What is Cryptocurrency and How it Works

New Delhi: The Supreme Court on Wednesday allowed trading in cryptocurrencies. In April 2018, the Reserve Bank of India (RBI) had issued a circular which barred banks and financial services from dealing in cryptocurrency.

The apex court quashed the ban imposed by RBI following a plea by the Internet and Mobile Association of India (IMAI). Now that the top court has allowed trading in cryptocurrency, here is all that you need to know about it:

Cryptocurrency or virtual currency is primarily an internet-based medium of exchange. It uses cryptographical functions to conduct financial transactions between two parties through private and public keys.

One of the most beneficial features of cryptocurrency is the fact that it is not controlled by any central authority and different banks and financial institutions can operate it independently. Transfers between two parties can be done with a minimal processing fees.

There are various types of cryptocurrency which are supported by a decentralised peer-to-peer network called blockchain. The blockchain technology ensures that all cyprocurrencies are monitored regardless of whether they are stored in a digital wallet or being used in trading.

To use this virtual currency, a user would need a payment network with accounts, balances, and transactions.

While this may seem to be an easy process there is a catch to it. The payment network has to prevent double-spending, meaning it has to stop a user from spending the same amount twice. Generally, this is ensured by a central server that keeps a record of and about the balances.

However, in a decentralized network, this facility or provision is not available. As a result, each and every person involved in the network has to do this job.

There has to be a record of all transactions with each and every person of the network so that at each level it can be checked if future transactions are valid or are an attempt to double spend.

Usually, cryptocurrency has a ledger where all transactions are made public so that total visibility is provided.