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.