CRYPTO POWER

Evolution is life. Generations have evolved, their lifestyle has evolved and many more things in this world have taken a drastic turn. Regulator of the world has also seen itself changing. I am not talking of “mighty god”, but the regulator of the economy, not the “central bank”. I am talking of “money”-

the all-time ruler.

BARTER SYSTEM

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COMMODITY MONEY

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GOLD

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METALLIC COINS

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BANK NOTES

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FIAT MONEY

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DIGITAL CURRENCY

One of the fastest evolving and most famous digital currency is cryptocurrency.

Cryptocurrency is a virtual or a digital currency that is secured by cryptography and is used for many purposes like initiating transactions, entering into smart contracts, investment purposes, etc. It uses blockchain technology and runs on a decentralized network. All transactions through cryptocurrency are recorded in a form of ledger.

First, let’s talk of some important terms related to cryptocurrency.

1) CRYPTOGRAPHY- It is the practice and study of techniques for a secure communication in the presence of third parties.

There are 3 types of cryptographic algorithms-

· SYMMETRIC CRYPTOGRAPHY-It is also known as secret key cryptography, in which only a single key is used to encrypt and decrypt the message. The key is secret and is used in a secured way.

· ASYMMETRIC CRYPTOGRAPHY- It is also known as public cryptography. It uses pair of keys to encrypt and decrypt the message. Public key is used to encrypt the message and private key is used to decrypt the message. In case of digital signatures, private key is used to encrypt signatures and public key to decrypt the signatures.

· HASHING- It is a process of converting an input of any length to an output of a fixed length using complex mathematical problems. Each input is given a unique hash and any change in input changes the hash. (Output is some code).

Encryption - It is a process of converting a plaintext into a ciphertext. Ciphertext is codes comprising of numbers, symbols and letters, etc.

Decryption- It is a process of converting a ciphertext back into a plaintext.

BLOCKCHAIN TECHNOLOGY- This was first adopted by Satoshi Nakamoto in 1991 for Bitcoin. It is like a database, but what is different is that, databases store information in the form of tables, but in blockchain technology information is stored in blocks which are chained together. When a new transaction happens, it is verified by 1000s of miners which is known as the mining process and then the information is stored in the form of a ledger in a fresh block. Once the block fills with data, as each block has its storage capacity, it is chained onto the previous block. Each block is represented by a hash. Any change in block changes the hash. A new block also contains the hash of the previous block. First block is known as the genesis block of every cryptocurrency.

DECENTRALISED NETWORK- It is a decentralized network, means it is not controlled by any central bank. Like, RBI in India, FED in US, EUROPEAN CENTRAL BANK, etc.

If it is not regulated by any bank than how inflation targeting done?

· In cryptocurrency inflation is not a big problem because the supply is regulated and limited. Like bitcoin can be accessed only to a limit of 21 million. Ethereum as such don’t have a limited supply but it’s accessed only up to 18 million pa.

· New block generation also controls the transactions, like in bitcoin every new block is formed every 10 minutes.

· Stablecoins- Stablecoins are type of cryptocurrencies that are pegged by assets like gold, silver, fiat currencies like US dollar, other cryptos, oil, etc. It helps in maintaining price stability.

Now let’s talk of a very sensitive matter- How cryptocurrency transactions are taxed? In India, US, Canada, etc.

1. It is treated either as a business income or as income from capital gains like, we have seen in trading of shares also.

Cryptocurrency business includes- cryptocurrency mining, trading in cryptocurrency frequently, etc.

Also, profit from sale of cryptocurrency, profit from investing cryptocurrency, can be considered under income from capital gains.

2. Also, government of India is thinking of levying 2% equvilisation levy on crypto transactions.