There are close to 200 nations in the world and as much currencies. In the 20th century, the US Dollar risen above all of them to be the global currency. The world is coming even closer and for that, world is looking forward for a digital currency, or a number of digital currencies that can act as legal tender across the border without any hindrance. This need gave birth to the idea of Cryptocurrency.The world seems to be undergoing some really serious changes as we face the pandemic. Many things will surely change, many will be replaced. Cryptocurrency is one of the biggest changes out there, waiting for us to cope up with. Let’s get to know more about it.
How Cryptocurrencies Work?
Here are some technical details that may help you understand the back end of cryptocurrency.
The Blockchain Technology
It is a real-time, peer-to-peer distributed immutable database that provides security, immutability, and transparency. It is a decentralized distributed ledger that is completely open to anyone and is a continuously growing.
Decentralized ledger means a widely distributed server. In a distributed server there is no central server or system. Instead, they are widely distributed over millions of computers amongst the users themselves, connected by a network called Blockchain.
How Does Blockchain Work?
In every transaction of Blockchain “Consensus Protocol” or “Consensus Algorithm” is used which happens to be the backbone of Blockchain. This algorithm is simply a procedure through which all the blocks of Blockchain reach the common agreement of the present state.By this protocol, every new block that is added to the database is the one and only version, which is authenticated by all the blocks in the Blockchain.
Any unauthorized access to this network is controlled by the Public Key Cryptography infrastructure or PKI Technology in short. All in all, the mechanism and it’s security, both are decentralized. PKI Technology uses “Hashing Function” in the Blockchain Network to ensure security. Each block contains some data, its own unique hash and hash of the previous block. In simple words, hash means digital fingerprint, which looks like this.
Once the block is created, its hash is calculated. Changing a little data inside the block causes the complete change in the hash. Thus, any malicious activity can be easily detected.
Data stored inside the Blockchain depends on the type of application infrastructure and what type of Blockchain is used. For example, Bitcoin blockchain stores data of the transaction records, sender’s address, receiver’s address, amount in bitcoins and some other technical information.
This entire process effectively creates the “Chain of Blocks”
Take the above image for example. Here we have a chain of three blocks. Block no. 3 points Block no. 2 and Block no. 2 points Block no. 1. Now if someone has tempered with the second Block, this causes a change of hash of the Block. Thus previous hash stored by the Block no. 3 becomes invalid.
The distributed ledger calculates hundreds of thousands of hashes per second thus series of Blockchains are also calculated again and an invalid block is corrected and added on the real time. This method is known as the Proof-of-Work mechanism.
What is Bitcoin Mining?
Mining is an activity carried out by network participants, which involves Proof-of-Work and results in the new coins as rewards for miners who successfully carry out Proof-of-Work for each new block. Proof-of-Work requires a hefty number of calculations done by the computer aimed at solving cryptographic hash puzzles.
These are the same calculations explained earlier enabling the network to function and to continue exchanging transaction messages with other network participants through Blockchain. More number of miners joins the network, more difficult it is to mine a bitcoin.
But miners don’t just generate new Bitcoins, they also use their computers to verify transactions. On verifying transactions miners get a small amount of fee out of that transaction.
Some Highly Valued and Massively Transacted Cryptocurrencies
Bitcoin is the first word which comes to our mind when we hear the word cryptocurrencies, and of course the most widely used cryptocurrency in the world. There are some interesting stories behind the birth of Bitcoin. Started off in 2009 by Satoshi Nakamoto, this pioneer of open source, peer to peer decentralized currency went on crossing all the upper limits and changed the scenarios and formulae of global investment and trading.
Bitcoin is limited. There are only 21 million or 21000000 Bitcoins, almost 90% of which have already being mined up. Though experts believe that the last Bitcoin will be mined up in the year 2140! However, Bitcoin will still be there for investment or trade even for smaller numbers. One Bitcoin consists of 1000000 bits and a Bitcoin can be divided up to 8 decimal places.
Bitcoin is perhaps the slowest amongst all the most widely used cryptocurrencies. It has a block creation time of 10 minutes.
Bitcoin is a fully open source currency. Anyone can review its code or develop it.
As of today, one bitcoin costs $ 55095 or ₹ 4105086.
Ethereum is the second most widely used cryptocurrency in the world followed by Bitcoin. Ether introduces 18 million new tokens every year, making it close to unlimited. It also claims to have ‘Programmable Blockchain’, thus claims to be better than Bitcoin. Ether gives two kinds of services based on security and privacy protocols viz. Mainnet Ether and Private Ether. While private Ether provides utmost privacy to one’s enterprise data, it is costlier compared to that of Mainnet Ether. The marginal cost is based mainly on the labour to set up and maintain the separate blockchain for privacy.
Ether also gives a variant of token in which there is a fixed value for every Ether Token you purchase. One can also convert their variable Ethers to Fixed ones in order to secure the investment. With a block creation time of 25 seconds, Ether is way faster than Bitcoin.
As of now, one Ethereum is $ 2123.07 or ₹ 158255.
Tether is perhaps the most controversial cryptocurrency out there. It has also been alleged that Tether is there just to fuel up Bitcoin. According to the New York Attorney General, Tether lied all the time that every Tether token is backed by a US Dollar. However, Tether happens to be the third most widely used cryptocurrency, all the same, may be because it is trustful since it is a stable currency, fixed at 1 Tether = 1 USD. Tether still claims to have backing of 74% Cash for all the Tokens mined.
