Cryptocurrency and Economy

6 min readJan 6, 2022

You can’t open a newspaper these days without seeing a headline about cryptocurrency, its growing popularity, and its applications and laws. No one, however, explains why the cryptocurrency is considered secure or how it is mined.

But, first and foremost, what is cryptocurrency? In this blog, we’ll give you an outline of the ideas and why they’re deemed incorruptible.

What is Cryptocurrency

In short, cryptocurrency is a virtual currency based on a distributed ledger and enforced by a network of computers. It operates on a decentralized network based on blockchain technology.

What is Blockchain?

A network of distributed ledgers, books, or other collections of financial accounts that rely on a certain sort of technology is referred to as a Blockchain. These digital ledgers can’t be tampered with. They can also be configured to capture and track nearly anything of value, resulting in a shared, distributed, and immutable record of the transaction history.

The beauty of blockchain is that tampering with it is nearly difficult. Hashing, which serves as a digital fingerprint for a specific set of data, is used to safeguard blockchain. The hashed value will always be the same for the same data. Attempting to alter a block within a blockchain causes the block’s hash to change. The subsequent blocks, which are connected to the hash of the first block, become invalid as a result of this modification.

Proof-of-work (PoW) is the second technique of safeguarding blockchain, and it works by slowing down the generation of blocks. In the case of Bitcoin, for example, calculating the requisite PoW and adding a new block to the chain takes roughly ten minutes. Because of this chronology, tampering with a block is extremely difficult because if one interferes with one block, they must also interfere with all of the thousands of subsequent blocks, resulting in hundreds of hours of work only to disrupt one chain.

Currency or Asset

The cryptocurrency was initially conceived as a medium of payment. Lately, it has developed into a form of asset, whose value keeps on fluctuating as it gets traded in the markets or exchanges. There is an element of both a currency and an asset in this new financial instrument. As an asset, it also has the feature of very rapid fluctuation in a short duration. The sensitivity to any apprehension even by a handful of “owners” results in major dips or jumps in the prices of these cryptocurrencies/crypto-assets. Market information and crypto exchanges do play a very critical role in the value of crypto-assets.

The Status of Cryptocurrency in India

India’s central bank has expressed concern about cryptocurrency’s potential danger to financial stability and the country’s macro-economy. While the government appears to prefer regulation over prohibition, the RBI has not changed its mind.

Image 1.3 — Performance of major Cryptocurrencies since Bitcoin (Source — Lance Lambert, Coindesk)

According to The Economic Times newspaper, the RBI maintained that such a full prohibition was necessary for a thorough presentation to its central board on Dec. 17. While the details of the presentation were not disclosed, the RBI stated that “different issues of CBDC and private cryptocurrencies” were discussed. The RBI’s foreign exchange management and control of virtual assets that originate offshore were mentioned as factors for the ban request. This effectively suggests that transaction anonymity is a problem.

The Economic Impact of Cryptocurrency

There are about 2000 cryptocurrencies available as of January 2020. Furthermore, nearly 36.5 million people in the United States hold or invest in some form of currency. Cryptocurrencies, such as Bitcoins, are popular because they offer a more modern, digital currency. Transactions on these sites are not handled by a third party. This enables transactions to be completed directly between the buyer and the vendor. Bitcoin has also been praised for its several advantages, including minimal transaction fees and quick processing. That explains why hundreds of billions of dollars have poured into new kinds of currency in recent years. Blockchain, the technology that underpins bitcoin, has also come a step closer to widespread acceptance.

Cryptocurrency offers various benefits to entrepreneurs all around the world. It has made it easier for enterprises to reach out to foreign markets rather than limiting themselves to domestic ones. This has allowed vendors to form relationships and build confidence with previously unavailable markets, which has been extremely beneficial to developing countries. Each day in the last three months of 2020, an average of 287 thousand confirmed Bitcoin transactions were recorded around the world.

The rise of cryptocurrency has resulted in the emergence of a new market. Currencies such as Bitcoin and Ethereum, among others, have paved the way for a new type of market, one that, unlike the current money system, is decentralized. In the not-too-distant future, cyberspace will emerge as the governing body that will oversee and preserve such disruptive markets. It’s worth noting that the near-zero transaction costs have elevated these currencies above the standard money we’ve grown accustomed to. What can be said with certainty is that this is only the beginning, and the number of possibilities in the future is limitless.

Challenges for Economies

Individual countries are facing real challenges as cryptocurrencies grow in their presence and influence over the global economy, such as the threat to the monetary system, the fear of misuse for nefarious purposes, and the lack of control over private crypto-exchanges allowing for the sale and purchase of cryptocurrencies. Another important consideration is how such transactions are taxed both domestically and abroad.

Cryptocurrencies are being looked at from a variety of angles by several countries. The first is crypto-friendly countries such as Malta, Singapore, and Switzerland, which encourage bitcoin adoption. The second group of countries prohibits the use of cryptocurrencies. China, for example, has largely prohibited cryptocurrency. Cryptocurrencies are also prohibited in South Korea, Bangladesh, Bolivia, Taiwan, and Lebanon. The usage of cryptocurrency is regulated under the third category. These countries, such as the United States, are attempting to strike a balance between encouraging the use of cryptocurrencies while also weighing the risks associated with their use.

There are differences in how cryptocurrencies are treated for various taxes, such as VAT, capital gains, and property tax. There is no doubt that all economies throughout the world must implement a fair and transparent taxation system that is also robust and dynamic. There is a risk that tax gaps will widen in this sector in the medium and long term due to a lack of certainty. While permitting crypto-instruments to be used as cash and a mechanism of payment faces greater obstacles, recognizing them as an asset may be possible.

Capital gains taxation could lead to more practical solutions, such as limitations on claiming losses and the establishment of a regulatory authority in each economy to issue periodic instructions and regulations. Analysis of cryptocurrency classes, as well as identifying the nature of these assets, can serve as a beginning point for gradually integrating this instrument into the financial system. However, given the digital nature of the situation and the technology involved, a global agreement is required.

Conclusion

Cryptocurrencies’ rise and acceptance in various regions of the world cannot be overlooked or dismissed. Block-chain technology will also be around for a long time. Cryptographic instruments have both benefits and drawbacks. It poses a threat to several economies’ financial systems and can be abused, with a high risk of hacking and anonymity.

Cryptocurrency has introduced a new technology-based business model. The market has attracted a large number of new buyers and made international trading more efficient. Even while the market has been rising, it still has a long way to go before becoming a more generally utilized form of cash.

References

Authors

Vishwakarma Institute of Technology, Pune

Cryptocurrency and Economy

Written by Shriraj Sonawane