crypto-currency had few takers; in the first recorded transaction, a buyer paid 10,000 Bitcon to an anonymous bidder and raised money to buy a couple of pizzas worth US$ 12 from Papa John’s.
While initial steps to popularise Bitcoin proved largely unsuccessful, it paved the way for other computer programmers to launch similar digital assets or crypto-currencies. These were available at prices less than US$ 1 and had limited takers.
Rise of crypto currencies
Bitcoin and other crypto currencies remained unpopular till 2011. In that year, about a dozen charities and other organisations began accepting Bitcoin donations, while others took crypto-currency payments for assorted good including burgers and soft drinks.
In 2012, the Bitcoin Foundation was established to popularise the concept of crypto-currencies, which led to over 10,000 merchants accepting Bitcoin for payments. The largest breakthrough for crypto currencies occurred a year later, when vendor Coin base reported a sale of over a million Bitcoin. The crypto-currency had found investors who believed it to be a futuristic legal tender.
Since 2013, several merchants began accepting Bitcoin payments since the crypto currency helped people to make payments for buying stuff from foreign suppliers, where paying in US Dollars, Euro and other major currencies remains restricted.
Buying and selling crypto currencies
Thanks to the rising popularity, it is now fairly easy to buy and sell crypto currencies. They can be bought using an international access credit card or debit card and a crypto currency wallet. There are several crypto currency exchanges around the world. Buyers have to place orders for buying specific amount of the specific crypto. It is also possible to bid for the price at which you wish to buy a specific currency.
Bidding has two distinct advantages. Firstly, it helps buy the crypto currency of choice when the market price hits a low. This enables one to buy more. Secondly, buyers need not pay cash down; the amount is debited only when the specific crypto-currency is available at the specified price, and only upon authorisation of the buyer.
Speculating in crypto currencies
The price of crypto currencies is currently low due to reasons such as use in crime and increased vigilance by law enforcement agencies. For example, Bitcoin sells at 6,750 US Dollars. On 15 December 2017, a single Bitcoin sold at US$ 17,900 – the highest for any crypto currency. Another popular crypto currency, Ethereum, was pegged at US$ 365 in April 2018, while in December it commanded a price of US$ 600 and more.
Speculation in crypto currencies is very risky and definitely not for short-term players. Their prices fluctuate wildly due to market demand and supply. For example, prices soared in May 2017 following the Wannacry ransomware attack on major companies. Cyber criminals demanded a ransom equivalent to US$ 600 in Bitcoin. Major organisations including National Health Service of the UK and various IT companies were forced to cough up the amount to free their database from this unprecedented ransomware attack, suspected to have links in North Korea. Fears of future attacks sent Bitcoin prices soaring.
Crypto currencies and anonymity
Most crypto currency trades harp on anonymity that buyers and sellers enjoy. This is a myth. Anyone wanting to buy crypto currencies has to pay cash through credit/ debit cards or net banking. Money gained from selling a crypto is also credited into bank account. Hence, these transactions can be easily traced.
The only anonymity that crypto currencies offer is while shopping for products or services. Casinos, escort services, certain hotels and other service providers, up-market jewelry designers offer cryptocurrencies as payment. These orders can be delivered anywhere in the world, including to proxy addresses.
Crypto currencies and crime
There are several incidences where crypto currencies have been used for criminal purposes. Hence, their trade has come under the scanner of major law enforcement agencies including International Police Organization (Interpol), European Union Police (Europol), Federal Bureau of Investigation (FBI) of the US, Mossad and Shin Bet, the external and internal security agencies of Israel, Directorate of Revenue Intelligence (DRI) of India, and several others around the world.
There are fears that crypto currencies are being increasingly used by major terror organisations including Islamic State in Iraq and Syria (ISIS) and Al Qaeda. American law enforcement agencies and their counterparts in South America are uncovering links between crypto currencies and drug trade.
Most countries also suspect that crypto currencies are being increasingly used by tax evaders. They buy crypto currencies using money on which tax has been evaded in one country and sell in another. Cash thus earned is stashed away in foreign banks and offshore accounts.
The crypto scenario in India
While Bitcoin and crypto-currency promoters in India claim that Arun Jaitley’s statements are not tantamount to a ban, actions such as raids on banks holding accounts of crypto exchanges highlight that the Indian government is firmly opposed to this tender. Ponzi schemes offering free crypto currencies are also rife, which has attracted attention from the Reserve Bank of India and investigating agencies. It is therefore advisable to read all news articles about crypto currency regulations in India rather than fall prey to the glib talk of their promoters. Should India pass a law banning crypto currencies altogether, investors stand to lose considerably.