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Significance: One of the most common cryptocurrency, Bitcoin has continued extraordinary price surge in the year 2017. Its market capitalization now exceeds the annual output of whole economies and the estimated worth of some of the world’s top billionaires. The total value of all bitcoins in circulation at $190 billion.  The cryptocurrency’s market cap is also bigger than the likes of Qatar, Kuwait and Hungary.  The cryptocurrency like bitcoin is now starting to challenge gold as the investment of choice.

What is cryptocurrency: A cryptocurrency is a digital asset designed to work as medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies.

There are numerous cryptocurrencies available in the market. The most famous one is the Bitcoin generated as a decentralised cryptocurrency in 2009.The underlying technical system upon which decentralized cryptocurrencies are based was created by an individual known as Satoshi Nakamoto.

Benefits of Cryptocurrency: 

  • Alternative investment choice: for traders as they gain confidence in alternate forms of money. This can be seen with the surge of its value n recent times. It generates about 155% return on an annual period compared to 6% on gold in the same period.
  • Innovations in digital sector:  are also created through major innovations in the financial sector using bitcoins and other cryptocurrencies. It stimulates digital lending activities  such as peer-to-peer lending, and digital wallets.
  • Cheapest form of transaction: With cryptocurrency, a new route for cash transactions opened up in the digital world, and the transaction costs are smaller compared to other forms. However, the increased demand recently have spiked up the cost of cryptocurrency transaction.
  • Transparency: The blockchain technology in various cryptocurrency act as a public ledger for every financial transaction on the bitcoin network. It ensures all transactions are recorded. Therefore, it brings in more transparency in its trade.
  • Security of transactions: The cryptocurrencies that are aided by the blockchain technology are more secure than the conventional financial sector technologies. Infact, cryptography controls the creation and transfer of a cryptocurrency which is highly secure.

Cons:

  • Volatility: The recent episodes of virtual currency flash crashes and a recent string of ransom ware attacks have proved to be detrimental for the cryptocurrency. Precious metals like gold are more stable than cryptocurrencies.
  • Jurisdictional issues: Governments can attempt to impose regulation on a currency or the entire industry, such as tax reporting rules or prohibitions on using digital currencies for certain transactions. However, it is difficult to enforce laws concerning a mechanism that is decentralized and redundant.
  • Threat to national security: Darknets are integrated with cryptocurrency recently. Terrorists use the cryptocurrencies like Monero, Ethereum etc. to fund terrorist activities, buy arms and ammunitions, use it for drug and human trafficking activities etc.
  • Tax complaince: It remains a concern. The transactions are not made under any jurisdiction. Also, these are not properly regulated by any central banks. Therefore, tax collection for these transactions remain a distant dream right now.
  • Problematic dispute resolution: Smart contracts are used in association with cryptocurrencies. The enforced smart contracts on these cannot ensure any clarity on establishing the seat of contracts, i.e. where the contract was concluded. Therefore they remain out of any legal system, which could lead to the development of a potentially unregulated system of contracting.

What India should do: India can follow in the footsteps of countries such as Canada, Hong Kong etc, and legislate to declare activities like money-laundering, financing of terrorism and drug trafficking using cryptocurrencies illegal, and put tracking mechanisms in place to fulfil its international obligations.