CRYPTOCURRENCY

Context:
  • The G20 conference on crime and security has started which will deliberate on ways to make significant progress to improve law and order in the age of cryptocurrency and darknet.
Key Highlights:
  • Strict measures: Currency listing and trading exchanges are implementing stricter measures to enhance transparency, ensure reliability, and prevent illicit activities.
  • Potential for misuse: The potential for misuse of crypto tokens in blockchain transactions remains a significant concern. A UN report noted nearly 20% of serious criminal attacks now involved cryptocurrency funding, crypto tokens.
What is Cryptocurrency?
  • Cryptocurrency is a bank-independent digital currency that uses a decentralised technology called blockchain to record and verify transactions in a digital ledger without any third-party interference or central authority monitoring the deal
  • The transactions are facilitated by cryptography, and a virtual wallet is used for sending and receiving money to ensure the safety and anonymity of transactions. Some of the examples of crypto currency are Bitcoin, Etherum, Ripple and Litecoin.
How Does Cryptocurrency Work?
  • Public Blockchain Ledger:
    • Distributed access: Blockchain in the context of cryptocurrency is a digital ledger whose access is distributed among authorised users.
    • Transaction details: This ledger records transactions related to a range of assets, like money, house, or even intellectual property. 
    • Shared access: The access is shared between its users and any information shared is transparent, immediate, and “immutable”. Immutable means anything that blockchain records is there for good and cannot be modified or tampered with – even by an administrator.
  • Private Ledgers and Permissioned ledgers:
    • Not all cryptocurrencies use public blockchain ledgers. There are also private and permissioned ledgers.
    • Private ledgers are exclusively accessible to a specific group of users, while permissioned ledgers are a combination of public and private blockchains, granting access to anyone with permission from the administrators.
Benefits Of Cryptocurrency:
  • Decentralisation: The biggest advantage of cryptocurrency is that it’s not owned by a single financial or government entity. This eradicates the monopoly of money and ensures cryptocurrency value isn’t dictated by a central bank or authority.
  • Lower transaction fees: The fee for transacting in cryptocurrency are very nominal and sometimes zero. This is because third parties and intermediaries, such as VISA and PayPal, are eliminated in the process.
  • Higher efficiency: Cross-border transactions using cryptocurrencies are accelerated without challenging foreign exchange procedures, increasing their efficiency and lowering their cost.
  • Accessibility: Cryptocurrencies boost the accessibility of financial services as they operate on decentralised networks and can be accessed by anyone with an internet connection and crypto wallet. 
  • Transparency: While cryptocurrency transactions are anonymous, the data recorded on a public blockchain ledger, such as the Bitcoin and Ethereum blockchain, is publicly available for anyone to view. Every cryptocurrency user gets access to a public key, which can be used to identify an investor.
  • Inflation Protection: Due to its limited supply, cryptocurrency is often seen as a way to protect against inflation. Cryptocurrencies use the mechanism to cap supply acting as a safeguard against inflation.
Challenges of cryptocurrency:
  • Volatility: Cryptocurrency prices can often fluctuate. While this volatility can lead to quick profits, it can also cause significant financial losses for investors. For example, recently in 2021 Bitcoin value dropped by 30%.
  • Lack of regulation: The absence of control and regulation in the cryptocurrency market increases the risk of cryptocurrency scams and market manipulation.
  • Hidden Parallel economy: What began as an attempt to create a hidden network to conceal sensitive communication from ordinary internet users has expanded into a full-fledged darknet, routing and encrypting data in a hidden parallel online world not accessible via standard browsers and not indexed by search engines.
  • Illicit activities: Commerce facilities have allowed the development of marketplaces for illicit offerings like drugs, firearms and ammunition, hacking tools and services as well as sale of credit card information and counterfeit documents.
  • Security risks: Although blockchain technology offers a robust security architecture, security lapses and hacking attempts are on the rise in the cryptocurrency ecosystem. Cybercriminals have attacked cryptocurrency exchanges and digital wallets, causing significant financial losses for both people and businesses.
  • Irreversible transactions: Bitcoin transactions are irreversible, it’s difficult to recover funds once they have been stolen.
  • Risk of losing coins: If the private key is lost or stolen, it is impossible to demonstrate another proof of ownership or to recover the cryptocurrency tokens.
  • Excessive cost of production: Depending on its type, mining cryptocurrency may require a large supply of electricity and other resources resulting in local pollution, noise and other consequences such as increased greenhouse gas emissions for communities living near the mining sites.