It charges for every transaction above $100000. The fee for fiat deposit of every transaction above $ 100000 is 0.1% and the same for fiat withdrawal is higher of 0.1% or $ 1000.
Tether also issues tokens backed by Gold. Tether claims to have the equivalent amount of Gold in a safe vault at Switzerland.
As of now, one Tether Gold (XAUT) is worth $ 1804 or ₹ 134454. Tether (normal) is always fixed at $1.00.
Invented by Billy Markus and Jackson Palmer for fun, over a famous meme of a Japanese dog of the breed Shiba Inu, the first token of Dogecoin was released on December 6th,2013. Dogecoin has unlimited supply of tokens. Though it was initially started with the intent of fun, Dogecoin has seriously jumped into the competition after Elon Musk openly presented his interest in the said cryptocurrency through a tweet dated April 1st, 2021. Since then, Dogecoin has jumped around 180% within less than a month. Block creation time being 1 minute, Dogecoin is quite faster.
Dogecoin gives two wallets. Multi Doge for light transactions and faster user experience, the other being Dogecoin core, for premium usage. As of now, one Dogecoin is worth $ 0.29 or around ₹ 22.
Litecoin is often regarded as a clone of Bitcoin. It is one of the oldest and thus widely used cryptocurrencies. It has a limited supply of 84 Million tokens. The block creation time of Litecoin is 2.5 minutes. As of now, one Litecoin is worth $ 265 or ₹ 19721
What is the legal status of Crypto Currency as of now?
In November 2017, a high-level Inter-Ministerial Committee was formed to study the issues surrounding virtual currencies and make recommendations for future actions. The Inter-Ministerial Committee has proposed a draft Bill that bans cryptocurrencies, criminalizes cryptocurrency-related activities in India, and regulates official digital currency.
In particular, the Bill prohibits the use of cryptocurrency for:
• Use as a medium of exchange, store of value or unit of account,
• Use as a payment system,
• Providing services such as registering, trading, selling, or clearing of cryptocurrency to individuals,
• Trading it with other currencies,
• Issuing financial products related to it,
• Using it as a basis of credit,
• Issuing it as a means of raising funds and,
• Issuing it as a means for investment.
The Bill provides for the following offences and penalties:
|Mining, holding, selling, issuing, or using cryptocurrency||Fine or imprisonment up to 10 years, or both|
|Issuing any advertisement, soliciting, assisting, or inducing participation in use.||Fine or imprisonment up to seven years, or both|
|Acquiring, storing, or disposing of cryptocurrency with intent to use||Fine|
Any subsequent conviction for any offence under the Bill would be punishable by a fine and imprisonment for 5-10 years, according to the Bill. Besides, attempting to commit an offence will result in a penalty of 50% of the maximum term of imprisonment for the offence, or the applicable fine, or both. All offences punishable with a fine may be compounded. Offenses involving the use of cryptocurrency in the issuance of related financial products or the issuance of cryptocurrency as a means of raising funds or investment would be cognizable and non-bailable. All other offences would be bailable and non-cognizable.
The maximum fine imposed by the Bill is the greater of (a) three times the loss caused and (b) three times the person’s gain. If the person’s loss or gain cannot be determined, the maximum fine for acquiring, storing, or disposing of cryptocurrency will be one lakh rupees. For all other offences, the maximum fine will be up to Rs. 25 lakh. To give effect to the offences, the Bill amends the Prevention of Money Laundering Act, 2002.
Disclosure requirements of cryptocurrency holdings by the Companies:
As a result of the Crypto Ban and high voluminous crypto transactions, In July 2019, Many Individuals who have invested in Cryptocurrencies, started getting notices of Summons u/s 131 of The Income Tax Act, 1961 from the Income Tax department of India. Indian crypto users have been asked to meet the officials in person within one week along with the list of documents and to produce evidence as required.
Last week, the Indian Ministry of Corporate Affairs (MCA) issued a notification requiring companies to disclose crypto trading and investments made during the fiscal year. These disclosures will be required beginning on April 1, 2021-22, the start of India’s fiscal year.
Every company that “traded or invested in cryptocurrency or virtual currency during the fiscal year” is required to report “profit or loss on transactions involving cryptocurrency or virtual currency,” “amount of currency held as of the reporting date,” and “deposits or advances from any person for trading or investing in cryptocurrency or virtual currency.” Crypto companies in India shall welcome the new requirements by the government, believing that it legitimizes cryptocurrency transactions.
Can Cryptocurrency Replace Paper Currency?
Though there are many challenges in replacing cryptocurrencies with paper currency, Cryptocurrency does have the potential to satisfy the functions of money. Thus, some users expect them to replace paper currency in the long run, but various central banks and monetary authorities are against such replacement and they have enough reasons not to let crypto currencies become legal tender of exchange, the prominent being it’s decentralized nature, leading to lack of authority by a central body.
The skyrocketing surges in the values of prominent Cryptocurrencies during the pandemic has made people take interest in private digital money.
For now, Cryptocurrencies are nothing more of an emerging alternative option to the stock investments and a payment mechanism similar to UPI and Credit cards.
All in all, we cannot really expect Crypto to replace the paper currency, but the future is for sure unpredictable.
Team Words of DPM
Jointly written by
CA Apurva Porwal