Around a decade ago, no one would have thought that the world would have a unique technology albeit a currency to trade in, without having the luxury of touching and feeling it! Yes, cryptocurrency has, of late, been creating a lot of noise, especially in India. The debate over its legality has been there since 2013 when the Reserve Bank of India issued a warning to the public against its use for the first time.

The warning certainly triggered a shock with many websites suspending their operations at that time. In view of this, the currency known by several names, Bitcoin to start with, should have never seen the light of the day. Yet, it continued to thrive. In fact, at a time, when almost everyone was struggling to make ends meet during the Covid-19-induced lockdown, it came as a saviour. 

A few intelligent ones started investing with an amount as low as Rs. 1500! In fact, a Systematic Investment Plan (SIP) in Bitcoin can start with as little as Rs. 100 on a daily basis. The money grew manifold. In fact, a friend made it big in a few months.

Now many would ask what exactly is this cryptocurrency? How is it generated? What kind of ecosystem does it operate in? Ever since the recession in 2008, the highly regulated traditional currencies lost their charm on account of loose monetary policies. Bitcoin came as a safe option with literally no interference from the government, without any inherent complications of physical boundaries, region or country.

The virtual currency had universal existence and a unique value, solely determined by the demand and supply forces, connected through a common network. Like any other currency, cryptocurrency can also be used for buying and selling goods. The stark difference lies in the fact that one has to find a merchant who deals in it. The transactions can be done through debit or credit cards too.

The biggest advantage of using cryptocurrency has been ease and safety of transactions. One can transfer funds without involving a lot of cost as compared to traditional means of transferring money, including a wire transfer. The currency is immune from the risks the traditional currencies face. It cannot be counterfeited. Nor can it be stolen.

In contrast to the normal paper currencies, which are governed by several factors like inflation, interest rates, and the quantum of currency printed by the RBI, it is engineered through a process called “mining”.

No, it does not involve any digging into the earth. It is basically a process of creating new units of currency with the help of a computer, a graphic card, a strong internet connection and, of course, power! There are a number of trading platforms that support software for mining. Once the software is run, it asks the user to solve complex mathematical problems suited to serve a given situation, generating a set of coins. A typical user can also purchase it from a broker which can be stored and spent from encrypted wallets.

Typically, a wallet address would comprise a string of 26 to 35 alphanumeric characters. For instance, 6b88c087247aa2f07ee1c5956b8e1a9f4c7f892a70e324f1bb3d161e05ca107b is an example of a Bitcoin wallet address. Any Bitcoin address can be used to transfer cryptocurrency to any address on the network. However, the sender’s wallet software should support the address.

Every transaction is recorded in a public ledger of transactions called “block-chain”. It is a decentralised ledger of all transactions across peer-to-peer networks, which helps in confirming transactions. For instance, “A” requests a transaction in cryptocurrency. This transaction is broadcast to a peer-to-peer network, consisting of computers commonly known as “nodes”. Once this transaction is initiated, it is validated through a set of predefined algorithms. After validation, a new block of data is created, which is added to the existing blockchain, which cannot be altered at any point of time. This technology can be used not only for generating cryptocurrency but also for transferring information, data, contracts and records!

The currency generated through this process can be used for purchasing products or selling at an agreed price or for transferring funds to any place in the world, without going through the cumbersome procedure of getting approvals from the bank. In other words, these transactions can be completed without thinking of restrictions under various legal provisions. Not only this, there is no risk of forgery. It is not easy to trace the transaction too as these transactions are digitally encrypted.

Currently, the banking system requires particulars of the transferor and the transferee viz-a-viz name, address, bank details for transferring funds. In the case of foreign transactions, the details are even more. For transferring cryptocurrency, all that is needed is a public address. It is as simple as sending an email. The software does not even disclose the IP address of the computer used for the transaction.

This has been a concern for various governments across the world, including India. The Indian government has been playing hide and seek with the need of having a cryptocurrency. In fact, it levied a complete ban on cryptocurrency in 2016. Later, it thought of promulgating a law to regulate it. The law was supposed to be enacted during the last session of Parliament.

During the recent budget session, the finance minister announced a 30 per cent tax on income from digital assets, including cryptocurrency. Not only this, a one percent TDS (tax deducted at source) has also been announced on all transactions in virtual digital assets. An average investor will also have to pay GST at the rate of 18 per cent on brokerage/service fee. 

In addition, if an individual suffers loss in cryptocurrencies, he/she will not be allowed to set off this loss against any other income or loss in the current financial year. By all means, it is meant to discourage these transactions. For a middle-class citizen, who has started his journey with a small amount of, say, Rs. 500, 30 per cent taxation is certainly a big blow.

The Indian government is treating income from cryptocurrencies like the income from winning lotteries etc. In many other countries, like South Korea, it is taxed based on profits. In the US, the tax rate is calculated based on the short-term or long-term capital gain. The tax rate varies from 10 to 37 percent in the case of short-term gain and 10 to 20 per cent in the case of long-term gain. In Germany, the tax is paid as per the income slab of the tax-payer.

The unregulated currency has certainly helped many in making a fortune. Over the last few years, the investment in cryptocurrency has grown to the extent of Rs. 6,000 crore, which is certainly not a small amount. Given the popularity and also its tendency of being misused, it certainly requires regulation and a prudent mechanism of taxation.

A recent report by a cybersecurity firm revealed that ransomware released by cryptocurrency has been the main cause in 79 per cent of cybersecurity incidents over the last 18 months. In view of such incidents, the deputy governor of the RBI, once again called for its ban last week. However, the government and its machinery seem to have taken the easy route of imposing a higher rate of taxes or announcing a blanket ban, instead of thinking out-of-the-box for its effective regulation.  

India offers a huge market for cryptocurrency. At present, various portals and crypto-focussed companies have generated employment for around 10,000 people. Had the government thought of a better plan, this digital currency would have generated enormous opportunities of growth in the near future. Harsh measures such as these will ring a death knell for crypto. What is needed is a better system for managing and regulating it, rather than imposing a blatant ban on its use. 

(The writer, a company secretary, can be reached at jassi.rai@gmail.com)