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Public vs private cryptocurrency: What is the difference and what the proposed ban means

Public vs private cryptocurrency: What is the difference and what the proposed ban means

There is a lot of confusion on "public" and "private" cryptocurrencies and what the government's recently proposed Crypto bill means when it suggests a ban on all "private cryptocurrencies." Here are the technical distinctions between the two.

Story highlights
  • In technical terms, public and private cryptocurrencies are distinguished on the basis of privacy that they offer.
  • It is highly likely that the government refers to privately-owned cryptocurrencies in its proposed bill, which includes all cryptocurrencies.
  • If not, cryptocurrencies like Bitcoin and Ethereum may not be covered under the ban.

The hot topic for the day in India is the proposed bill around cryptocurrencies which has left the fans of crypto in the country at the edge of their seats. The bill talks of a ban on "all private cryptocurrencies" in India, effectively prohibiting the use of such cryptocurrencies within the country, either for transactions or for investments.

Fear not, though, as the bill is only at a proposal stage as of now. It will be presented before the parliament during the Winter session, which will start later this month. Any more clarity on its meaning and purpose will only be disclosed during this presentation.

Though there are some interesting pieces of jargon used in the proposal that have left the readers confused. The most important one is the use of the word "private cryptocurrencies." As people struggle to understand the meaning of this, the resulting frenzy from the possible ban has seen the crypto-market go on a freefall.

That is because of the general notion that all cryptocurrencies are private in nature, since they are not authorised or regulated by a government body. To much extent, this is true.

And yes, in all probability, this is what the proposed bill means - A ban on ALL (existing) cryptocurrencies.

For reference, this is what the bill proposes -

"To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses,"

To focus on the proposed prohibition, the government has mentioned that it will entertain some exceptions. What these are and how they will be decided upon is yet unclear, as are many other things about the ban.

For now, we know for sure from the proposal that a ban on private cryptocurrencies may be passed. While we strongly speculate that the government means a blanket ban on all cryptocurrencies from this, there is an alternate possibility.

You see, in the world of cryptocurrencies, the terms "private" and "public" are used in more technical regard.

Understanding cryptocurrencies

To understand these terms, let us focus on how cryptocurrencies work. All cryptocurrencies are based on distributed ledgers, one of their biggest advantages over other forms of currencies. While there is one ledger in the case of your bank or other financial institutions, cryptocurrencies use blockchain technology to have multiple ledgers, all of them connected over the network. Any transaction on the network is recorded and cross-checked across all these ledgers, leaving no chance for a miscalculation or a bogus entry. Quite simply, anything on a ledger that does not match with other ledgers gets cancelled.

This means there is no need for third-party monitoring of the network or its ledgers. Hence, there is no central institution monitoring the transactions. The network of computers connected to the blockchain does it on its own. This is also why cryptocurrencies, particularly Bitcoin, have led to the origin of "Decentralised Finance" or "DeFi." Meaning everything is decentralised, and there is no one bank controlling these finances.

This is also why, in the traditional sense, all cryptocurrencies are private in nature, as there is no single body controlling them.

But in the cryptocurrency space, the terms "private" and "public" refer to the level of privacy that the cryptocurrencies provide.

Let us understand this through private cryptocurrencies first.

Private cryptocurrency

The distributed ledger we talked of above obviously leads to transparency in the entire system. Meaning you can personally view anything that is happening throughout the ledger. This means we will know of any transactions and the wallet addresses conducting them right through this network.

A private cryptocurrency uses several cryptographic measures to mask this information. Meaning on the network of private cryptocurrency, the wallet addresses will be masked or hidden, the details of the transaction may be hidden and so on. This allows users a level of privacy that is not available with their "public" counterparts.

Some of the famous private cryptocurrencies in use are Monero, Zcash, DASH, Horizen and so on.

Public cryptocurrency

As you can figure, public cryptocurrencies are quite the opposite of this. Transactions happening over such networks can be traced or linked to the wallet addresses, and even their amount can be deciphered. They provide ways for users to be anonymous, but that is only to the extent of maybe not revealing your original name or so. The wallet address linked to you can still be configured through a trace.

In case someone knows that the wallet address is yours, all privacy is lost.

This is what "public cryptocurrencies" mean in the technical sense. Bitcoin, Ethereum, Litecoin are examples of this.

What the proposed bill refers to

Though you should note that it is highly unlikely that the proposed bill was going by the above definitions. If you have a look at the proposal again, you will notice the mention of an "official digital currency" in the bill. This reiterates that the government was referring to private and public cryptocurrencies as those that are privately-owned and others that are owned by the state.

On the slight chance that it wasn't, crypto fans in India can rejoice at the fact that Bitcoin, Ethereum and most major cryptocurrencies are not covered in the proposed ban.

In either case, now you know a much important distinction between two different classes of cryptocurrencies.