At present there are two types of currencies in world and they include the reserve currencies, are fiat currencies.
The term ‘fiat currencies’ refers to currencies that are issued by a government, and the government promises to pay the holder of such currencies an equivalent amount in gold, if needed. Thus, these currencies usually have a central regulatory body which issues them, and are consequently called ‘centralized’. They have the value because somebody said so. The modern state can make anything it chooses as acceptable currency, without any further backing of any kind, even without a connection with gold.
A crypto-currency is a medium of exchange that uses cryptography to manage the creation of new units as well as secure the transactions. These are a subset of digital currencies. One of the most striking features of crypto-currency is that it weeds out the need for a trusted third party such as a governmental agency, bank etc. The crypto-currency system collectively creates the units. The rate at which such units are created is defined beforehand and is publicly known unlike the traditional currencies where the government or the authorized banks control the supply. The fundamental system on which most crypto-currencies are based today was created by Satoshi Nakamoto.
Brief of crypto-currency variant
Bit-coin is a kind of crypto-currency, a form of payment that uses cryptography to control its creation and management, rather than relying on central authorities. According to Nakamoto, Bit-coin is a software-based online payment system and introduced as open-source software in 2009.It is also considered to be the world’s first decentralized currency (does not mean fait currency).
Unlike usual forms of currency, it is in virtual form and may be used to transact in physical as well as online transactions. The origin of the concept of Bit-coin can be traced to Satoshi Nakamoto, who discussed in his research paper the design of Bit-coin as a new digital currency. The idea of a digital currency is improper, free from the supervision of banks and the government has been one of the most discussed and strived for ideas since the advent of the modern internet.
Many proposals for such a currency were floated but none were successful. Bit-coin, is a peer-to-peer digital system of payment. As Satoshi Nakamoto, the creator of Bit-coin puts it – “an electronic cash system”.
Payments are recorded in a public ledger using its own unit of account. When the algorithm was created by Nakamoto, a finite limit of 21 million on the number of Bit-coin that would ever exist was set. Currently, over 12 million are in circulation. The number of Bit-coin mined has skyrocketed since 2009. The system was intended to be set up in a way where the difficulty of mining every next Bit-coin is greater than the previous one. The final Bit-coin will be mined in the year 2140, at the current rate.
In India, entrepreneurs have shown enthusiasm towards the Bit-coin system and all eyes are on the Reserve Bank of India (RBI), which has not yet come out with an ultimate verdict. Although, RBI has issued a press release cautioning users, holders and traders of Virtual currencies, including Bit-coin, about the potential financial, operational, legal, security related risks that they are exposing themselves to. Pending this, it is also time to think about the tax treatment of Bit-coin as the transactions in virtual currency are increasing in India.
According to crypto-currency survey report, Bit-coin per se is not illegal in India and this is in consonance with an international approach. Bit-coin creation and transfer are based on open source cryptographic protocol managed in a decentralized manner, and, if harnessed properly, Bit-coin could deliver many benefits to the Indian economy.
Today, real currency is being used to purchase and sell Bit-coin at the current exchange value. Once the purchase has been made the value of the particular amount of Bit-coin is transferred from one wallet to another. Since every wallet has its own unique 33 characters and all Bit-coin wallets are synchronized, thus a false entry by any single person being made is almost impossible. Although pseudonyms are used for trading purposes, the history of every transaction in the form of continuously updated block-chain information is stored in the wallets.
Blog by : Adv Priyanka Pandey