FINANCIAL SYSTEM

The financial system or financial sector of any country consists of specialised and non-
specialised financial institutions, of organised and unorganised financial markets, of financial
instruments and services which facilitate transfer of funds. Procedures and practices adopted in
the markets, and financial interrelationships are also parts of the system. These parts are not
always mutually exclusive; for example, financial institutions operate in financial markets and
are, therefore, a part of such markets.
The word "system" in the term "financial system", implies a set of complex and closely
connected or interlinked institutions, agents, practices, markets, transactions, claims and
liabilities in the economy. The financial system is concerned about money, credit and finance-
the three terms are intimately related yet are somewhat different from each other.
Money refers to the current medium of exchange or means of payment.
Credit or loan is a sum of money to be returned, normally with interest; it refers to a debt of
economic
Finance is a monetary resources comprising debt and ownership funds of the state, company or
person.
INDIAN FINANCIAL SYSTEM
The politico-economic background of the financial development in India has been determined
by the nature our mixed economic system. The objectives of this system with respect to growth,
sectoral priorities, distribution have influenced the functioning and development of IFS. Some of
the marked characteristics of Indian economy during the past 50 years are continuous inflation,
increasing internal (fiscal) and external deficits, industrialisation, urbanisation and significant
structural transformation. Functioning within this context, all sectors of the economy, including
the financial markets, have undergone significant changes. Further, there has been a close
interaction between the financial and economic systems.
INDIAN FINANCIAL SYSTEM BACKGROUND
A striking feature of the IFS is its prodigious growth in the past 50 years in terms of size,
diversity, sophistication, and complexity. Money supply, savings, bank deposits and credit,
primary and secondary issues and so on have increased tremendously, the supportive factor
being the continuous and high rate of inflation. While the prices in 1996 were about 18times the
prices in 1950, the commercial banks' deposits, to take just one example, in 1997 were more
than 618 times their deposits in 1951. The bank deposits have increased from Rs. 909 crore in
1951 to Rs. 5, 61, 982 crore at the end of March 1997. This is a very remarkable growth indeed,
particularly as, with the passing years, it occurred on an expanding base. The quantitative
growth of the IFS has been accompanied by significant diversification and innovations in
respect of an array of financial institutions, instruments, and services. India has witnessed all
types of financial innovations, during the past 50 years. A large number of totally new
institutions catering to almost every sector have been set up since 1950. As a result, today we
have a highly diversified structure of financial institutions. Similarly, a large number of new
financial instruments have come to be introduced, as a result of which we now have a fairly
diversified portfolio of financial claims. Further, significant reorganisation, gloabalisation,
privatisation, deregulation, automation, computerisation, changes in ownership, consolidation
and mergers of financial institutions have been effected. A veritable financial revolution appears
to have occurred in India, as elsewhere, over the years.
Objectives of Indian Financial System
1. Accelerating the growth of economic development.
2. Encouraging rapid industrialization
3. Acting as an agent to various economic factors such as industry, agricultural Sector,
Government etc.
4. Accelerating Rural Development
5. Providing necessary financial support to industry
6. Financing Housing and Small Scale Industries
7. Development of Backward areas, Infrastructure and livelihood
8. Imposing price control in need
Functions of Indian Financial System
1. Allocates resources
2. Mobilizes savings
3.Facilitates distributing, Trading, Hedging, Diversifying, pooling, and reducing Risks.
4. Facilitates exchange of goods and services
5. Enables economic units to exercise their time preferences
6. Enhances liquidity of financial claims through securities trading
7. Facilitate better Portfolio management.
LIMITATIONS OR WEAKNESSES OF INDIAN FINANCIAL SYSTEM
The measures taken by the government over the years to develop a strong financial system has
definitely resulted in a considerable amount of consistency and growth in the economy.
However, some of the weaknesses or limitations of Indian Financial System are that are still to
be addressed are:
1. Lack of coordination between different financial institutions
2. Monopolistic market structures
3. Dominance of development banks in industrial financing
4. Inactive and erratic capital market
5. Imprudent & immoral financial practice.
Importance of Financial System
1. Provision of liquidity
2. Mobilization of savings
3. Size transformation/Capital formation
4. Maturity transformation
5. Risk transformation
6. Lowering of cost of transaction
7. Payment mechanism
8. Assisting new projects
9. Enable better decision making
10. Meet short- and long-term financial needs
11. Provide necessary finance to the Government
12. Accelerate the process of economic growth of the country

