Why the interest in virtual currencies?

• Bitcoin saw its value trading at above $10,000 (about Rs. 6.43 lakh) per bitcoin, up by about 900% from its value on January 1, 2017. At a time when the Indian government is in the process of determining the legality of cryptocurrencies, it is important to understand what exactly a virtual currency means for the layman.

What is bitcoin?

• Bitcoin is one of many cryptocurrencies that have gained popularity across the world.
• A cryptocurrency is a basically a digital asset that has been created to function as a medium of exchange, like cash.
• It uses cryptography to ensure the security of transactions — authentication and prevention of duplicate transactions — and to control the creation of new units of currency.
• This is different from cash in that cryptocurrencies have no physical form.
• They are simply numbers on a screen and there is no central bank that issues new currency. However, bitcoin has emerged as the popular face of cryptocurrencies.

Can you use bitcoin as currency?

• At the moment, the Reserve Bank of India has banned transactions in India using cryptocurrencies. In other words, while you can buy and sell cryptocurrencies on online exchanges, you can’t use them to pay for goods and services within the country. In April, the government had constituted an inter-disciplinary panel to look into the legality of cryptocurrencies and suggest a way forward, which included a having a regulator if they are legalised.
• The panel, which included officials from the Department of Economic Affairs, Department of Financial Services, Department of Revenue, Ministries of Home Affairs and Electronics and Information Technology, the Reserve Bank of India, NITI Aayog, and the State Bank of India, submitted its report in August.
• The contents have not yet been made public.

What do the experts say?

• Experts and central banks across the world are slowly arriving at the conclusion — written about in various research papers but not yet implemented in policy — that cryptocurrencies are here to stay.
• The only way to regulate their value and quantity is for central banks to issue their own digital currencies.
• While the value of digital currencies such as bitcoin are market-determined, depending on what somebody is willing to pay, a central bank-backed digital currency will have its value controlled to an extent by the central bank itself, much like any other major currency in the world.
• There is, however, still a lot of analysis to be done regarding the effect of such a central bank-backed digital currency on factors such as inflation and price levels. Perhaps that is perhaps why central banks worldwide are not rushing ahead to issue their own digital currencies.

Source:TH