Bitcoin

Bitcoin is a decentralized digital currency that is exchanged between two parties without involving intermediaries like banks or other financial institutions.?As defined in a whitepaper released by the hidden inventor of Bitcoin, Satoshi Nakamoto, Bitcoin is “a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.To understand Bitcoin, one needs to understand the underlying structure, the manner of operation of the Bitcoin ecosystem and the extent of usage of the same in India.?

working of bitcoin

Bitcoin achieves elimination of intermediaries with the help of its underlying technology, blockchain.?Currently if you have to transfer funds to someone, one of the possible ways is by giving cash or alternatively use a trusted intermediary (example, a bank). Both the mechanisms, whether it be physical cash (with the central bank of the country as the guarantor) or electronic transfer, involve an intermediary (in the later case, a bank or another financial institution). When intermediaries are involved, there are transaction costs.

Anyone can create a Bitcoin wallet for free by downloading the Bitcoin program. Each wallet contains a public key and a private key.?

The public key is like an address or an account number via which any person can receive Bitcoins.?

A private key is like a digital signature via which a person can send Bitcoins. The name suggests that private keys should be only held and known by the owner and public keys can be shared with anyone for receiving Bitcoins. That is where you would have heard in the news about Bitcoins being lost either due to a private key not being accessible or stolen by hackers.?

Owners of Bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public.Since the inception of Bitcoin in 2009, each and every transaction that has occurred is stored in a ledger, which is considered immutable, non-tamperable and irreversible.

Bitcoin transactions are verified via telecommunication network nodes through cryptography and are then recorded in a decentralized distributed ledger called blockchain. This is one of the distinguishing aspects of Bitcoin from some other crypto assets, where there is centralized exchange (like the stock exchange) through which all transactions need to be routed or validated.?

Regulation of Bitcoin in India

On the regulatory front, India saw two major developments this year:?

In February 2022, in India, the Indian government proposed to introduce taxation on virtual digital assets, which would imply a taxation system for cryptocurrencies, but there is no clarity on whether the Indian government finds cryptocurrencies legal either as “asset” or “currency”.?

India’s Finance Minister has categorically stated since then that “taxing cryptocurrencies doesn’t mean legalizing them.” This indicates the government is still evaluating all the factors associated with cryptocurrencies and it would be early to make any assumptions on their legality.?