Bitcoin is a hot word these days. Many know that it is related to money or currency. But what exactly is Bitcoin? What is a cryptocurrency? Is it legal in India? Why is it in the news? Read further to know.
Supreme Court of India has recently lifted the ban on cryptocurrencies imposed by the Reserve Bank of India.
But why did the Reserve Bank of India warn about Bitcoins? Let’s see each of these questions in detail in this article.
What is Bitcoin?
Bitcoin is a type of digital currency that enables instant payments to anyone. It was introduced in 2009.
It is based on an open-source protocol and is not issued by any central authority. It is a peer-to-peer currency. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network.
“Bitcoin”, capitalized, refers to the protocol and transaction network whereas “bitcoin”, lowercase, refers to the currency itself.
- It is the first decentralized digital currency.
- They are digital coins you can send through the Internet.
- Compared to other alternatives, they have several advantages.
- They are transferred directly from person to person via the net without going through a bank or clearinghouse. (This means that the fees are much lower, you can use them in every country, your account cannot be frozen and there are no prerequisites or arbitrary limits.)
How does Bitcoin work?
- The digital currency is generated all over the Internet by anybody running a free application called a Bitcoin miner.
- Mining requires a certain amount of work for each block of coins.
- This amount is automatically adjusted by the network such that Bitcoins are always created at a predictable and limited rate.
- Your Bitcoins are stored in your digital wallet which might look familiar if you use online banking.
- When you transfer them, an electronic signature is added.
- After a few minutes, the transaction is verified by a miner and permanently and anonymously stored in the network.
It uses public-key cryptography, peer-to-peer networking, and proof-of-work to process and verify payments. They are sent (or signed over) from one address to another with each user potentially having many, many addresses.
- Each payment transaction is broadcast to the network and included in the blockchain so that the included bitcoins cannot be spent twice.
- After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the blockchain. (Bitcoin blockchain is a database that holds information about all transactions.) Using these techniques, Bitcoin provides a fast and extremely reliable payment network that anyone can use.
What are the advantages of Bitcoins?
Advocates highlight the following points in favor of Bitcoins.
- The Bitcoin software is completely open-source and anybody can review the code.
- It is changing finance the same way the web changed publishing. When everyone has access to a global market, great ideas flourish.
Let’s look at some examples of how they are already used today:
- You can purchase video games, gifts, books, servers, and alpaca socks.
- Several currency exchanges exist where you can trade them for dollars, euros, and more.
- They are a great way for small businesses and freelancers to get noticed.
- It doesn’t cost anything to start accepting them, there are no chargebacks or fees and you’ll get additional business from the Bitcoin economy.
Bitcoins are sent easily through the Internet, without needing to trust any third party.
- Are irreversible by design
- Are fast. Funds received are available for spending within minutes.
- Cost very little, especially compared to other payment networks.
- The supply is regulated by software and the agreement of users of the system and cannot be manipulated by any government, bank, organization, or individual.
- The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) to miners who help secure the network.
Are Bitcoins limited?
The total possible number of bitcoins is around 21 million. A bitcoin was valued at $10 in October 2012 but it leapt to around $1000 or Rs 67,000 in December 2013. Now, as of March 2020, a bitcoin is valued at around $8800 or Rs. 6,50,000.
How to get them?
- Exchanges with local currency.
- Sell something and get bitcoins in return.
Arguments against Bitcoins
- Assets are not backed by tangible entities such as land.
- Wastes computer power.
- Enables crime.
- Encourages anarchy.
- It’s very much still an experimental currency and is a high-risk environment for consumers and investors at the moment.
Renowned economist Paul Krugman, is a skeptic that for example, says: “So do we need a new form of money? I guess you could make that case if the money we have were misbehaving. But it isn’t. We have huge economic problems, but green pieces of paper are doing fine — and we should let them alone.”
In 2014 Warren Buffett warned other investors to stay away from Bitcoin, calling it “a mirage.” He went so far as saying that, even though there may be a better way of transmitting money, the “idea that it has some huge intrinsic value is just a joke!
Why is RBI not an advocate of Bitcoins?
The RBI issued a circular in April 2019 banning regulated financial institutions from providing services to crypto businesses. The ban went into effect three months later. Banks subsequently closed the accounts of crypto exchanges.
The Reserve Bank of India points out that users expose themselves to potential financial, legal, and security-related risks when they deal in virtual currencies like bitcoins.
In its list of potential risks, the apex bank highlights problems such as losses arising out of hacking, no sources of customer recourse, and the general financial volatility surrounding Bitcoins.
“The creation, trading or usage of virtual currencies including Bitcoins are not authorized by any central bank or monetary authority. As such, there is no established framework for recourse to customer problems,” the RBI said in a statement.
Several India-based trading platforms and exchanges have sprung up over the last six months, catering to Indian users by allowing them to purchase Bitcoin in rupees. The RBI, however, has pointed out that no regulatory approval has been obtained by any entities that carry out such activities.
Supreme Court of India ruling on Cryptocurrencies
The RBI ban on cryptocurrencies was challenged in the Supreme Court by the Internet and Mobile Association of India and a few other stakeholders.
In a significant judgment (March 03, 2020), the Supreme Court on lifted the curbs on exchanges in cryptocurrency imposed by the Reserve Bank of India. The Court held that the RBI’s circular preventing bans from dealing in transactions involving cryptocurrency was disproportionate.
Bitcoins can be a topic in UPSC Prelims, Mains, or Interviews.
For UPSC Interview: Can Bitcoins replace the Indian Rupee? If yes, explain why.
For UPSC Mains: What are bitcoins? Analyze the effectiveness of digital currency in the background of recent RBI observations.
For UPSC Prelims: Which among the following statements about bitcoins are true?
- In India, RBI controls the Bitcoin market.
- Bitcoins are free from inflation and deflation.
- The total possible number of Bitcoins is limited.
- Bitcoins help in preventing money laundering and illegal trading.
Choices: A – 1 only, B – 1, 2, 4 only, C – 3 only, D – All the above
Read: Bitcoin halving