Cryptocurrencies

A cryptocurrency is a form of money that uses cryptography for its creation and control. It is a virtual currency, and unlike traditional currencies, it does not have any central economic authority to control production and distribution. The first cryptocurrency, bitcoin, came into picture in the year 2009 when its creator, using the alias Satoshi Nakamoto, unveiled the whole concept through a paper. The identity of Satoshi Nakamoto remains anonymous till date. Bitcoins have created a big impact on the international economy since its inception. Recently the conversion rates of bitcoin crossed the mark of $1200 from just a few dollars in a matter of just a few months. There has been a big debate on the legality of bitcoins due to the anonymous nature of transactions and the lack of a central controlling authority. Countries such as Germany, Canada and the Singapore have given a legal status of bitcoins as a currency, while China banned the handling of bitcoin transactions by financial institutions in December 2013. In the United States of America, bitcoins have been given the status of “property” and not a legal tender. The legal status of bitcoins in India still remains unclear in India with the Reserve Bank of India “restricting” trading in bitcoins.

Cryptocurrencies are created and managed by P2P (peer to peer) networks. As a result, Cryptocurrencies exist only virtually and there is no physical currency, unlike traditional currencies like Rupee, Dollar, Pound, which exist in physical form. However, certain persons have developed physical bitcoins, but these are also based on the principles of cryptography- the private key of “one” bitcoin is engraved on the physical bitcoin. The physical form is more of a novelty and has no real meaning as such.

All transactions in cryptocurrencies are practically anonymous. Although a record of all transactions is available on the internet, but the real identities of the persons behind the transactions are actually hidden. It is only the public key, which can be anything, that is visible to the public, thereby making the transaction completely anonymous. The introductory paper on Bitcoin also discusses the issue of privacy at large. The paper goes on to say that new key pairs should be used for each transaction to avoid them being linked to a common owner. Thus, it is almost impossible to link transactions to particular persons. This essentially makes cryptocurrencies the perfect choice for being used as a method for illicit payments. It has also been reported that bitcoins are being used for money laundering and tax evasion.