  • Increase of Cyber Criminals: Criminal investigations in this realm have become increasingly difficult because of the convergence of cryptocurrencies and the darknet involving large-scale cryptocurrency theft or operations funded by cryptocurrencies.
What Is Digital Currency?
  • A digital currency is any currency that is available entirely in electronic form.
  • Digital currency is exclusively exchanged through virtual means and does not leave a computer network.
  • The three major varieties of digital currency are cryptocurrency, central bank digital currency (CBDCs) and stablecoins.
  • The digital Rupee will be a fungible legal tender, that means the holders or consumers can use it without having a bank account.
Central Bank-backed Digital Currency (CBDC):
  • CBDCs are digital versions of government-backed, fiat money, which uses blockchain technology to verify and store transaction data but the major difference is they operate on a centralised network, which is a permissioned network.  The Reserve Bank of India (RBI) launched the first pilot of Digital Rupee- Retail segment (e-R) on December 01, 2022.
Difference between cryptocurrency and digital money:
  • The basic core difference between a cryptocurrency and digital money is that cryptocurrencies use decentralised networks.
  • Whereas CBDCs, though use the blockchain technology, is entirely centralised.
  • A central bank oversees and facilitates the transactions with the help of other third-party organisations.
  • In the core, cryptocurrencies are private money, whereas CBDCs are government-backed forms of money.
Cryptocurrency regulation in India:
  •  Payment Regulation: Cryptocurrencies as a payment medium in India are not regulated by any central authority. There are no rules and regulations or any guidelines laid down for settling disputes while dealing with cryptocurrency. So, trading in cryptocurrency is done at investors’ risk.
  • Crypto Tax: In the Union budget for the fiscal year 2022-23, the Government of India announced its plan to implement a 30% tax deduction on the transfer of virtual currency or cryptocurrency assets.
  • SC banning RBI circular: The Supreme Court of India lifted the curb on cryptocurrency imposed by RBI, which restricted banks and financial institutions from providing access to banking services to those engaged in transactions in crypto assets.
Arguments in favour of regulating cryptocurrency in India. 
  • Curbing illegal activities: Regulation will help prevent illegal activities such as money laundering and terrorist financing. This is important not only to ensure the safety of the financial system but also to protect the interests of consumers.
  • Clarity on status of cryptocurrency: Regulation will provide clarity on the status of cryptocurrency and make it easier for businesses to operate in this space. This will also help to create a level playing field for all players in the market.
  • Taxing cryptocurrency transactions: Regulation will allow the government to tax cryptocurrency transactions, which will help increase the country’s revenue. This is particularly important in India, where the government is facing a revenue shortfall due to the ongoing economic crisis.
  • Safe and responsible use: Regulation will provide a framework for the safe and responsible use of cryptocurrency, which will help to increase consumer confidence in this new asset class.
Arguments against regulating cryptocurrency in India:
  • Stifling Innovation: Regulation could stifle innovation and make it difficult for new players to enter the market. This could also make it more difficult for individuals to access new investment opportunities.
  • Difficult to regulate anonymous transactions: Enforcement Regulation could be difficult to enforce, as cryptocurrency transactions can be made anonymously and are not subject to the same level of control as traditional financial transactions.
  • Risk of underground trading: There is a risk that regulation could drive cryptocurrency trading underground, where it would be even more difficult to monitor and regulate. This would not only increase the risk of illegal activities but also make it more difficult for the government to protect consumers.
Way Forward:
  • Joint Collaboration across borders: Geographic limits provide barriers. Jurisdictional concerns cause roadblocks. The level of collaboration observed in the private sector is required which works within and across country borders.
  • Proactive Engagement: The cryptocurrency market players need to proactively engage with law enforcement. Joint efforts of multiple law enforcement agencies around the world achieved some success. They could identify individual actors or marketplaces in some cases.
  • Sharing of information: Alongside Open-Source Intelligence methods, the sharing of information, data analytics, specialised tools and skills are necessary to investigate crimes that involve crypto and the dark web.
  • Capacity Building: Enforcement agencies must augment capabilities, embrace tools and methods and harness skills available in the private sector.
  • Connecting Dots: They should look for ways to connect the dots that would reveal activities on the darknet.
  • Darknet Domain Specialisation: The key to success would be specialised political, policy and operational understanding of darknet networks, services, cryptocurrency investigations, and information gathering, as advised by UNODC.
News Source: TOI

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