Crypto Currency - A 'cryptic' overview
Published: Oct 17, 2018
Reserve Bank of India (RBI) controls and regulates the monetary policy of the India. All Indian currencies have to be recognized by RBI. Just few years back, in India, a very small chunk of people used to make transactions through digital money. Now the use of digital money by people has increased many folds. Seeing the benefits and convenience associated with digital modes of payment, even the government encourages people to make more use of it. But do you know that in India, exists a currency which is not recognized by RBI or any other appropriate authority and despite this fact, it is still in circulation and use? The currency is called Crypto Currency.
The Government of India and RBI both does not recognize crypto currency. But soon after realizing that its existence is Indian financial market is becoming stronger with each passing day, RBI issued instructions to all banks and financial institutions to stop associating with person who deals in crypto currency because of risks associated with it.
A crypto currency is an international phenomenon. A crypto currency is virtual or digital currency having no physical existence. It uses cryptography for security. It cannot be easily counterfeited. Crypto currency is not issued or generated by any specific country or authority and does not work under their control. Crypto currencies are mainly created to act as a medium of exchange. It works through distributed ledger technology. The world's largest crypto currency at present is BITCOIN. It's estimated worth is $137 billion.
Since there is no central authority to regulate and control crypto currency system, it functions through distributed consensus. Ownership of crypto currency can only be proved cryptographically. The system allows transfer of ownership of the cryptographic units. If two and more instructions for changing the ownership come to system, then cryptographic units are entered and the system performs one of the instructions.
The founder and promoter of concept of Crypto Currency is Mr. David Chaum of America. In 1983 he is the one who conceived cryptographic electronic money named as ECASH . After some time in 1995, he implemented it through DIGICASH. Under Digicash system for electronic payments, software is used to withdraw notes from a bank and specific encrypted keys are used, before it can be sent to a recipient. After some time, Mr. Nick Szabo made "BIT GOLD", which requires users to complete a proof of work with solutions.
The first Bitcoin was launched in 2009 by Mr. Satoshi Nakamoto. In year 2011 "NAMECOIN" was introduced in market which made internet censorship very tough. Thereafter a Crypto Currency called "LITECOIN" was created which successfully used scrypt as its hash function. Soon thereafter "PEERCOIN" was released, followed by "IOTA"
The "IOTA" was the first crypto currency which used Tangle technology instead of block chain. At present more than 4000 alternative variants of Bitcoin are in circulation and use.
The current scenario is that many merchants are accepting, crypto currencies or Bitcoins for receiving payment of goods and services rendered due to availability of user-friendly apps. For example, on purse.io or on amazon.gocoin, shopping online with crypto currencies is possible. A New York based rental platform called Manage Go, gives an option to make payment of rent and maintenance services to landlords through crypto currency. But since the technology is at early stage of development, it would take time for people to make use of it in their day to day life, as buying or spending crypto currencies are not very easy. The use of Bitcoins has been growing since its inception. It crossed 17.30 million in September 2018. The graph, given below indicates total number of Bitcoins in circulation from 2011 to September 2018.
It is important to note that a crypto currency does not serve all the traditional functions of money or currency such as store of value, unit of account etc, but still is termed as currency. A commodity is one that is interchangeable with other commodities of the same type. The entire family of crypto currencies is classified as commodities by tax authorities of different countries. Since it has mixed features, a crypto currency acts as a currency, a security or even as commodity depending on its use. It is also called crypto asset.
If looked at from the angle of investment then it is observed that crypto asset has an ultra-attractive return profile. Its popularity as an investment product has increased manifold. Some data suggests that it is world's best performing asset. Even though crypto asset provides investment opportunities yet it is still not very appropriate as an investment asset class because of its speculative features.
In digital economy, though crypto currency is a fizz word it is full of challenges and risks. It is interesting to know that whatever block chain technology is used in particular crypto currency system, it is ultimately a customers who pays fees in form of commission. This can push people away from using it as medium of payment.
Most of the crypto currency wallets are of high volatility and provide only basic primitive function of movement of currency from one wallet to another. The online banking system gives much more services and functions. A crypto currency has exchange rate risks. Hence, it is important to provide some sort of value assurance to the Merchants. It is not easy to find place where the crypto currency is accepted and this leads to customer dissatisfaction and decrease in level of trust.
At present, depending upon technology used, most of crypto currencies are able to handle maximum 100 transactions per second. There is need to have innovation in technology so that this limitation can be crossed.
Risk of online theft coupled with fact that crypto currencies are unregulated discourages merchants from accepting this mode of payment. Even after so many years, less than 1% of the entire world's population knows about it and an even less number of people are actually using it.
In many countries like South Korea, Japan and Switzerland, crypto currency system has been made fully or partially legal. It is hoped that in the coming years many other countries will finally decide the fate of the crypto currency in their respective economic system.
(The views expressed are strictly personal.)
