CRYPTOCURRENCY - ECONOMY
News: Crypto’s Lehman Brothers moment – and what happens after the fall of FTX
What's in the news?
● A
30-year-old MIT graduate who went from billionaire to bust, a note of caution
from the White House, and lakhs of customers with their money stuck - the past
week has arguably been one of the most dramatic in the world of cryptocurrency.
● The events could pave the way for stricter regulations in an industry that is now seen as playing fast and loose with customers funds.
FTX:
● FTX, the world’s second
biggest crypto exchange (used to buy and sell
cryptocurrency like Bitcoin), went bankrupt, affecting an estimated 10 lakh-plus people who were barred from
withdrawing funds.
● The FTX collapse predictably shook investor's confidence and prompted a fresh selloff in cryptocurrencies - for instance, Bitcoin, which is already down over 70% this past year, plummeted another 12% in just five days.
What is Crypto currency?
1.
A cryptocurrency is a form of digital or
virtual currency based on a network that is distributed across a large
number of computers.
2.
It is nearly impossible to counterfeit
or double-spend.
3. Many cryptocurrencies are decentralized networks based on blockchain technology.
Who issues cryptocurrencies?
Cryptocurrencies are generally not issued by any central authority. Therefore, it makes them theoretically immune to government interference or manipulation
Advantages:
1.
They include cheaper and faster
money transfers.
2.
They are decentralized systems that
do not collapse at a single point of failure.
3.
They enable secure online payments without
the use of third-party intermediaries.
4.
One can do away with the charges on transactions.
5.
Facilitate cross border financial
transactions.
6. Based on block chain technology which is not prone to counterfeit and ensures transparency.
Disadvantages:
1.
They include price volatility.
2.
They include high energy consumption
for mining activities. Crypto mining led to huge energy consumption.
3.
They can be used in criminal activities.
Eg. Terror financing and many ransomware
attacks ask to settle in crypto currency.
4.
It is believed that cryptocurrency will disrupt
many industries, including finance and law.
5.
Not a legal tender because It is not
issued by any centralised authority and doesn't backed by any asset
6. No exchange value. It's value is based on the speculation onl
7. It Isn't regulated by Government. Hence it will make the present monetary tools ineffective and will lead to inflationary pressures.
Go back to basics:
Story of Cryptocurrencies so far in India:
● The
RBI has been cautioning users, holders and traders of virtual currencies (VCs)
through public notices on December 24, 2013, February 1, 2017 and December 5,
2017 that dealing in VCs is associated with potential economic, financial,
operational, legal, customer protection and security related risks.
● In
a circular, dated April 6 2018, RBI had prohibited its regulated entities to
deal in VCs or provide services for facilitating any person or entity in
dealing with or settling VCs.
● The
said circular has been set aside by the Supreme Court on March 4, 2020.
● Further
RBI, vide its circular dated May 31, 2021 has also advised its regulated
entities to continue to carry out customer due diligence processes for
transactions in VCs, in line with regulations governing standards for know your
customer, anti-money laundering, combating of financing of terrorism (CFT),
obligations under Prevention of Money Laundering Act (PMLA), 2002, etc. in
addition to ensuring compliance with relevant provisions under Foreign Exchange
Management Act (FEMA) for overseas remittances.
● The
Union Budget, 2022 introduced taxation
on Virtual Digital Assets (VDA), commonly referred to as cryptocurrencies.
Tax will be levied on transfer of VDA at a flat tax of 30% (besides cess and
applicable surcharge).
● Further,
as one would have expected, the requirement for withholding taxes on VDA
transactions has also been introduced with effect from 1 July 2022. The
transferee is required to withhold taxes at the rate of 1% on transfer of VDA
to a resident taxpayer.