Structure of Indian Financial System

Financial Institutions
They are business organisations that act as mobilisers and depositories of savings and as
purveyors of credit or finance. They also provide various financial services to the community.
They differ from non-financial (industrial and commercial) business organisations in respect of
their dealings, i.e. while the former deal in financial assets such as deposits, loans, securities and
so on, the latter deal in real assets such as machinery, equipment, stocks of goods, real estate
and so on. The distinction between the financial sector and the "real sector" should not be taken
to mean that there is something unproductive (ephemeral) about finance. At the same time, it
means that the role of financial sector should not be overemphasised.
The activities of different financial institutions may be either specialised or they may overlap;
quite often they overlap. Yet we need to classify financial institutions and this is done on the
basis of their primary activity or the degree of their specialisation with relation to savers or
borrowers with whom they customarily deal or the manner of their creation. In other words,
the functional, geographic, sectoral scope of activity or the type of ownership are some of the
criteria which are often used to classify a large number and variety of financial institutions
which exist in the economy.
However, it should be kept in mind that such classification is likely to be imperfect and
tentative. According to one classification, financial institutions are divided into banking and
non-banking institutions. The banking institutions have quite a few things in common with the
non-banking ones, but their distinguishing character lies in the fact that, unlike other
institutions. they participate in the economy's payments mechanism, i.e., they provide
transactions services, their deposit liabilities constitute a major part of the national money
supply, and they can, as a whole, create deposits or credit, which is money.
Banks, subject to legal reserve requirements, can advance credit by creating claims against
themselves, while other institutions can lend only out of resources put at their disposal by the
savers. The distinction between the two has been highlighted by Sayers by characterising the
former as "creators" of credit, and the latter as mere "purveyors" of credit.
While the banking system in India comprises the commercial banks and co-operative banks, the
examples of non-banking financial institutions are Life Insurance Corporation (LIC), Unit Trust
of India (UTI) and Industrial Development Bank of India (IBDI). Financial institutions are also
classified as intermediaries and non-intermediaries. As the term indicates, intermediaries
intermediate between savers and investors; they lend money as well as mobilise savings; their
liabilities are towards the ultimate savers; while their assets are from the investors or
borrowers. Non intermediary institutions do the loan business but their resources are not
directly obtained from the savers. All banking institutions are intermediaries. Many non-
banking institutions also act as intermediaries and when do so they are known as Non-Banking
institutions also act as intermediaries and Insurance Corporation (GIC) are some of the NBFIs in
India. Non-intermediary institutions like IDBI, Industrial Finance Corporation (IFC), and
National Bank for Agriculture and Rural Development (NABARD) have come into existence
because of governmental efforts to provide assistance for specific purposes, sectors and regions.
Their creation as a matter of policy has been motivated by the philosophy that the credit needs
of certain borrowers might not be otherwise adequately met by the usual private institutions.
Since they have been set up the government, we can call them Non-Banking Statutory Financial
Organisations (NBSFO).
Financial markets
They are the centres or arrangements that provide facilities for buying and selling of financial
claims and services. The corporations, financial institutions, individuals and governments trade
in financial products in these markets either directly or through brokers and dealers on
organised exchanges of off-exchanges. The participants on the demand and supply sides of these
markets are financial institutions, agents, brokers, dealers, borrowers, lenders, savers and
others who are interlinked by the laws, contracts, covenants and communication networks.
Financial markets are sometimes classified as primary (direct) and secondary (indirect)
markets. The primary markets deal in the new financial claims or new securities and, therefore,
they are also known as new issue markets. On the other hand, secondary markets deal in
securities already issued or existing or outstanding. The primary market mobilise savings and
supply fresh or additional capital to business units.
Secondary markets do not contribute directly to the supply of additional capital, they do so
indirectly by rendering securities issued on the primary markets liquid. Stock markets have
both primary and secondary market segments. Very often financial markets are classified as
money markets and capital markets, although there is essential difference between the two as
both perform the same function of transferring resources to the producers. This conventional
distinction is based on the differences in the period of maturity of financial assets issued in
these markets. While money markets deal in the short-term claims (with a period of maturity of
one year or less), capital markets do so in the long-term (maturity period above one year)
claims. Contrary to popular usage, the capital market is not only co-existence with the stock
market; but it is also much wider than the stock market.
Similarly, it is not always possible to include a given participant in either of the two (money and
capital) markets alone. Commercial banks, for example, belong to both. While treasury bills
market, call money market, and commercial bills markets are examples of money market, stock
market and government bonds markets are examples of capital market. Keeping in view
different purposes, financial markets have also been classified into the following categories:
a. Organised and unorganised
b. Formal and informal
c. Official and parallel and
d. Domestic and foreign.
There is no precise connotation with which the words unorganised and informal are used in this
context. They are quite often used interchangeably. The financial transactions which take place
outside the well-established exchanges or without systematic and orderly structure or
arrangements constitute the unorganised markets. They generally refer to the markets in
villages or rural areas, but they exist in urban areas also. Interbank money markets and most
foreign exchange markets do not have organised exchanges. But they are not unorganised
markets in the same way the rural markets are. The informal markets are said usually involve
families and small groups of individuals lending and borrowing from each other. This
description cannot be strictly applied to the foreign exchange markets, but they are also mostly
informal markets.
Financial Instruments and Services
As mentioned earlier, financial systems deal in financial services and claims or financial assets
or securities or financial instruments. These services and claims are many and varied in
character. This is so because of the diversity of motives behind borrowing and lending. The
stage of development of the financial system can often be judged from the diversity of financial
instruments that exist in the system.
The financial assets represent a claim to the payment of a sum of money sometime in the future
(repayment of principal) and / or a periodic (regular or not so regular) payment in the form of
interest or dividend. With regard to bank deposit or government bond or industrial debenture,
the holder receives both the regular periodic payments and the repayment of the principal at a
fixed date. Whereas with regard to ordinary share or perpetual bond, only periodic payments
are received (which are regular in the case of perpetual bond but may be irregular in the case of
ordinary share).
Financial securities are classified as primary (direct) and secondary (indirect) securities. The
primary securities are issued by the ultimate investors directly to the ultimate savers as
ordinary shares and debentures, while the secondary securities are issued by the financial
intermediaries to the ultimate savers as bank deposits, units, insurance policies, and so on. For
the purpose of certain types of analysis, it is also useful to talk about ownership securities (viz.,
shares) and debt securities (viz. debentures, deposits).
Financial instruments differ from each other in respect of their investment characteristics
which, of course, are interdependent and interrelated. Among the investment characteristics of
financial assets of financial products, the following are important:
1. Liquidity
2. Marketability
3. Reversibility
4. Transferability
5. Transaction Costs
6. Risk of default or the degree of capital and income uncertainty and a wide array of other risks
7. Maturity period
8. Tax Status
9. Options such as call-back or buy-back options
10. Volatility of prices and
11. The rate of return-nominal, effective and real.
FUNCTIONS AND CLASSIFICATION OF FINANCIAL MARKETS
FINANCIAL MARKETS The group of individuals and corporate institutions dealing in financial
transactions are termed as financial markets.
The centres or arrangements that facilitate buying and selling of financial assets, claims and
services are the constituents of financial market. Basically they are classified into two
categories:
1. Unorganized Market
2. Organized Market Unorganized Market
The sector that is not governed by any statutory or legal authority is known as unorganized
sector. This sector consists of the individuals and institutions for whom there are no
standardized rules and regulations governing their financial dealings. They are not under the
supervision and control of RBI or any other regulatory body. Local money lenders, Pawn
brokers, Traders, Landlords, Indigenous bankers, etc., who lend money are in the unorganized
sector.
Organized Market - The sector that is governed by some statutory or legal authority is known as
organized sector. This sector consists of the institutions for whom there are standardized rules
and regulations governing their financial dealings. They are under the supervision and control
of RBI and other statutory bodies.
They are further classified into two:
A. Capital Market
B. Money Market
C. Foreign Exchange Market
D. Bond market
E. Commodity Market
F. Derivative Market
G. Crypto Currency Market
A. Capital Market Capital Market refers to the market for long term finance. Financial assets
which have a long or indefinite maturity period are dealt in this market. Capital Market is
further classified into the following three:
a) Industrial Securities Market
b) Government Securities Market
c) Long-term Loans Market

