Evolution of payments
Till a decade ago, no one imagined that electronic payments would account for $3.7 trillion in 2019 in India. But with the launch of enabling infrastructure like Bharat QR, Aadhaar Enabled Payment System (AePS), National Electronic Toll Collection (NETC), Bharat Bill Payment System (BBPS), and Rupay Cards this volume has been achieved.
Cryptocurrency, launched in 2009, is also a type of electronic payment system. But unlike UPI or BHIM, cryptocurrency does not rely on banks to verify transactions. It is a peer-to-peer system through which one can send or receive payments to anyone and anytime.
Financial systems in any country work under a strict framework of laws and regulations. At the apex of such a system is the Central Bank of the country. For example, in India, it is the Reserve Bank of India (RBI) or the Federal Reserve in the US. These central banks keep a vigil on the financial system to avoid shocks that can derail the country’s economy. This works because of the trust reposed by every stakeholder of the financial system and a guarantee backing the exchange/transaction given by the central bank/government. Thus, the central bank regulates and controls the economy to make sure it functions well through policy measures like inflation-targeting, interest rates, etc.
The cryptocurrency network is an alternative to this well-established financial system. The block chain technology used in such exchanges makes transactions decentralized thereby making the role of a central bank redundant. Despite the widespread excitement around the cryptocurrency concept, there is lesser clarity on how to invest in cryptocurrency.
What makes cryptocurrency a path-breaking idea?
- Autonomy: Without an intermediary like a bank or government, crypto gives users more control over how they spend their money.
- Secure: Each transaction in a cryptocurrency exchange requires two-factor authentication. This makes transactions as secure as the current digital payments.
- No banking fee: Users are not subject to any traditional banking fees, so this means a lesser cost of transactions. Even international payments are low cost as there is no intermediary. Bill Gates in an interview with Bloomberg in 2014 said, “Bitcoin is exciting because it shows how cheap it can be.”
- Peer focus: Users can carry out transactions on the network around the world without requiring approval from any external source of authority because it is purely peer-to-peer.
- Accessible: With only a smartphone or computer, cryptocurrency can be accessed by populations who do not have access to traditional banking systems.
- Acts as a buffer: For businesses, cryptocurrency can serve as an effective balancing asset to cash which is subject to depreciate over time because of inflation.
At a recent virtual event on Cryptocurrency hosted by CoWrks, some informative talking points emerged. The Blockchain technology is the most democratic, secure, transparent and efficient technological innovation in recent times and has the potential to bring large scale disruptions in the technology space. The sectors which will benefit the most from this disruption are BFSI sector followed by the Retail and Consumer sector because as a digital currency, Cryptocurrency is designed to work as a store of value or a medium of exchange. Blockchain technology has received much attention also due to the returns from crypto investments which have outperformed all traditional investment channels such as Gold, Equity and Mutual Funds, Real Estate over the last decade. Even global tech giants like Microsoft, Facebook, Amazon, Tesla, Visa, PayPal and MicroStrategy are working on creating use cases with blockchain technology. The Blockchain is also the fundamental backbone of Smart Contracts, DeFi (Decentralized Finance) and NFT (Non-Fungible Tokens).
How to invest in cryptocurrency: Things to keep in mind
- Cryptocurrency has to be stored in one or the other digital wallet. So, make sure you understand the benefits, technology and security that the digital wallet uses.
- It is an upcoming technology that is slowly gaining popularity. With no external control, the prices of crypto fluctuate rapidly. This need not be a cause of worry. But it is always better to be prepared for price volatility.
- Neither the RBI nor Income Tax Department has issued any directive or rule specifically mentioning tax on income from cryptocurrency investments. But it is good to pay tax on the income thus generated. Profits from the sale can be taxed as business income if traded frequently or as capital gains if held for investment purposes.
Benefits of investing in cryptocurrency for businesses
- It gives businesses access to new capital and liquidity reserves.
- It helps position the business in an emerging tech space of the future.
- As clients and vendors increasingly start using crypto, businesses will have to eventually adopt it as a means of making/receiving payments.
- Programmable money like crypto enables real-time and accurate revenue-sharing which enhances transparency.
Considering the challenges that a central bank may face in regulating crypto, many countries have not been forthcoming about it. In India, the RBI even banned cryptocurrency in 2018. This ban was struck down by the Supreme Court of India in March 2020 providing investors much needed relief.
There are many best crypto to invest in but companies like Wazirx, CoinSwitch Kuber, CoinDCX, UnoCoin are some of the emerging names in the Indian cryptocurrency space. But it is important to look for features like security, xchange fees/network fees/wallet fees and credibility of the exchange before carrying out any transactions.
(Note: CoWrks does not endorse monetization of Cryptocurrency.)