Blockchain And Cryptocurrency

Finance has long been a very conventional field with no major breakthroughs happening for many years until the introduction of Bitcoin in 2008 by an anonymous person/ group going by the name of Santoshi Nakamoto. Some people look at cryptocurrency as a major technical breakthrough in the field of Finance that has the potential to change the way we transact, while some look at it with skepticism since it can lead to increase in underground transactions. Through this paper we first try to understand what does 'Cryptocurrency' mean and briefly explain how does blockchain works,then whether truly cryptocurrencies are fool proof with no chance of fraud, and lastly,Reserve Bank of India's opinion on cryptocurrencies. The universe of cryptocurrencies comprises of various tokens and talking about each one of them is beyond the scope of this paper. In this paper we try to focus only on Bitcoin.

- Navnit Kumar

About the author

Navnit Kumar Senior Manager (Faculty) Union Bank of India Staff Training Centre, Gurugram

Understanding the term 'Cryptocurrency'

Before defining cryptocurrency, we must understand the characteristics of currency. A well-functioning currency should have 3 functions:

Store of Value: Store of Value means that the value of a currency should be stable over time. Due to high volatility this criterion is not met by cryptocurrencies.

Unit of Account: Unit of account means that money should allow us to easily determine the value for goods and services and allow us to compare them to each other. The volatility of Bitcoin makes it difficult for us to consider it as a unit of account.

Medium of Exchange: Medium of Exchange means that money should allow buyers and sellers to make transactions. Bitcoin partially fulfills this criterion but slow transaction speeds, high volatility poses some hurdles.

Since cryptocurrencies do not fulfill these criteria defining cryptocurrency as 'virtual currency' would not be inaccurate.

Now coming to Cryptocurrency, the Inter RegulatoryWorking Group on Fintech and Digital Banking set by RBI in 2017, defines cryptocurrency as digital representations of value, issued by private developers and denominated in their own unit of account. They also added that cryptocurrencies are not necessarily attached to a fiat currency but are accepted by natural or legal person as a means of exchange.

Brief understanding of Blockchain and Bitcoin