The Reserve Bank of India (RBI) has through various public notices dated December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.
The creation, trading or usage of Virtual currencies (VCs) including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.
Keeping in view the risks associated with VCs, the RBI through its notification no:- RBI/2017-18/154 dated April 6, 2018, decided that entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/ sale of VCs.
It was also stated that the regulated entities which already provide such services shall exit the relationship within three months from the date of this circular, i.e within July 6, 2018.
What is Cryptocurrency
A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled.
Cryptocurrencies are so called because the consensus-keeping process is ensured with strong cryptography. This, along with the aforementioned factors, makes third parties and blind trust as a concept completely redundant.
What is Fiat Currency
Fiat money is the currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made.
Most modern paper currencies are fiat currencies; they have no intrinsic value and are used solely as a means of payment.
As part of the Bretton Woods Agreement, the Indian rupee was pegged to the US dollar, which itself was backed by gold. This arrangement ended in 1971, making the Indian rupee a fiat currency. All currencies now are fiat currencies and there are no existing currencies backed by commodities.
Types of Cryptocurrency/Virtual Currency
Altcoin:Altcoins are any form of cryptocurrency that isn't Bitcoin. The currencies inspired by Bitcoin are collectively called altcoins and have tried to present themselves as modified or improved versions of Bitcoin.
Bitcoin: Bitcoin is the original form of cryptocurrency; it was developed by a programmer or a group of programmers going by the name Satoshi Nakamoto. Bitcoin is a decentralized cryptocurrency that relies on the blockchain to distribute its ledger and record proof of work.
Bitcoin Cash: This cryptocurrency is a hard fork of Bitcoin that was created to decrease fees associated with Bitcoin transactions by increasing block size. It's also designed to be more spendable than Bitcoin.
Ethereum (ETH): Launched in 2015, Ethereum is a decentralized software platform that enables Smart Contracts and Distributed Applications (?Apps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an overwhelming response.
The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). As of June 2018, Ethereum has a market cap of $47.47 billion and on June 21, 2018, it closed at $525.77.
Litecoin: Litecoin is an altcoin that is a fork of Bitcoin, and it was launched in 2011. Litecoin is nearly identical to Bitcoin, but it differs in several key ways: Litecoin has a faster block generation time than Bitcoin; Litecoin has a higher maximum number of coins than Bitcoin; and Litecoin uses the scrypt cryptographic hash algorithm instead of SHA-256. As of June 2018, Litecoin has a market cap of $4.89 billion.
Monero: Monero is another altcoin, and was specifically designed for anonymity. Monero transactions can't be traced, which has made it a popular cryptocurrency among cybercriminals and crypto mining malware coders. As of June 2018, Monero has a market cap of $1.812 billion and on June 21, 2018, it closed at $123.32.
Ripple: Ripple is a centralized cryptocurrency that is designed to make international payments easier by eliminating exchange rates and cross-border fees. It has faced criticism due to its centralized ledger, which gives the Ripple company the ability to control prices. As of June 2018, Ripple has a market cap of $18.9 billion and on June 21, 2018, it closed at $0.534.
Zcash (ZEC): Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https," is how Zcash defines itself. Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. As of June 2018, Zcash has a market cap of $713.254 million and on June 21, 2018, it closed at $190.22.
By market capitalization, Bitcoin is the largest blockchain network, followed by Ethereum, Ripple, Bitcoin Cash, Litecoin, and EOS.
Terms associated with Cryptocurrency
ASIC: Application specific integrated circuits (ASICs) are chipsets built to perform a very specific task. Many ASICs are built to mine cryptocurrency and are a huge improvement in power consumption and speed over graphics processing units (GPUs) that have been the most common hardware to date.
Block: Blockchains consist of individual blocks that are added to the ledger as they are mined. Once a block has reached a predetermined size (which varies from cryptocurrency to cryptocurrency), it is verified and added to the blockchain.
Blockchain: Blockchain is the driving force behind cryptocurrency, but its uses aren't limited to monetary ones. A blockchain is a decentralized, distributed ledger that can consist of cryptocurrency transactions, computer code, and other forms of data. It's split between all the notes that participate in the network so that a consensus can be formed as to what is a valid transaction and what is not. Ledgers in the cryptocurrency world are also known as blockchains, which contain complete records of the history of a cryptocurrency's use. In this case, the ledgers are not physical objects—ledgers are digital lists of cryptographically hashed data validated through group consensus.
Consensus: Blocks can't be added to a blockchain without a majority of users reaching a consensus as to their validity.
Private/public keys:Keys are used in all cryptocurrency transactions and come in two forms: Public and private. A public key is what is sent by the owner of a cryptocurrency wallet when they want to send currency to another user or use their coins for a purchase. Private keys are unique to all cryptocurrency wallets and are used to validate the public key and act as unique signatures for each cryptocurrency transaction. Private keys should never be shared, as someone with access to a private wallet key has control over the cryptocurrency in that wallet.
Supply: Supply refers to a total amount of a particular cryptocurrency and is divided into three terms: Circulating supply, total supply, and maximum supply. Circulating supply refers to the estimated number of coins being used by the public or available in markets; total supply is the total amount of coins that currently exist, and maximum supply is the total amount of coins that will ever be issued. Most forms of cryptocurrency have a theoretical maximum supply, but in many cases, it's unlikely to ever be reached.
Wallet: A wallet is a digital storage space for the cryptocurrency. Wallets can be apps, cloud-based websites, or just a plain TXT document stored on a hard drive. If a cryptocurrency wallet is stolen, or its private key is revealed, anyone has access to the coins it contains—just like having your wallet stolen in real life.
Threats associated with Cryptocurrency
Hacking - VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
No proper way of recourse - Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems/ disputes/chargebacks etc.
No underlying backing of asset - There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
Legal and financial risk - It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
Illicit activities - There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combat the financing of terrorism (AML/CFT) laws.
Effects of the RBI Notification
No money transfer after midnight:Buying and selling in rupee have stopped as banks and other financial institutions are not going to facilitate cryptocurrency trade from July 6, 2018. This means that investors in Cryptocurrency will not be able to transfer the money in their bank account.
Peer-to-peer transactions:Investors can only do peer-to-peer (P2P) transactions with a fellow trader. One would only be able to transact in the form of exchange with any another cryptocurrency. Some exchanges like WazirX and Koinex Loop are working on the peer-to-peer model that will allow transactions between buyer and seller directly with exchange being just a facilitator.
Rise of black market:RBI has banned banks from associating with cryptocurrency, not cryptocurrency. This may push holders of any cryptocurrency to approach buyers on marketplaces like OLX or black market to convert crypto to the rupee, presumably at a higher price.
Bitcoins will turn costly: Any prospective bitcoin buyer in India will now have to buy it from peers, presumably after paying a premium over the current exchange rate.
List of notable cryptocurrencies (worldwide basis)
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