Crypto Currencies in India - Daily Current Affair Article for UPSC, IAS, Civil Services and State PCS Examinations


Crypto Currencies in India - Daily Current Affair Article for UPSC, IAS, Civil Services and State PCS Examinations


Context:-

The Supreme Court has struck down a ban on cryptocurrency trading in India, which was in place after a Reserve Bank of India's order from April 2018.

Background :-

  • Popular forms of cryptocurrencies such as Bitcoin, Ethereum use blockchain technology and operate independent of a central bank.
  • The RBI order had banned trading of all virtual currencies in India. The Internet and Mobile Association of India (IAMAI) was the petitioner in this case on behalf of all the virtual currency trading companies.
  • The Supreme Court has struck down a ban on trading of virtual currencies (VC) in India, which was imposed by a Reserve Bank of India order in April 2018. The court in its 180-page judgment said that the ban proposed on trading of virtual currencies was not proportionate and that the RBI itself had not found any adverse impact or harm done by the activities of these VC exchanges.

What are the crypto currencies :-

  • There is no globally accepted definition of what exactly is virtual currency. Some agencies have called it a method of exchange of value; others have labelled it a goods item, product or commodity.
  • Satoshi Nakamoto, widely regarded as the founder of the modern virtual currency bitcoin and the underlying technology called blockchain, defined bitcoins as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”. This essentially meant there would be no central regulator for virtual currencies as they would be placed in a globally visible ledger, accessible to all the users of the technology. All users of such virtual currencies would be able to see and keep track of the transactions taking place.

Are crypto currencies dangerous?

  • Organisations across the globe have called for caution while dealing with virtual currencies, while also warning that a blanket ban of any sort could push the entire system underground, which in turn would mean no regulation.
  • In June 2013, the RBI had for the first time warned users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security-related risks that they were exposing themselves to. The following year, the Financial Action Task Force came out with a report that highlighted both legitimate uses and potential risks associated with virtual currencies. In a different report, it again said use of such virtual currencies was growing among terror financing groups.

Why did the RBI ban virtual currencies?

  • Owing to the lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules, the RBI initially flagged its concerns on trade and use of the currency. Risks and concerns about data security and consumer protection on the one hand, and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand, also had the RBI worried about virtual currencies.
  • In its arguments in the Supreme Court, the RBI said it did not want these virtual currencies spreading like contagion, and had therefore, in the larger public interest, asked banks not to deal with people or exchanges dealing in these non-fiat currencies.
  • The RBI argued that owing to a “significant spurt in the valuation of many virtual currencies and rapid growth in initial coin offerings”, virtual currencies were not safe for use.

What did the petitioners say :-

  • The petitioners, who included virtual currency exchanges operational in the country, told the Supreme Court that the RBI action was outside its purview as the non-fiat currency was not a currency as such. They also argued that the action was too harsh and there had been no studies conducted either by the RBI or by the central government.
  • Arguing that the ban was solely on “moral grounds”, the petitioners said the RBI should have adopted a wait-and-watch approach, as taken by other regulators such as the Directorate of Enforcement or the Securities and Exchange Board of India.

Court’s Judgement:

  • “We have allowed the writ petitions,” a bench headed by Justice R.F. Nariman said while pronouncing the verdict,.
  • In the judgment, the bench noted, “While we have recognised elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities.”
  • According to the judgment, the RBI’s circular was not proportionate. It also pointed out the contradiction in the RBI’s stand where it insisted that virtual currencies are not banned in India, but the circular had then gone on to ban all trading around them.
  • The bench said that by banning trading and the VC exchanges, the virtual currencies have been disconnected from their lifeline. “What is worse is that this has been done despite RBI not finding anything wrong about the way in which these exchanges function
  • The judgment also refers to the differing position from the government of India, and notes how the same inter-ministerial committee has come to two completely different conclusions in 2018 and 2019. In the 2018 version of the Crypto-token Regulation Bill, the inter-ministerial committee approved the sale and purchase of digital crypto asset at recognised exchanges.
  • But this position completely changed in 2019. The same committee called for a complete ban on “private cryptocurrencies,” while also calling for the creation of a digital rupee as legal tender. This inherent confusion in the stance of the government is noted in the judgment.
  • The court held that the ban did not pass the “proportionality” test. The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1)(g), which states that all citizens of the country will have the right to practice any profession, or carry on any occupation or trade and business.

About Block Chain Technology :-

  • Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
  • A simple analogy for understanding blockchain technology is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent.
  • Of course, blockchain is more complicated than a Google Doc,but the analogy is apt because it illustrates three critical ideas of the technology 1. Block, 2. Miner, 3. Node

Blocks

Every chain consists of multiple blocks and each block has three basic elements:

  • The data in the block.
  • A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
  • The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.

Miners

  • Miners create new blocks on the chain through a process called mining.In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn't easy, especially on large chains.
  • Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the "golden nonce" and their block is added to the chain.
  • Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it's extremely difficult to manipulate blockchain technology. Think of it is as "safety in math" since finding golden nonces requires an enormous amount of time and computing power.
  • When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.

Nodes

  • One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
  • Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.

General Studies Paper- III

  • Economics

Mains Question:-

  • What is crypto currency ? How it is differ from Bitcoin ? Discuss its impact over economy of India?
  • What is block chain technology ? Discuss its Key feature?

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