Info Nuggets THE FUTURE OF MONEY
UNDERSTANDING CRYPTOCURRENCY AND ITS IMPACT
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1. What is cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is designed to work as a medium of exchange where individual ownership records are stored in a computerised database using blockchain technology. Unlike traditional fiat currencies, cryptocurrencies are decentralised, meaning they are not issued, controlled or backed by any central authority like a government or central bank. Their value is primarily determined by supply and demand and the underlying technology.
Key characteristics
Digital/virtual: Exists only electronically.
Decentralised: No central issuing authority.
Cryptographic security: Uses advanced encryption to secure transactions and control the creation of new units.
Blockchain technology: Transactions are recorded on a distributed public ledger, making them transparent and immutable.
Peer-to-peer: Transactions occur directly between users without intermediaries.
2. Different kinds of cryptocurrencies
Cryptocurrencies can be broadly categorised based on their function and underlying technology:
Bitcoin (BTC): The first and most well-known cryptocurrency, often considered “digital gold”. It primarily functions as a store of value and a medium of exchange.
Altcoins (Alternative Coins): This term encompasses all cryptocurrencies other than Bitcoin. They often aim to improve upon Bitcoin’s limitations or offer different functionalities. Examples include:
Ethereum (ETH): Not just a cryptocurrency, but a blockchain platform that enables “smart contracts” and decentralised applications (dApps). Ether is its native cryptocurrency.
Ripple (XRP): Designed for fast and low-cost international payments, primarily aimed at financial institutions.
Litecoin (LTC): Often called “digital silver”, designed for faster transaction times than Bitcoin.
Cardano (ADA), Solana (SOL), Polkadot (DOT): These are prominent blockchain platforms with their native cryptocurrencies, focusing on scalability, security and interoperability.
Stablecoins: Cryptocurrencies designed to minimise price volatility by being pegged to a “stable” asset like fiat currency (eg., USD Coin (USDC), Tether (USDT) pegged to the US Dollar), commodities or other cryptocurrencies. They aim to offer the benefits of blockchain technology with the stability of traditional assets.
Utility Tokens: These tokens provide users with access to a specific product or service within a blockchain ecosystem. They are not designed as a currency but rather as a means to interact with a decentralised application.
Security Tokens: Digital representations of ownership in real-world assets (e.g., real estate, company equity). They are subject to securities regulations.
Memecoins: Cryptocurrencies inspired by internet memes or pop culture, often created as a joke but can gain significant speculative value (e.g., Dogecoin (DOGE), Shiba Inu (SHIB)).
Central Bank Digital Currencies (CBDCs): While not decentralised cryptocurrencies, it’s important to mention them. These are digital currencies issued and backed by a country’s central bank, functioning as a legal tender. India is exploring its own CBDC, the Digital Rupee.
3. Legal status of cryptocurrency in India
As of June 2025, the legal status of cryptocurrency in India can be described as unregulated but not banned.
Not legal tender: Cryptocurrencies like Bitcoin or Ethereum are not recognised as legal tender in India. This means they cannot be used as a replacement for the Indian Rupee for official purchases or debt settlement.
RBI’s stance: The Reserve Bank of India (RBI) had previously banned regulated entities from dealing in cryptocurrencies in 2018, but this ban was overturned by the Supreme Court of India in 2020, citing it as unconstitutional.
Taxation: The Indian government has taken steps to tax cryptocurrency transactions. As per the Finance Bill of 2022:
A 30% tax is imposed on any income or gains from the transfer of virtual digital assets (which includes cryptocurrencies).
A 1% Tax Deducted at Source (TDS) is levied on payments made for the transfer of virtual digital assets exceeding Rs 50,000 per financial year.
Regulatory framework in progress: India is actively working towards a comprehensive regulatory framework. The “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” was introduced but is yet to be passed. Discussions are ongoing within the government and with international bodies like the G20 on how to best regulate the crypto market, considering issues of financial stability, money laundering, and investor protection.
Investment and trading: Currently, buying, selling and trading cryptocurrencies is legal in India, albeit subject to the mentioned taxation. There are no restrictions on investing in them.
