Cryptocurrency is an electronic or digital currency that works on a peer-to-peer basis without the need for a trusted third/central organization such as a governmental agency, bank etc. It allows for paperless and borderless transfer-of-ownership. It is cryptographically secure and has a system of the distributed ledger (records are stored in various computers to ensure safety). It is anonymous, meaning that no one can know the value of the currency one owns. This anonymous nature of cryptocurrency transactions makes them well-suited for notorious activities, such as money laundering and tax evasion. Cryptocurrency functions through the technology called BLOCKCHAIN.
Blockchain has two key features. Firstly, it is a distributed ledger. In this system, millions of computers have the data recorded of the currency owned by the people and the value of the currency should be the same in all the computers. If someone tries to manipulate or change the records, then it takes only those values to be valid which are present in at least 51% of the total computers. Through this, it avoids the trust issues which occur in other mode of transactions. Secondly, data storage in Blockchain is safe. It provides the users with two keys i.e. private key (to access one’s own money and transactions) and public key (for making inward transactions).
Here, data is stored in chains and for adding a new block you need a lot of computing power. Every new block in the chain has its specific address depending upon the data that was stored in the last/previous block. Any changes made in the data stored will give errors in the next block’s address. This process makes it very secure for keeping money in a paperless form and making transactions.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009. Bitcoin is the first decentralized cryptocurrency. The transactions are made without any middlemen, meaning – no banks involved. Bitcoin software is Open source i.e. anybody can review the code. Bitcoins are generated by anyone with a Bitcoin Mining application. A certain amount of work and computing power is required for each block to be mined. Cryptocurrencies mining is the process through which coins are released to come into circulation. And mining happens when computers on the network solve complex mathematical problems, and are rewarded with new coins. The total amount of bitcoins is predictable and limited. They are stored in a digital wallet, similar to online banking. Transactions are verified by Miners and permanently and anonymously stored on the network.
Due to the security risks and lack of government oversight, cryptocurrencies, including Bitcoins, have been outlawed in India. Cryptocurrencies are not immune to the threat of hacking. There is a lot of risk involved. It carries cyber security threat and is prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. It can be a source of money laundering and terror financing due to anonymity. However, the government would explore the use of blockchain technology (underlying the cryptocurrencies) to add muscle to the digital economy.