What are cryptocurrencies?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Cryptocurrencies are digital or virtual currencies that can be used as a medium of exchange and are trying to fit into the traditional currency space.

As of today, cryptocurrencies are bought using legal tender and the value of one unit depends on the rise or fall in demand for the particular cryptocurrency.

Let’s take Bitcoin for example

Bitcoin, the world’s biggest and best-known cryptocurrency, has seen its share of booms and troughs in its valuation.

Bitcoin comes under the umbrella of cryptocurrencies. Litecoin, Ripple, Dash, among others, are also other examples of this form of digital currencies.

In two months Bitcoin saw a slump and rise, just like any other volatile market. The cryptocurrency in March was trading at nearly $8,200 per unit after touching its near four-month lows of $7,676. The entire cryptocurrency market was seen losing sheen and has lost over $60 billion in value in just one day, CNBC reported.

One of the key factors for this is due to the banning of the currency in various countries. Search giant Google, following Facebook’s suit, said that are planning to ban advertisements related to cryptocurrencies, which led the market dip.

Now, after the slump, the prices jumped on Thursday, led by a surge in bitcoin to two-week highs, with people active in the market citing a squeeze on traders who have bet against prices, given a lack of obvious news to trigger the gains.

How are cryptocurrencies introduced in the market?

Cryptocurrencies are introduced into the market much like a stock market offering, and are called Initial Coin Offering (ICO).

If one buys cryptocurrency in exchange of legal tender money, the cryptocurrency unit can be used wherever it is accepted, and all transactions are done virtually.

Are cryptocurrencies and cashless transactions the same?

Cryptocurrencies and cashless transactions may seem similar in many ways. But there’s a catch. Even though cashless transactions are also synonymously termed as digital payments there is a clear difference between the two.

Cashless transactions are authorised and tracked by the user’s bank account, making it as good as a transaction by legal tender currency. The bank provides their customers debit and credit cards, internet and mobile banking facilities.

Some banks, such as IDBI, have also started providing their customers virtual cards instead of the plastic cards that are used today.

Digital wallets, such as PayTM, are also a legitimate means of payment in India,  as the user links their bank account to the wallet to make payments.

In the case of cryptocurrencies, one unit of the cryptocurrency will hold the value of the legal tender currency sum, as per the market tide.

This means the value of one unit of the digital currency can range from Re 1 to Rs 1,00,000 or even higher, depending on its market value.

For cashless transactions, the value remains the same as that of the legal tender, which is authorised by the government.

In terms of legality, digital currencies are illegal in India and South Korea, among other nations. The United States, on the other hand, is looking into the idea of proposing cryptocurrencies.

If cryptocurrencies are banned, will it pose a threat to payment gateways?

That said, it does not mean that if a country bans cryptocurrency, it won’t pose a threat to the cashless gateways. For instance, India’s central bank reiterated that cryptocurrencies will be deemed illegal in its April policy meet.

NS Nappinai, Cyber Law Advocate, told CNBC-TV18, the move can take into account the payment system, i.e., payment wallets and debit or credit systems and said that “all of it can be blocked.”

In Budget 2018, Arun Jaitley, Finance Minister, said the government is looking for ways to regulate the cryptocurrency market.

Nappinai said she wouldn’t call this a ban. However, it “will effectively close the doors for a lot of cryptocurrency exchanges or brokerage platforms.”

The US, however,  is considering to roll out the ICO of OilCoins in the first quarter of this year. This will be the world’s first compliant and legal tender cryptocurrency as it will be supported by verified oil reserves and the exchange, the price of one OilCoin will be backed and decided by the authorities. OilCoins will work like tokens, where each unit of the currency will represent the value of one oil barrel.

With a superpower economy such as the US taking the lead, it is likely that other countries will follow suit.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow