Crypto Currency : Concept and it’s relevance in Indian Context

Currency and it’s value :- In short, currency is money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment. In a closed economy value of a currency is determined by the demand (Generated because of goods available in the market) and supply (Availability of currency in the system due to their issue by Sovereign) and is maintained by the government at that level by regulating exchange value. As in closed system government decides exchange value consequently it has to make available foreign currency at the value determined by it. In an open economy when everything is market driven value of a currency is also deduced by it’s availability and requirement. In such a system there are three ways to measure the value of the currency. The first is how much the domestic currency will buy in terms of foreign currencies. That’s what we call the exchange rate measures. Forex traders on the foreign exchange market determine exchange rates. They take into account supply and demand, and then factor in their expectations for the future. For this reason, the value of money fluctuates throughout the trading day. The second method is the value of Treasury notes – As they can be converted easily into domestic currency through the secondary market for Treasurys. When the demand for Treasuries is high, the value of the domestic. currency rises.The third way is through foreign exchange reserves. That is the amount of domestic currency held by foreign governments. The more they hold, the lower the supply the more they sell higher the supply in global market. Thus value of any currency is determined in an open system after compound effect of all three ways. But in both the system on thing is common that value of the currency is backed by the Credibility of the domestic government since it’s the government which assure us (By promising) about the value attached with the currency.

Crypto Currency concept:- Now think of a currency which is not in the form of currency and notes but is stored at a digital platform and which is not backed by any promise of sovereign and which is not regulated by government and whose supply , storage and ownership is assured by the concept of Block Chain mechanism. In short this is crypto currency. Technically speaking Cryptocurrency is a digital currency built with cryptographic protocols that make transactions both secure and difficult to fake. Here also the value of the currency is deduced through open market forces. Supply and demand.

What is Block Chain Mechanism and how this concept applies to Cypto Currency :- In a blockchain, data is broken into chunks called blocks that are distributed amongst multiple “node” computers on a network. All succeeding nodes have references of transactions stored in preceding nodes. The blocks are “chained” together cryptographically in such a way that each block “agrees” with all the blocks that precede it. Each of the node computers maintains its own copy of the complete record of all blocks ever created. If a block was altered, then none of the subsequent blocks would “agree” with it and it would be obvious that the alteration had happened. To make the chain appear valid again would require altering every subsequent block. But making just a single new block agree with the previous blocks requires a lot of computation, and modifying a whole series of blocks so that they all agree again would require so much computation that it’s not practical for anyone to do it. So blockchain provides a means of storing data such that it is practically impossible for anyone to alter the data without detection. Further, each node is following the same set of rules, and each node can confirm for itself that every other node that adds to the blockchain has followed those rules. So far we haven’t specified what kind of data is being stored. It could be any kind of data, but in the case of cryptocurrency, it is a ledger of transactions. This ledger is structured differently than a bank-account ledger, but it is conceptually the same. It represents a current balance for each account, it records transactions between accounts, and it reflects balance changes that result from transactions. When one account (wallet) wishes to send cryptocurrency to another account, it publishes a transaction to the network. Nodes that chose to create blocks – the miners – accumulate transactions until they have enough to fill a block. Once a miner has enough transactions to fill a block, it begins the process of generating a number the “nonce” that will chain the new block to the preceding block. The miner adds the nonce to the block and publishes the block to the network. Other nodes receive the block, confirm that it meets all the rules, and add it to their local copies of the blockchain. The most typical way for a wallet’s balance to increase is through a transaction that simultaneously reduces another wallet’s balance by the same amount. This is how currency is transferred from one wallet to another. One of the agreed-upon rules that nodes follow and enforce is that the “inputs” to this kind of transaction must equal the “outputs” from the transaction. (A miner can also charge a fee for adding an individual transaction to the blockchain. This fee is one of the outputs from the transaction, and it decreases the sender’s balance by an equivalent amount.) There’s another way to increase a balance, a special rule. When a miner creates a new block, it includes in that block a special transaction that increases the miner’s own wallet balance without decreasing any other wallet’s balance. This is the “mined” currency that is the source of all new currency, and it constitutes payment for the computational effort needed to calculate the nonce. So, a cryptocurrency starts with a blockchain and adds additional rules about transactions and balances that are stored in that blockchain. One of those rules provides an incentive for miners to provide the computational efforts necessary for maintaining the integrity of the distributed ledger.

Crypto currency Comparative Data Analysis and concerns :

Status as on 09.11.2020

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As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009,so have concerns that such an unregulated person to person global economy may become a threat to society. Leading bitcoin exchange like Zebpay or Unocoin is a private company. There is no regulatory institute to regulate the bitcoin transactions , to safeguard the interest of innocent investors. There are Concerns that crypto currency may become tools for anonymous web criminals. Another main concern is high volatility of the crypto currency which will never make it a viable option for investments. 

Crypto Currency Terminology :-

Fork :- Any crypto currency framework chain moves in forecasted direction, but sometimes it undergo minor or larger deviations, because system is based on a consensus concept, which means, that every action must be agreed by other users or nodes, but this may happen that this consensus may not be met by all the parties, thus there can be separation in the chain which is called fork.

Soft Fork (An accidental or soft fork occurs in three main cases):1.When two or more miners deciphered a code of the block simultaneously and causing the chain separation. 2.When BlockChain is undergoing hackers attack. 3.When the system updates and one part of nodes start using a new version of the ledger and the other still running transactions in the older one, this causes two alternatives of one protocol. In this case, the blocks of the old and new versions should be fixed, refine and then united again in that chain, which had more consensus.