4. How it is different from normal currency (Fiat currency)
Cryptocurrency:
Decentralised: Not controlled by any central authority like a government or central bank. It operates on a distributed ledger technology (blockchain).
Digital: Primarily exists in a digital form and is not typically physical.
Fixed or limited supply: Many cryptocurrencies, like Bitcoin, have a predetermined and often limited maximum supply, making them scarce.
Value from market demand and supply: Its value is determined by how much people are willing to pay for it in the market, rather than government backing.
Transactions are irreversible: Once a cryptocurrency transaction is recorded on the blockchain, it generally cannot be reversed.
Peer-to-peer transactions: Allows for direct transactions between individuals without the need for intermediaries like banks, often with lower fees.
Transparency and immutability: Transactions are recorded on a public blockchain, making them transparent and difficult to tamper with.
Volatility: Generally more volatile in price compared to fiat currencies due to market speculation and adoption.
Pseudonymous: Transactions are tied to cryptographic addresses, not directly to a user's real-world identity.
Global accessibility: Can be used and transferred anywhere in the world with an internet connection, bypassing traditional banking hours and international transfer restrictions.
Fiat currency (Normal currency):
Centralised: Issued and controlled by a central authority, typically a government and its central bank.
Physical and digital: Can exist in both physical forms (cash, coins) and digital forms (bank balances, electronic transfers).
Potentially unlimited supply: Central banks can print more money as needed, which can lead to inflation if not managed carefully.
Value from government decree and trust: Its value is derived from government declaration (legal tender) and the trust people have in the issuing authority and the stability of the economy.
Transactions can be reversed: Traditional banking transactions can often be reversed or disputed through financial institutions.
Requires intermediaries: Transactions typically involve financial intermediaries like banks to process and verify payments.
Less transparent: While transactions are recorded by banks, they are not publicly visible to everyone.
Relative stability: Generally more stable in price due to government regulation and monetary policy.
Identifiable: Transactions are linked to individual identities through bank accounts and financial regulations.
Geographical restrictions: Often subject to national borders and regulations for international transfers, which can incur higher fees and delays.
EXAMINATION QUESTIONS
SHORT ANSWER QUESTIONS (2-3 MARKS)
Define cryptocurrency and state its core characteristic.
Name any two major types of cryptocurrencies and briefly describe their primary function.
What is the current legal status of cryptocurrency in India regarding its use as legal tender?
Mention two key differences between cryptocurrency and traditional fiat currency.
Explain the role of cryptography in securing cryptocurrency transactions.
LONG ANSWER QUESTIONS (5-7 MARKS)
Discuss the concept of decentralisation in cryptocurrencies and how it differentiates them from conventional financial systems.
Elaborate on the different categories of cryptocurrencies, providing examples for each.
Analyse the current legal and regulatory landscape of cryptocurrencies in India, highlighting the key government decisions and their implications.
Compare and contrast cryptocurrency with fiat currency, focusing on aspects like control, value and transaction mechanisms.
What are the advantages and disadvantages of using cryptocurrency as a medium of exchange?
ANALYTICAL QUESTIONS (10-15 MARKS)
“The rise of cryptocurrencies presents both opportunities and challenges for national economies and global financial stability.” Critically analyse this statement in the context of India’s stance on cryptocurrency, considering aspects like financial inclusion, regulatory concerns and technological advancements.
Examine the concept of blockchain technology as the foundational element of cryptocurrencies. Discuss how blockchain ensures transparency, security and immutability in crypto transactions, and its broader implications beyond digital currencies.
Despite their growing popularity, cryptocurrencies face significant hurdles in achieving mainstream adoption as a universal medium of exchange. Discuss these challenges, including volatility, scalability, regulatory uncertainty and environmental concerns. How might these challenges be addressed?
The Indian government has imposed a 30% tax on crypto gains and 1% TDS. Discuss the rationale behind these tax measures and their potential impact on the cryptocurrency market and investor behavior in India. Do you think these measures signal a move towards recognition or further control?
Discuss the potential impact of Central Bank Digital Currencies (CBDCs) like India’s Digital Rupee on the future of decentralised cryptocurrencies. Will CBDCs replace or complement existing cryptocurrencies, and what are the implications for financial innovation and control?
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