Model Answer
0 min readIntroduction
Cryptocurrency, a digital or virtual currency secured by cryptography, has emerged as a disruptive force in the global financial landscape. Unlike traditional currencies issued by central banks, cryptocurrencies operate on a decentralized technology called blockchain. The advent of Bitcoin in 2009 marked the beginning of this revolution, and today, thousands of cryptocurrencies exist, attracting investors and sparking debate about their potential and risks. The recent volatility and regulatory scrutiny surrounding cryptocurrencies have brought their impact on global and Indian society into sharp focus, necessitating a comprehensive understanding of their implications.
What is Cryptocurrency?
Cryptocurrencies are digital assets designed to work as a medium of exchange using cryptography to secure transactions and control the creation of new units. Key features include:
- Decentralization: No single entity controls the network.
- Blockchain Technology: A distributed, immutable ledger recording all transactions.
- Cryptography: Secures transactions and verifies transfers.
- Limited Supply: Many cryptocurrencies have a capped supply, aiming to prevent inflation (e.g., Bitcoin’s 21 million limit).
Examples include Bitcoin, Ethereum, Ripple (XRP), and Litecoin.
Global Impact of Cryptocurrency
Cryptocurrencies have a multifaceted impact on global society:
- Financial Inclusion: Provides access to financial services for the unbanked population, particularly in developing countries.
- Reduced Transaction Costs: Cross-border transactions can be cheaper and faster than traditional methods.
- Innovation: Spurs innovation in financial technology (FinTech) and blockchain applications.
- Illicit Activities: Used for money laundering, terrorist financing, and other illegal activities due to anonymity.
- Volatility: Extreme price fluctuations pose risks for investors.
- Energy Consumption: Proof-of-Work cryptocurrencies (like Bitcoin) require significant energy consumption.
According to the Chainalysis 2023 Crypto Crime Report, illicit transaction volumes fell to $20.1 billion in 2022, a 65% decrease from 2021, but still represent 0.24% of all cryptocurrency transaction volume.
Impact on Indian Society
The impact of cryptocurrency on Indian society is growing, albeit with regulatory challenges:
- Adoption Rate: India has a significant number of cryptocurrency investors, estimated at over 15 million as of 2023 (WazirX-TRM report).
- Investment & Trading: Cryptocurrency exchanges like WazirX, CoinDCX, and Zebpay have gained popularity.
- Regulatory Uncertainty: The Indian government has taken a cautious approach, initially proposing a ban, then opting for regulation.
- Taxation: A 30% tax on crypto gains and a 1% TDS (Tax Deducted at Source) on every crypto transaction were introduced in the 2022-23 budget, impacting trading volumes.
- RBI Concerns: The Reserve Bank of India (RBI) has expressed concerns about financial stability and investor protection.
- Digital Rupee: The RBI launched the Central Bank Digital Currency (CBDC), the e-Rupee, as a response to the growing popularity of cryptocurrencies.
The regulatory landscape remains fluid, with ongoing discussions about a comprehensive legal framework for cryptocurrencies in India. The government is exploring options for regulating crypto assets while balancing innovation and risk mitigation.
Conclusion
Cryptocurrency presents both opportunities and challenges for global and Indian society. While it offers potential benefits like financial inclusion and innovation, concerns regarding illicit activities, volatility, and regulatory uncertainty remain. India’s approach, characterized by cautious regulation and the introduction of a CBDC, reflects a pragmatic attempt to harness the benefits of digital currencies while mitigating associated risks. A clear and comprehensive regulatory framework is crucial for fostering responsible innovation and protecting investors in the long run.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.