Do cryptos have any rationale?

Recently, former President Donald Trump expressed support for Bitcoin at a crypto gathering, even suggesting it could become a strategic reserve if he returns to office. This is surprising, given that cryptocurrencies lack the stability of gold or cash.

1. Amid dissatisfaction with traditional financial systems, there is a growing interest in cryptocurrencies and blockchain technology for financial autonomy and innovation.
2. However, the long-term viability and sustainability of these technologies remain uncertain.

What is Cryptocurrency and How Does it Work?

1. Cryptocurrency is a decentralized digital or virtual currency that uses cryptography for security.
2. Examples: Bitcoin, Ethereum, Ripple, Litecoin.
3. Functionality:
   1. Transactions are recorded on a public digital ledger called the blockchain.
   2. The blockchain is maintained by a decentralized network of computers that verify and add transactions.
   3. Users need a digital wallet to store their public and private keys for transactions.
   4. Cryptocurrencies can be acquired through "mining," which involves solving complex mathematical problems to validate and record transactions.

What is Blockchain Technology?

1. Definition: Blockchain is a decentralized digital ledger that records transactions across a network of computers.
2. Mechanism:
   1. Each block contains a set of transactions.
   2. New transactions are added to every participant's ledger, ensuring security and transparency.
3. Applications Beyond Cryptocurrency:
   1. Financial Institutions: Used for secure and transparent transaction processing, reducing fraud and operational costs.
   2. Education: Potential for managing student records and academic achievements.
   3. Scholarship Systems: Could incentivize academic excellence and maintain records efficiently.

What is the Legal Status of Cryptocurrency in India?

1. Regulation:

   1. Cryptocurrency is unregulated but not banned. The government does not recognize it as legal tender and aims to limit its use in illegal activities.

   2. Taxation: Transfers of virtual currencies/cryptocurrencies are subject to a 30% tax as per the Union Budget 2022-23.
2. Central Bank Digital Currency (CBDC):
   1. India has introduced its own CBDC, the Digital Rupee (e-RUPI), in collaboration with NPCI and other stakeholders.
   2. CBDCs are legal tenders issued and backed by central banks, differing from decentralized cryptocurrencies.

Pros and Cons of Cryptocurrency:

1. Pros:
   1. Security and Transparency: Blockchain technology offers enhanced security and transparency in transactions, reducing fraud.
   2. Innovation and Tokenization: Enables tokenization of assets and innovation in financial instruments.
   3. Reshaping Finance: Potential to transform global finance, offering new paradigms for value storage and transfer.
   4. Financial Autonomy: Provides alternatives to traditional banking, especially beneficial in unstable economies.
2. Cons:
   1. Speculative Nature: High volatility and speculative trading undermine stability and reliability as a medium of exchange.
   2. Regulatory Challenges: Uncertain regulatory environment and concerns over illegal activities can hinder adoption and integration.
   3. Limited Acceptance: Low acceptance by merchants and high transaction costs limit practical utility and integration with traditional systems.
   4. High Costs and Inefficiency: Cryptocurrencies can have high transaction fees and slower processing times compared to conventional payment methods.

Conclusion:

India's rapid adoption of cryptocurrency highlights the nation's shift towards digitalization. However, the absence of a regulatory framework presents significant challenges, including potential risks of fraud, money laundering, and financial crimes. To foster a secure and functional cryptocurrency ecosystem, there is an urgent need for robust regulatory oversight and measures to integrate these technologies into the mainstream financial system while addressing their inherent risks.

Must Check: Best IAS Coaching In Delhi

UPSC Prelims Result 2024 Out: Expected Cut Off & Other Details, UPSC Prelims 2024 Answer with Explanation, Daily Prelims Quiz, Daily Current Affairs, MONTHLY CURRENT AFFAIRS TOTAL (CAT) MAGAZINE, Best IAS Coaching Institute in Karol Bagh, Best IAS Coaching Institute in Delhi, Daily Mains Question Answer Practice, ENSURE IAS UPSC Toppers, UPSC Toppers Marksheet, Previous Year Interview Questions, UPSC Syllabus