What is Digital Currency?

Brief insight about Digital currency which is making waves in Financial World.

Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet . Types of digital currencies include cryptocurrency, virtual currency and central bank digital currency.  Digital currency may be recorded on a distributed database on the internet, a centralized electronic computer database owned by a company or bank, within digital files or even on a stored-value card like bank debit card.

One of the major uses of cryptocurrencies is to send money across borders. With the help of cryptocurrency, the transaction fees paid by a user is reduced to a negligible or zero amount. It does so by eliminating the need for third parties, like VISA or PayPal, to verify a transaction. This removes the need to pay any extra transaction fees.

Since the privacy and security of cryptocurrency transactions are high, it’s hard for the government to track down any user by their wallet address or keep tabs on their data. Bitcoin has been used as a mode of exchanging money in a lot of illegal deals in the past. Cryptocurrencies are also used by some to convert their illicitly obtained money through a clean intermediary, to hide its source.

The developers wanted to create virtually untraceable source code, strong hacking defences, and impenetrable authentication protocols.

This would make it safer to put money in cryptocurrencies than physical cash or bank vaults. But if any user loses the private key to their wallet, there’s no getting it back. The wallet will remain locked away along with the number of coins inside it. This will result in the financial loss of the user.

In order to know the implication of digital currency we will first understand the basics of regulated entities and non-regulated entities

All Non-Banking Finance Companies (NBFC)s, Miscellaneous Non-Banking Companies (MNBCs) and Residuary Non-Banking Companies (RNBCs). All authorized persons (APs) including those who are agents of Money Transfer Service Scheme (MTSS), regulated by the Regulator.

Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank.

Now the problem before the sovereign governments all over world is how to address this tricky issue. The Indian Government to address this issue they have two options in front ban or regulate the cryptocurrency. Complete ban will not only kill completely the new technology revolution taking place in financial world which will make other countries to move way ahead of us it will adversely affect our macroeconomics.

Macro economics studies economy-wide phenomena such as inflations, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment. Complete ban in any field will adversely affect the development of its use to human race for instance there will be many development in the field of pharmaceutical which has helped in increasing the life span of human and also to lead healthy life.

Now we will look into the latest development in the field of Digital Currency in our country. As per top Government official the proposal for a central bank digital currency (CBDC) backed by the country’s banking regulator may included in the upcoming bill to regulate cryptocurrency.

In future, there may be RBI authorised & regulated private stable coins.  It is in response in to central bank’s concern about macro-economic stability, government’s stand is not to ban cryptocurrencies but rather provide cryptocurrency via the RBI. It is a right step in direction preventing creation of big speculative bubble in form of betting around crypto in macro-economic scenario and it can be very costly price the government has to pay out of tax payers money which has been experience in many financial scams occurred in the country after the liberalization of Indian Economy after 90’s.

In focus Crypto industry put its views before government and key proposals from authorities

• Route transactions via bourses instead of P2P transfers. (P2P means from persons to persons may be individual, company etc. without intermediaries)
• Tax airdrops of coins. An airdrop is a distribution of a cryptocurrency token or coin usually for free, to numerous wallet addresses. Airdrops are primarily implemented as a way of gaining attention and new followers, resulting in a larger user-base and a wider disbursement of coins. It is marketing gimmick.
• Capital criteria for exchanges.
•  Filtration mechanism to all only some cryptocurrencies. There are more than 10,000 cryptocurrencies in existence as on November 2021.
• Accredited crypto investors.

Multiple Issues

Authorities have identified some of multiple issues to be addressed on priority basis. New coins, after their initial launch will give away free as a marketing strategy by creators of cryptocurrencies to developers, exchanges and others. Such airdrops can be 20% or higher. Authorities feel that since airdrops (coins) are in the nature of gifts should be taxed. Another key source of crypto in India is arbitragers who cash in on the price difference by buying crypto from overseas and sell in India.

At present, overseas purchases are either through remittance of funds through banking channels or in the form of swaps of stable coins for crypto from a foreign supplier. Crypto members like Indiatech.org and IMAI   (Internet and Mobile Association of India) has been responding to queries to Authorities. It is perceived that there may not be outright ban, the law and subsequent regulations have to lay down the minimum capital and other requirement not for exchanges but even for crypto custodians, aggregators and wallet providers.

There are multiple issues. For instance, will accredited investors (as defined by SEBI in terms of net worth and  income) have more flexibility on crypto investments. Definitely we are seeing the DIGITAL CURRENCY REVOLUTION in near future.