The government on Tuesday pulled the metaphorical -- or rather the virtual -- rug from under the feet of cryptocurrency investors. In a proposed bill the Centre aims to prohibit all private cryptocurrencies. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 would allow certain exceptions to promote the underlying technology and its uses. Soon after news of the proposed bill made headlines, a bloodbath of sorts ensued. Panic selling and heightened activity led to the crash of India’s largest cryptocurrency exchange, WazirX.
As frantic buyers rushed to sell off their cryptocurrencies, stakeholders sought to make sense of the proposed bill. And as they attempted to decode the bill from the few details in hand, one question emerged over and over -- what exactly is a private cryptocurrency, when cryptocurrency in essence is all public?
The difference between private and public cryptocurrency is nuanced for many, and blurry for most.
In a 2019 report, ‘Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies’, the Ministry of Finance differentiated between the two by stating the following: Distributed ledgers use independent computers (referred to as nodes) to record, share and synchronise transactions in their respective electronic ledgers. This obviates the need for keeping data centralised as in a traditional ledger. Distributed ledgers are shared records of data across different parties. They can be categorised as permissioned or permissionless, depending on whether network participants referred to as nodes need permission from any entity to make changes to the ledger. Distributed ledgers can be categorised as public or private depending on whether the ledgers can be accessed by anyone or only the participating entities in the network.
Now, all cryptocurrencies, based on blockchain technology, offer some degree of anonymity, although not full privacy. Transactions can be traced, and addresses linked. If the identity linked to the address is revealed then not much privacy remains.
According to Nasdaq, all transactions on an open blockchain can be viewed by a person with access to the blockchain but it is the degree of traceability that varies. As such public coins are linkable and traceable, but privacy coins deploy a host of stealth tactics to steer away from that.
In other words, privacy coins hide transaction details by default. They have public open ledgers but transaction details are blurred to protect the privacy of end users, stated Nasdaq.
Bitcoin, Litecoin, Ethereum are examples of public cryptocurrencies while Monero, Zcash, and Dash are private cryptocurrencies.
WHAT DOES THE GOVERNMENT MEAN?
However, the use of the term ‘private cryptocurrencies’ by the government remains unclear. While the aforementioned is understood to be in a technical sense, there is also another view that private cryptocurrencies might also indicate virtual currencies that are not issued by a government.
In fact, the finance ministry report from 2019 too had stated that cryptocurrencies have been created by non-sovereigns and are hence private enterprises. It said that there is no underlying intrinsic value of these private cryptocurrencies. “There is no fixed nominal value of these private cryptocurrencies i.e. neither act as any store of value nor are they a medium of exchange. Since their inception, cryptocurrencies have demonstrated extreme fluctuations in their prices. Therefore, the Committee is of clear view that the private cryptocurrencies should not be allowed. These cryptocurrencies cannot serve the purpose of a currency. The private cryptocurrencies are inconsistent with the essential functions of money/currency, hence private cryptocurrencies cannot replace fiat currencies,” it had stated.
As the bill is yet to be etched out, it has left much open for debate and discussions. Multiple interpretations have emerged from crypto experts and players on what the government essentially means.
While most industry players have acquiesced that there is not much detail to go on for now, they have urged users to not panic sell. Cryptocurrencies traded in red on Wednesday, with Bitcoin witnessing a 25.04 per cent drop, Ethereum going down by 22.86 per cent and Dogecoin 22.54 per cent.
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