Digital Currency and Crypto Currency

 

Digital Currency and Crypto Currency

Virtual Digital Assets – Virtual digital assets are defined by introducing Finance bill in 2022 by adding Clause 47 A in to IT Act, 2000.

According to this, “A Virtual Digital Asset is any information or code or number or token except any centralized digital currency, generated through cryptographic means.”

Example – Cryptocurrencies, Non Fungible Tokens (NFTs), Codes etc.

Indian Union Budget 2022-23 has proposed to introduce taxation regime for Virtual Digital Assets by expanding term ‘Property’ under IT Act to include Virtual Digital Assets into it.

Crypto Currency- It is decentralized form of Crypto Assets generated through crypto mining and backed by Block Chain Technology.

Example – Bitcoin, Ethereum, Ripple Etc.

These are not currencies but only referred as Virtual Digital Assets as these are part of DeFi (Decentralized Financial) system.

I.e. Its creation and distribution is laid by individuals.

NFT (Non Fungible Token) – NFT is a unique, irreplaceable token that can be used to prove ownership of digital assets such as music, art, design etc.

NFTs are cryptographic assets on Block Chain with unique identification code and therefore each token is different from each other opposed to Fungible currencies like Money.

          Difference between Non Fungible Tokens and Fungible Tokens

·      NFT cannot be exchanged for another NFT because they are unique and different with each other.

While Fungible Tokens can be easily exchanged with another Fungible Token or Currencies.

·      NFTs cannot be used for commercial transactions.

While Fungible tokens are used for commercial transactions.

Ø Cryptocurrencies like Bitcoin, Ethereum and ripple are fungible digital assets which can be easily exchangeable with one another.

Ø Digital Currencies, Fiat paper currencies like Dollar, Euro Rupee, etc. are Fungible currencies.

Therefore these are used in commercial transactions at global level.

Digital Currency- It is a centralised Digital form of Fiat Currency backed by Block chain Technology and regulated by Central bank of country, therefore not considered as Virtual Digital Asset.

Example – Digital Renminbi (or e-CNY – digital Chinese Yuan) is a digital currency issued by China’s Central Bank.

Fiat currency is Government issued currency which is not backed by any commodity like Gold or Silver.

Intrinsic value of Fiat currency is much less than its face value and these are the legal tender declared by government.

Rupee – part of Centralized Financial System.

Physical Assets vs. Cryptocurrencies-

·      Physical Assets like Land, Gold are not being used as medium of Exchange because they are not easily divisible and portable.

But Crypto assets are more divisible and portable even than physical currencies.

·      Physical Assets like Land, Gold have some underlying value.

While Crypto is “pure speculative asset” has Zero underlying value.

Ø Financial Crisis of 2008 was happened due to loss of underlying values of some physical assets.

Benefits of Cryptocurrencies-

·      Advanced Technology

·      Increased Transparency

·      Individual’s participation in e-economy

·      Part of DeFi (Decentralized Financial) ecosystem

·      Accurate Tracking of Transactions

·      Easy medium of exchange as fungible in nature

·      Environmental sustainability as reduce use of paper currencies.

·      Safe and Secure to use as backed by Block chain Technology

Block Chain technology- Block Chain means Digital Public Ledger.

Block Chain technology is a decentralized technology used to store electronic financial transactions.

(A ledger is a book of accounts keeping record of economic transactions of debit and credit.)

Crypto mining- It is a cryptographic process of creating crypto coins.

Money in cryptocurrency is not printed, it is rather discovered or mined.

Mining is used to confirm waiting transactions and record it into public ledger i.e. block chain technology.

          Concerns for Cryptocurrencies –

·      Crypto jacking- It is a recent Cyber threat in which attackers used malwares to enter in to other remote users computers to use their hardware to mine crypto coins.

It reduces the cost burden of mining cryptocurrencies and therefore attackers generate huge profits.

Desktops, Laptops, tablets even Mobile devices are used for the purpose without knowledge of owners.

·      These are vulnerable to use in invisible transactions, which can have serious implications in crime, terrorist financing, money laundering, proliferation of weapons of Mass destruction etc.

Therefore can have negative impact on Global Financial System.

·      Virtual Currency along with technological advancement cannot manufacture Social trust as it leads to Socio-economic inequality in society.

·      Need to be regulated as millions of investors indulge in risky trading of cryptocurrencies due their high volatile and fluctuating prices.

·      Crypto mania is getting built of purely speculative investments,

Eventually bursting of such bubbles badly hurt people economically.

·      According to some experts – if Crypto assets would be legalized for promoting block chain technology and for medium of exchange, its negative impact can be seen in future on citizens and nation.

·      As DeFi system is used by only some section of society due to need of high digital intellectual and technological advancement, it can bring huge socio-economic and gender discrimination.

·      Crypto mining and Crypto jacking have become new threat in Cyber space.

·      Huge demand of Energy and Electricity can have serious implications on environment.

 

Way Ahead –

·      Government should focus on Centralized digital currency as a part of central financial system to keep control on macro economy of Nation.

·      Virtual currencies can be acceptable as medium of exchange only when trust develop in society as currency essentially represent trust in society.

·      Gap between Digital haves and haves not should be bridged trough focusing on Digital Literacy so that Socio-economic and digital inequality can be minimized.

·      According to some expert – To regulate crypto currencies, government should accord the status of ‘Financial Instrument’ to cryptocurrencies.

·      As it cannot be completely ban due to technological innovation, it need to be regulated and for this it must be recognized.

In Indian Union Budget 2022-23, Government proposed to introduction of 30% tax regime for Virtual Digital Assets.

·      Although it is a technological innovation, government should avoid any tech-unfriendly image as crypto may threaten the State’s macroeconomic role.

                     As Digitalized currencies, Virtual Digital Assets, Online transactions are demand of time, there is need of more R&D on Crypto assets with required expertise as well as need to overcome the challenges faced by society in globalized era.

             So that our nation can achieve sustainable economic development along with technological advancement and Socio-economic and Environmental sustainability.

                                                                                                              - by Pooja Gupta