Impact of Cryptocurrency on the Indian Economy

                                    Impact of Cryptocurrency on the Indian Economy

Cryptocurrency is a digital or virtual money that uses cryptography for security and is not under the control of a central bank or a government. The first and most well-known cryptocurrency is Bitcoin, which was created in 2009 by an unidentified person or group using the alias Satoshi Nakamoto. Since then, thousands of additional cryptocurrencies have been created, each with unique properties and potential applications. Unlike traditional currency, which is controlled by central banks and governments, cryptocurrencies are decentralized and operate on a peer-to-peer network. Transactions are confirmed by a distributed network of nodes and recorded on a public ledger called a block chain. This makes transactions transparent and immutable, meaning they cannot be altered once they are recorded. Cryptocurrencies can be bought and sold on exchanges, traded as commodities, or used to purchase goods and services from merchants that accept them as payment. Some people view cryptocurrencies as a speculative investment opportunity, while others see them to participate in a decentralized economy that operates outside of traditional financial institutions. Cryptocurrency has gained popularity in India in recent years due to several factors, including the growing use of mobile devices and the increasing adoption of digital payment systems. Additionally, cryptocurrency has been seen as a potential alternative to traditional banking systems, particularly for those who are unbanked or underbanked.

 

Cryptocurrency is a relatively new and rapidly evolving phenomenon, and research on its impact on the Indian economy is limited. However, several studies have explored the potential benefits and risks associated with the use of cryptocurrency in India.

 

Cryptocurrencies as Disruptive Financial Innovations

Cryptocurrencies leverage blockchain technology to enable decentralized and thrustless transactions, reducing the need for intermediaries. By eliminating intermediaries like banks and payment processors, cryptocurrencies have the potential to reshape traditional financial services. Cryptocurrencies can provide access to financial services for the unbanked and underbanked populations in developing economies.

Cryptocurrencies allow for seamless cross-border transactions, potentially reducing fees and delays associated with international transfers. Cryptocurrencies enable the tokenization of real-world assets, such as real estate and art, potentially increasing liquidity and accessibility. Cryptocurrencies have led to the emergence of new business models, including Initial Coin Offerings (ICOs) and decentralized applications (DApps).

 

Regulatory Frameworks and Policy Considerations

The regulatory environment surrounding cryptocurrencies has been a focal point in the literature. In the Indian context, early regulatory ambiguity has led to challenges in understanding the legal status and taxation of cryptocurrencies. The Reserve Bank of India's (RBI) circular in 2018 prohibiting banks from providing services to cryptocurrency-related entities significantly impacted the local cryptocurrency ecosystem. However, recent indications of potential regulation and discussions about introducing a digital rupee have renewed the debate.

 

Cryptocurrency Adoption and Financial Inclusion

Cryptocurrencies have been proposed as vehicles for enhancing financial inclusion, particularly in economies with large unbanked populations. India's efforts in digital financial inclusion through schemes lik e Aadhaar and the Unified Payments Interface (UPI) align with the potential of cryptocurrencies to reach the unbanked. The emergence of crypto-based remittance platforms also offers an alternative to traditional remittance methods, potentially reducing transaction costs and increasing efficiency.

 

Volatility and Investment Behavior

Cryptocurrencies have exhibited significant price volatility, prompting discussions about their viability as investment assets. Researchers have explored the relationship between cryptocurrencies and traditional assets, revealing varying degrees of correlation and potential diversification benefits. Indian investors' interest in cryptocurrencies has grown, with some viewing them as alternative investment options in the face of economic uncertainty.

 

Implications of cryptocurrency on the Indian economy

Another study by Banerjee et al. (2020) examined the potential implications of cryptocurrency on the Indian economy. The study found that cryptocurrency could have a positive impact on financial inclusion and reduce the dependence on traditional banking systems. However, the study also noted concerns about the potential for cryptocurrency to be used for illegal activities and the lack of regulatory oversight. A study by Dey et al. (2019) explored the potential impact of cryptocurrency on the Indian financial sector. The study found that while cryptocurrency had the potential to disrupt traditional banking systems, it could also create new opportunities for financial innovation and investment. The study suggested that a balanced approach was needed to regulate cryptocurrency and to promote its safe and effective use.

 

Factors driving the growth of cryptocurrency in India

1.      Decentralization: Cryptocurrencies are appealing to people who are leery of political control because they are decentralized such that they are not controlled by any central government.

2.      Lower transaction fees: Compared to conventional payment methods, cryptocurrencies have lower transaction fees, making them a more cost-effective choice.

3.      Potential for high returns: Cryptocurrencies have experienced significant price increases in the past, leading to high returns for early investors.

4.      Peer-to-peer transactions: Cryptocurrencies enable direct peer-to-peer transactions without the need for intermediaries, making them faster and more efficient than traditional payment systems.

5.      Increased awareness: Cryptocurrencies have gained popularity in India due to increased awareness through social media, news coverage, and educational initiatives.

 

T.Vigneshwaran

R.Vishal karthik

III B.Com