a) Industrial Securities Market - The financial market where industrial securities like
equity shares, preference shares, debentures, bonds, etc., are dealt with is called as
Industrial Securities Market. In this market, the industrial concerns raise their capital
and debts by issuing appropriate securities. This market is again classified into the
following two viz., Primary Market and Secondary Market Primary Market - The
financial market concerned with the fresh issue of industrial securities is called as
primary market. It is also called as new issue market. In this market, industrial securities
which are issued for the first time to the public are dealt. Secondary Market - The
financial market concerned with the purchase and sale of already existing industrial
securities is called as secondary market. In this market, industrial securities which are
already held by the individuals and institutions are bought and sold. Generally, these
securities are quoted in the stock exchanges. This market consists of all the stock
exchanges recognized by the Government of India. Securities Contracts (Regulation) Act,
1956 regulates the stock exchanges and Bombay Stock Exchange is the main stock
exchange in India which leads the other stock exchanges.
b) Government Securities Market or Gilt-edged Securities Market - The financial market
where Government securities like stock certificates, promissory notes, bearer bonds,
treasury bills, etc., are dealt with is called as Government Securities Market. The long
term securities issued by the Central Government, State Governments, Semi-government
authorities like City Corporations, Port Trusts, etc., Improvement Trusts, State
Electricity Boards, All India and State level financial institutes and public sector
enterprises are bought and sold in this market.
c) Long-term Loans Market - The financial market where long-term loans are provided to
the corporate customers is called as Long-term Loans Market. Development Banks and
Commercial Banks play a major role in this market. This market is classified into three
 categories viz., Term loans market, Mortgages market and Financial guarantees market:
Term loans market - This market consists of the industrial financing institutions which
supply long term loan to corporate customers. They are created by the Government both
at the national level and regional level. They provide term loans to corporate customers
and also help them in identifying investment opportunities. They also encourage new
entrepreneurs and support modernization efforts. IDBI, IFCI, ICICI, SFCs, etc., come
under this market. Mortgages market - This market consists of the institutions which
supply mortgage loan mainly to individuals. The term ‘mortgage’ refers to the transfer of
interest in a specific immovable property to secure a loan. Financial guarantees market -
This market consists of the institutions which provide financial guarantee to individuals
and corporate customers. The term ‘guarantee’ refers to a contract whereby one person
promises another person to discharge the liability of a third person in case of his default.
There are different types of guarantees prominent among them are Performance
guarantee and Financial guarantee.
B. Money Market Money Market refers to the market for short term finance. Financial assets
which have a short period of maturity are dealt in this market. Near money like Trade Bills,
Promissory Notes, Short term Government Papers, etc., are traded in this market. Composition
of money market (Financial instruments dealt in money market) –
The money market comprises of the following:
1. Call money market
2. Commercial bills market
3. Treasury bills market
4. Short-term loan market
Call money market - The market where finance is provided just against a call made by the
borrower is called call money market. In this market finance is provided for an extremely short
period of time.
Commercial bills market - The market where finance is provided by discounting of commercial
bills is called as commercial bills market. The term ‘commercial bills’ refer to the bills of
exchange arising out of genuine trade transactions.
Treasury bills market - The market where finance is provided against the treasury bills is called
as treasury bills market. The term ‘treasury bill’ refers to the promissory notes or finance bills
issued by the government for its short-term finance requirements.
Short-term loans market - The market where finance is provided in the form of short term loans
is called as short term loans market. The term ‘short-term’ refers to a period less than one year.
Commercial banks provide short term loans in the form of overdrafts and cash credits. These
loans are given to meet the working capital requirements of traders and industrialists.
C. Foreign Exchange Market The market where foreign currencies are bought and sold against
domestic currency is called foreign exchange market. In other words, the system where the
domestic currency is converted into foreign currency and vice-versa is called as foreign
exchange market
D. Bond Market
A bond market is a marketplace for debt securities. This market covers both government-issued
and corporate-issued debt securities. It allows capital to be transferred from savers or investors
to issuers who want funds for projects or other operations. The debt, fixed-income, or credit
market are all terms used to describe this sector.

