From UPSC perspective, the following things are important :
Prelims level : Cryptocurrencies and Legal Tender Currency
Mains level : Issues with Cryptocurrencies
Former RBI Deputy Governor R. Gandhi made a case for treating and regulating crypto as a separate asset class with a view to enabling governments around the world to effectively deal with illegal activities associated with virtual currencies.
Why in news?
- After quite a lot of debate over the years, people have fully understood that crypto cannot be a currency because the fundamental element of a currency that it should be a legal tender is missing in this case.
- The general consensus among many policymakers is that it should be deemed as an asset, not as a currency, not as a payment instrument, and not as a financial instrument as there is no clear identified issuer.
What are Cryptocurrencies?
- A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
- It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
- It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
- Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.
How does it work?
- Cryptocurrencies work using a technology called the blockchain.
- Blockchain is a decentralized technology spread across many computers that manage and record transactions.
What is Blockchain Technology?
- Simply, blockchain is a decentralized, distributed, and public digital ledger.
- Blockchains are a new type of network infrastructure (a way to organize how information and value move around on the internet) that creates ‘trust’ in networks by introducing distributed verifiability, auditability, and consensus.
- Blockchains create trust by acting as a shared database, distributed across vast peer-to-peer networks that have no single point of failure and no single source of truth.
- No individual entity can own a blockchain network, and no single entity can modify the data stored on it unilaterally without the consensus of its peers.
Back2Basics: Legal Tender Money
- A legal tender is a coin or a banknote that is legally tenderable for discharge of debt or obligation.
- Coin of any denomination not lower than one rupee shall be legal tender for any sum not exceeding one thousand rupees.
- Fifty paise (a half rupee) coins shall be legal tender for any sum not exceeding ten rupees.
- While anyone cannot be forced to accept coins beyond the limits mentioned above, voluntarily accepting coins for amounts exceeding the limits mentioned above is not prohibited.
- Every banknote issued by the Reserve Bank of India unless withdrawn from circulation shall be legal tender at any place in India.
- ₹1 notes issued by the Government of India are also Legal Tender.