Hard fork :-Here worth to emphasize, that every crypto-system has its own rules and visions, and when a part of the community one day will decide to make some changes it will cause hard fork.

In other words, hard fork shapes brand new currency on the basis of an existing software protocol. For instance, bitcoin has more than 10 different forks. Interestingly, that nodes of original bitcoin have the ability to receive coins from fork as a kind of bonus. Now, let’s put bitcoins news aside, because how hard fork enables new cryptocurrencies to exist, really easy to understand by the example of Ethereum and Ethereum Classic.

Failover :- Means the process of detecting a failure while block chain upkeeping and switching from the failed component to other components that can perform the same function. In this case, it means switching from the failed mining pool to another one.

Shilling :- The phenomenon known as “shilling” is pretty much synonymous with “conning”. Essentially, this revolves around making other person thinking that a particular coin or token will be extremely valuable in the future. There are many ways to go about this, including using fake volume building, spamming and outright lying, and is one of the biggest downsides of the crypto world. In the world of fiat currency, you’d be able to sue such an individual or organization. But in case of crypto currencies the risk of being prosecuted by the law in almost negligible.

ICO (Initial Coin Offering) :- The term itself is an abbreviation for Initial Coin Offering. The literal translation is “primary placement of coins” or “primary monetary offer”. If you are interested in investments in crypto-currencies, then you must have already come across this term. In simple words, ICO is crypto-currency crowd sharing (Decentralized platform based on block chain technology), that is, collecting money for something. Often in ICO projects are involved, which in one way or another are related to the technology of blocking and crypto currency. IPO Vs ICO – The main difference is that investors in the IPO buy securities (shares) for the currency, and in the case of ICO, the internal currency of the issue is a token (a virtual coin). The main task of the initiators of crypto-currency crowdsfunding is to sell as many tokens as possible rather, sell enough coins .Their real value remains uncertain until the issue of token is released to the exchange. The buying side, that is, investors, in the future will be able to use the startup tokens to obtain services, services or goods provided by the ICO. 

History of Crypto currency and it’s initial use:- Satoshi Nakamoto published the white paper called Bitcoin: A Peer-to-Peer Electronic Cash System, describing the functionality of the Bitcoin blockchain network. This carved the path for the events that followed later on.

After four month , Satoshi Nakamoto, whose true identity remains a mystery even today, mined the first block of the Bitcoin network, effectively piloting the blockchain technology. The first mined block is also known as the Genesis Block. (This all happened in Year 2008-09)

The first recorded purchase of goods was made with Bitcoin when Laszlo Hanyecz bought two pizzas for 10,000 BTC. This day is still commemorated to date as the Bitcoin Pizza Day. (22nd May, 2010 ) valued at $150 million later on. 

India and Crypto Currency :-The Indian central bank (RBI)had in 2018 banned crypto transactions after a string of frauds in the months following Prime Minister Narendra Modi’s decision of de monetization where 80% of the nation’s currency. Cryptocurrency exchanges filed a lawsuit against this decision of the government in Supreme Court of India in September 2019 and won respite in March 2020. The win in court prompted an almost 450% surge in trading in just two months – April and May 2020. according to TechSci Research, it was expected that more Indians will take risk of investing their savings in Crypto Currencies due to job loss and an economic slowdown worsened by the coronavirus pandemic. Bitcoin marketplace Paxful reported 883% growth between January to May 2020 from around $2.2 million to $22.1 million. WazirX, a Mumbai based crypto exchanger grew 400% in March 2020 and 270% in April 2020 on month-on-month basis. There are news that India plans to introduce a new law banning trade in cryptocurrencies. The bill is expected to be discussed shortly by the Union cabinet before it is sent to parliament. The Union government is in a mood to encourage blockchain, the technology underlying cryptocurrencies, but is not interested in making cryptocurrency trading legal.

Background of Law Suit Filed by Crypto Exchange in September 2019 :- India where a large sum of people uses platforms like ZebPay, KuCoin etc that offer you to buy and sell crypto currencies in exchange of rupee and to do so, a customer has to register and provide their IDs such as Aadhar Card and PAN Card. Doing this allows the platform to keep a record of all the transactions of customers and as an authority, RBI and other financial institution can check these records at any time they want. A few NGOs came together to challenge the RBI’s decision. They filed an affidavit against the ban. And the court is hearing the argument from both the sides. RBI Stand :- RBI urged the Supreme Court to discard the affidavit entirely saying “The impugned circular and the impugned statement neither violate the right to equality guaranteed under Article 14 or the right to trade and business guaranteed under Article 19 of the Constitution…The petitioner cannot seek to exercise the extraordinary jurisdiction of this Honorable Court to avail a right which they do not have. The impugned circular and the impugned statement have been issued in a manner that is consistent with the powers conferred on the RBI by the law and the same are legal and valid.”

Government Efforts for Crypto Currency Trading Streamlining:- SEBI sent some of its members recently to the UK, Switzerland and Japan to study the legalities of cryptocurrency exchanges and trading. India’s federal government think tank, Niti Aayog, is exploring possible uses of blockchains structures that publicly store transactional records or blocks in several networked databases to manage land records, pharmaceutical drugs supply chain or records of educational certificates. And while it is also planning a virtual currency of India.