Explained: How crypto wallets can help you manage holdings amid impending ban

    Explained: How crypto wallets can help you manage holdings amid impending ban

    Explained: How crypto wallets can help you manage holdings amid impending ban
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    By CNBCTV18.com  IST (Updated)


    Crypto wallets provide a safe space for investors for holding their cryptocurrencies like Bitcoin, Ether, and other altcoins. Not only are coins safe to store in a wallet, but your holdings are cryptographically protected. Investors can leverage such wallets to safely manage their crypto holdings when the government is on the brink of announcing a ban on private cryptocurrencies.

    The Indian government is expected to soon introduce a bill to ban private cryptocurrencies. This has left crypto investors in the country worried. Most investors are unsure about the implications of such a ban on existing crypto holdings, but they have several options to manage their holdings using crypto-wallets.
    Let's try and understand how crypto wallets function, the various types of crypto wallets, and how to stay prepared amid an impending ban on cryptos.
    What are crypto wallets?
    Crypto wallets like any other physical wallet are a secure place to keep all your cryptocurrencies such as Bitcoin, Ether, and others. Crypto wallets allow you to not just store, but also transfer holdings with complete security as they are cryptographically protected (a mathematical technique for encrypting and decrypting data).
    Some of the popular Indian crypto wallets include WazirX, Coinbase, and CoinDCX. The wallets can be accessed either from a computer, mobile, or laptop while maintaining complete privacy.

    How do crypto wallets work?
    Crypto wallets work by storing two keys—public and private—for all crypto assets.
    When you register with a crypto exchange, a wallet gets created with two keys – a public key and a private key. Think of the public key as your phone number; people need it to reach you. When somebody sends you crypto assets, the ownership gets transferred to your wallet’s public key.
    The private key, on the other hand, is like your password and must not be shared with anyone. You require the private key to transfer crypto-assets to another entity. Your private key must match the public wallet address to authorise the transfer of funds from your wallet to another wallet.
    The transaction is activated only when the public and private keys match. If somebody is sending you crypto assets, the balance in your wallet increases (credit), and the sender’s balance reduces (debit).
    Since crypto wallets are not digital storehouses of currency, there is no real flow of assets when a transaction takes place. It is simply a record of asset exchange added to the blockchain in an encrypted form. It eventually reflects in the wallet balance of the sender and the receiver.

    Are there different types of crypto wallets?
    Yes, there are different types of crypto wallets based on factors like your needs, the private key assigned, among other things.
    Self custody wallets: These wallets are best for investors who want total control over their holdings. The wallet can be operated via a private key. Self custody wallets can be either software wallets that include desktop, mobile and online wallets or hardware wallets, where the private key is stored in a hardware device. However, please note if you lose its key, there will be no way to retrieve it or access your wallet.
    Third-party custody wallets: This includes two types, hot and cold wallets. A hot wallet is similar to the one you carry with you. It is always online and can be used to transact in crypto assets at any point in time. In this case, the private key is stored on the cloud to allow immediate asset transfers. Exchanges such as WazirX and CoinDCX offer such hot wallets in India. A cold wallet is offline. It is like a digitally secured vault like a USB drive or external hard drive on which coins are stored with a higher level of security. In a cold wallet, the private key is stored on hardware not connected to the internet. Examples of cold wallets include Trezor and Ledger.

    How wallets can help you manage your holdings
    While most investors might find it safe to exit their holdings completely, there may be a few other options. Long-term investors could move their crypto assets to self custody wallets and perhaps, even send these wallets to overseas friends or family, per an article by Inc42.com.
    However, it is important to keep in mind that Indian crypto exchanges follow the KYC (know your customer norms) and require your PAN card for signing up. So transfer to hardware or external drive can also be easily traced by regulatory authorities.
    Another option would be to directly transfer crypto-assets to friends or family abroad. But, again, there is a catch. The receiver of crypto assets becomes the owner and may have to pay tax on it depending on crypto regulations in that country.
    Cryptocurrency investors can also use peer-to-peer transfer methods to dispose of or continue holding their crypto assets, experts told the Economic Times. Cryptocurrencies such as Bitcoin are based on blockchain technology that allows peer-to-peer (P2P) transfer from one wallet to another and one person to another without a banking account or using any other official channel, experts pointed out.
    Industry bodies, meanwhile, have recommended steps the government can take to help investors smoothly transition into the regulated crypto space. The technology think tank, Policy 4.0, for example, believes a wallet-based solution for crypto might help India tackle the regulatory risks.

    According to a Business Today report, Policy 4.0 has recommended that India build its own wallet to handle KYC (know your customer) details, monetary concerns, and inflow and outflow of crypto.
    The first step towards regulation, according to Policy 4.0, should be on wallets with the onus on citizens to get a verified wallet. "Any crypto industry players then simply have to onboard verified wallets onto their platform," it said.
    An 'India Wallet', Policy 4.0 pointed out, can be used to monitor all activities involving cryptocurrency including trading, and also store coins, collectibles, and tokens. This wallet can integrate with crypto exchanges as well as non-fungible token (NFT) marketplaces. India could leverage the already existing digital mediums for KYC, such as DigiLocker or UIDAI.
    In any case, most experts believe if a ban is indeed imposed, the government may give investors some time to make a decision on their existing holdings. So it might make sense to stay put and wait for more details.
    As Vikram Subburaj, Co-founder and CEO of Giottus Cryptocurrency Exchange pointed out to Business Today, “If India proceeds to ban crypto, though highly unlikely, we anticipate a timeframe before which they must be exchanged or disposed of.”

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