Why in the news?
- Hinting at a possible shift in India’s cryptocurrency policy, the Union Finance Minister said countries would have to “prepare to engage” with stablecoins, whether they welcome the change or not.
Cryptocurrency
- What is it?: A cryptocurrency is a digital or virtual currency that uses cryptography for security.
- Features:
- Digital currency: Exists only electronically, not as physical bills or coins.
- Decentralized: Not controlled by any central authority like a government or bank.
- Secured by cryptography: Uses encryption techniques to ensure secure transactions and prevent counterfeiting.
- How it works:
- Transactions: Recorded on a shared public ledger called a blockchain. This ensures transparency and immutability (transactions can’t be altered).
- Mining: New units of cryptocurrency are created through a process called mining, which involves solving complex mathematical problems with computers.
- Wallets: Users store their cryptocurrency in digital wallets. These wallets can be software-based or hardware devices.
- Types:
- Bitcoin (BTC): The first and most well-known cryptocurrency.
- Ethereum (ETH): A platform that allows for building decentralized applications (dApps).
- Tether (USDT): A stablecoin pegged to the value of the US dollar.
- Benefits:
- Fast and cheap transfers: Can enable faster and cheaper international payments compared to traditional banking systems.
- Security: Encryption makes it difficult to counterfeit or steal cryptocurrency.
- Transparency: Blockchain technology provides a transparent record of all transactions.
- Challenges:
- Volatility: Prices of cryptocurrencies can fluctuate significantly.
- Security risks: Crypto wallets can be vulnerable to hacking.
- Regulation: The regulatory landscape for cryptocurrency is still evolving.
Stablecoins
- What is it?:
- Stablecoins are a category of cryptocurrencies designed to minimize price volatility by pegging their value to a stable asset.
- They are usually linked to fiat currencies (e.g., US Dollar, Indian Rupee), commodities (e.g., gold), or use algorithms to maintain stability.
- Issues:
- Regulatory Concerns: Many operate without proper financial oversight.
- Reserves Transparency: Questions about whether collateral truly backs supply.
- Financial Stability Risk: A sudden crash (e.g., TerraUSD) can create contagion effects.
- Illicit Use: Risk of being used in money laundering, terror financing, tax evasion.
- India’s Positions:
- RBI opposes private stablecoins citing financial stability and sovereignty risks.
- Promotes Central Bank Digital Currency (CBDC / Digital Rupee) as a safer alternative.
- No specific law on stablecoins, but regulated under Foreign Exchange Management Act (FEMA), Prevention of Money Laundering Act (PMLA), and IT Act if linked to illegal activity.