What is Cryptocurrency, Definition, Advantage, Disadvantage, How does work crypto?

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Сурtocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units and to verify the transfer of assets. Cryptocurrencies are a type of digital currencies, alternative currencies and virtual currencies. The first decentralised cryptocurrency was Bitcoin, created in 2009. Since then numerous other cryptocurrencies have been created.

How Does Cryptocurrency Work?

Cryptocurrencies use decentralised control as opposed to centralised electronic money and central banking systems. The decentralised control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger. Transactions are sent between peers using software called cryptocurrency wallets (for storing, sending and receiving digital currency). The person creating the transactions uses the wallet software to transfer funds from one account to another. To transfer funds, knowledge of password associated with the account is needed. Transactions made between peers are encrypted and then broadcast to the cryptocurrency’s network.

It is then put in a queue to be added to the public ledger. Transaction are then recorded on the public ledger via a process called ‘Mining’. All users of a given cryptocurrency have access to the ledger if they choose to access it. The transaction amounts are public, but who sent the transactions is encrypted. Many transactions are added to a ledger at once. Then ‘blocks’ of transactions are added sequentially by miners. That is why the ledger and the technology behind it are called block chain’ It is a ‘chain of blocks of transactions. The validity of each cryptocurrency’s coins is provided by blockchain. It is a continuously growing list of records, called blocks, which are linked and secured using cryptography.

Advantages of Cryptocurrency

Cryptocurrencies are gaining popularity because they provide privacy protection, cost effectiveness, lower entry barriers which can be used as alternative to banking systems and fiat currencies, open source methodology and public participation and also immunity to government led financial retribution. Every transaction is transparent, autonomous and secure.

Cryptocurrencies are digital and hence cannot be counterfeited or reversed arbitrarily by the sender. Cryptocurrency uses a ‘push’ mechanism that allows the cryptocurrency holder to send exactly what he or she wants to the merchant or recipient with no further information. Decentralisation is one of the main advantage of cryptocurrency as it is managed by its own network and not any central authority

Since cryptocurrency is not bound by exchange rates, transaction charges or other charges of any country and hence it can be used at an International level without any problem. It is eco-friendly as it is paperless. Anonymity is one of the greatest advantages provided by cryptocurrency as one need not to reveal its identity. Due to these benefits cryptocurrency started to gain acceptance world wide.

Facebook has officially launched its virtual currency named ‘Libra’. It will be governed by the Libra Association, a Swiss Group including 28 members. It would run on a block chain on which cryptocurrency payments take place.

Disadvantages of Cryptocurrency

Cryptocurrencies have their own set of associated risks. Most people are not aware of how to use cryptocurrency and hence become vulnerable to hacking. Cryptocurrencies are highly volatile in nature. There is a lack of central issues, which means that there is no legal formal entity to guarantee in case of any bankruptcy.

There is not a way to get a refund of the amount paid mistakenly by someone. If a person has stored digital currency on his phone or computer then it is better to remember the passwords and not lose these devices. Losing one’s coin means one would not be able to retrieve it.

Cryptocurrencies are being denounced in many countries because of their use in grey and black markets. There are two sets of interconnected risks, one being to the growth and expansion of these platforms in the uncertain policy environment and the other being the risks these platforms pose to the users and the security of the state. They also have the potential use for illicit trade and criminal activities and can be used for Terror Financing. They also have the potential for tax evasion.

Global Scenario

The acceptability of cryptocurrencies as a legal instrument currently varies from country to country. While some are in the process of formulating laws and measures, others are yet to respond to this disruptive change. Some countries like Algeria, Bolivia, Egypt etc have completely banned the cryptocurrencies. An implicit ban’ has been applied in another 15 countries like Bahrain, Bangladesh, China etc. Bank of Thailand announced its plans to create its own cryptocurrency. UNICEF accepts cryptocurrency donations.

cryptocurrencies are coming under the regulatory net in order to check . Japan became the first country to regulate cryptocurrencies, the US is quickly laying down regulatory guidelines. The UK and Australia continue to work on the formalities while China has recently banned Initial Coin Offerings (ICO) due to various reasons, including various ICO scams around the world.

The burgeoning use of cryptocurrencies in terror financing, ransomwares, illicit drugs or arms trade and cybercrime has also raised red flags among the security and law enforcement agencies. They may well have the potential to displace the existing financial systems which enable electronic flow of money across different olitical boundaries.

Cryptocurrency Position in India

India plays a relatively small role in the global cryptocurrency market as it has only 2% of the global cryptocurrency market cap. The Reserve Bank of India has been keeping a tab on the increasing use of cryptocurrencies and it had issued an advisory in this regard in 2013, cautioning users, holders and traders of virtual currencies to its potential financial, legal and security related risks. The Ministry of Finance also held a public consultation on regulating virtual currencies in May 2017

In March 2020, Supreme Court of India declared the April 2018, notification of RBI that had banned the transactions through virtual currencies, as unconstitutional. This may lead to increase in the use of cryptocurrencies in India.

If authorised as an electronic payment system or designated a legal instrument, cryptocurrencies will fall under the purview of the RBI; capital gains and business transactions will be liable to tax, and foreign payments are also going to fall under the purview of Foreign Exchange Management Act. Regulated cryptocurrencies will enshrine robust consumer protection provisions.


Owing to this unstable and nascent phase of cryptocurrencies and less realisation of its worth due to limited use, it is foreseen that while people of India are eager and looking forward to transparent, quick and high return currencies but the Indian Government has its own stand which believes in knowing and exploring more about the cryptocurrency.

Overall cryptocurrencies have a long way to go before they can replace credit cards and traditional currencies as a tool for global commerce. People need to be educated about it as many people are still unaware of cryptocurrency. Businesses need to start accepting it so that it can gain wider acceptance.

The future appeal of cryptocurrencies lies in allowing our ultimate control over our money, with fast secure global transactions and lower transactions fees when compared to all existing currencies. But the government will have to take considerable steps, given the risk from possible use of cryptocurrencies in terror financing, money laundering and tax evasion.

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