Cryptocurrency 101

Cryptocurrency is the talk of the town now, it’s everywhere, from thousands of digital coin ATMs installed over the world to the hospital in Pakistan offering to accept the digital currency. Among all the debate about its legality and profitability, an unfamiliar mind finds itself confused over the word ‘cryptocurrency.’ Now we are going to discuss all the whats and the hows of cryptocurrency.

What cryptocurrency really is?

Cryptocurrency is a digital currency which is created and accessed electronically and can be used to buy things electronically. Just like dollar, rupees or yen, various conventional currencies circulating today, there are more than 900 cryptocurrencies available. Most famous of them is Bitcoin, the first cryptocurrency invented in 2009. Ethereum, Litecoin, Factom and dozen others are also used in a fair amount.

Cryptocurrency serves the same purpose as conventional currency except for the one main difference: it is decentralized i.e. there is no central bank regulating it. There is no intermediary present between two dealing parties. In the case of conventional currencies, banks have all the record and they charge fees for their services. However, in the case of cryptocurrency, there are no banks present to cut fees. It is the anonymity ensured by the absence of intermediary which has made it famous; just like in emails and phone calls, where our message travels from A to B without relying on a third-party, thus ensuring our privacy.

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But the question arises who regulates the transactions? What if someone just duplicates their cryptocurrency or uses it for more than one transaction? To solve this problem, an online public ledger, Blockchain, keeps and updates all the record of transactions. It is the technology at the heart of Bitcoin and other cryptocurrencies. It uses cryptography to make transactions secure and makes them publicly available while ensuring the user’s anonymity, thus also helping to reduce fraud. Since it is publicly available, the whole community can verify the authenticity of a transaction.

Is it legal in Pakistan?

State Bank of Pakistan hasn’t announced any regulations for the cryptocurrency, which means that digital currency neither holds the status of money nor it is illegal to use. However, earlier this year, FBR launched action against those involved in money laundering and tax evasion through digital currency, and SECP warned the public to beware of scams in cryptocurrency. Apart from this, there aren’t any comments by the Government of Pakistan.

The majority of countries have no legislation regarding any digital currency. Japan has given it the status of legal tender. However, Saudi Arabia, Bangladesh, and few other countries have declared it illegal, citing their concern over its possible use in money laundering.

The reason for the absence of any clear legislation is that the cryptocurrency is still in developing phase and a very small fraction of public uses it. Unless major investors enter this market, we cannot expect a word about its legality from the government.

What’s so good about it?

Because of the absence of any third party, it offers a number of benefits.

Privacy and transparency:

No one knows how much digital currency you have and what transaction you have made unless you make your online wallet public. Compared to conventional currency, where banks carry all the information regarding your balance and transactions, it is up to you how much information you want to share with others.

Whenever you make a transaction, data is updated on Blockchain, an online ledger, but your identity is kept private. If someone wants to verify a transaction they would look it up in Blockchain, but they won’t know your name. However, this privacy must not be confused with complete anonymity; you are still required to prove your identity while signing up.

Online payments:

Of what use a currency is if you cannot buy things with it. Many websites accept cryptocurrency as payment. For instance, Overstock.com accepts Bitcoins as payment and the good thing is they also ship to Pakistan. You can also top up your prepaid mobile phone using Bitrefill. Freelancers also prefer to use cryptocurrency, as it reduces their transaction fees and increases their earning by 2% to 5%.

Any disadvantages or risks?

Yes, there are many risks and disadvantages of using cryptocurrency.

Very volatile:

There are a limited number of coins at the moment and demand varies from day to day. The rate of digital currency adoption may hamper or increase depending on the press coverage and other factors. But point needing emphasis is that overall trend is upwards. Earlier this year Bitcoin surpassed the value of one ounce of gold. Around the same time, it also dropped by 30%. It’s a high-risk medium and you better not keep your savings in it.

Still under development:

You won’t find any ATM for cryptocurrency in Pakistan. There aren’t any local retailers offering to accept any digital currency. So, you can’t simply go out in the market and use cryptocurrency; it still has a lot of growing to do. The price that vendor cuts for processing your transaction keep changing, servers often don’t work and it takes a whole day to do just one transaction. Cryptocurrency is new to this world and is still under development, but still, it is improving with every passing day.

Taxable?

World of cryptocurrency is an uncharted territory. It is so new that there isn’t any legislation regarding its taxation. The government hasn’t classified it either as a commodity or a currency. There are no statements regarding taxation of cryptocurrency. There is still a lot of confusion about its taxability. So, in order to avoid trouble, it is advisable to establish a record keeping system and keep a track of when is cryptocurrency acquired and when it is disposed of.

In the next story, I will tell you about the most popular cryptocurrency Bitcoin. I will also give you a detailed explanation on what you can do to buy Bitcoin or other coins in Pakistan.

Feel free to drop your questions below for further discussion.