Meaning
One can issue fresh debt in the primary market or exchange debt securities in the secondary
market in the bond market. Bonds are the most common type of trading. However, bills and
notes can also be used. Institutional investors, traders, governments, and individuals all use the
bond market.
Bond markets are divided into three categories:
corporate,
government, and
agency.
Types of Bond Market
Depending on the type of bond and the type of buyer, multiple types of bond markets exist:
Primary Market - The main market is where the bond issuer sells bonds to
investors directly. New debt securities are being issued in primary markets.

Secondary Market - The definition of the bond market incorporates flexibility.

Bonds purchased in the primary market can be sold on the secondary market.
Brokers assist in the secondary market buying and selling of bonds.

a) Treasury Bonds
b) Agency Bonds 
c) Municipal Bonds
d) Corporate Bonds
e) Savings Bonds
f) Corporate Bonds
Types of Bond Markets Based on the Type of Bond - Explained
a) Treasury Bonds
Treasury bills, notes, and bonds issued by the Treasury Department are the most important
bonds. All other long-term, fixed-rate bonds have their rates determined by them. The Treasury
auctions them out to pay for the federal government's activities.
On the secondary market, these bonds are also resold. They are the safest because the
government guarantees them. As a result, they also provide the lowest return. Almost every
institutional investor, firm, and sovereign wealth fund owns a stake in them.

b) Agency Bonds 
These are the bonds that are guaranteed by the federal government.

c) Municipal Bonds
Different cities issue municipal bonds. They are tax-free. However, their interest rates are
slightly lower than corporate bonds. They carry a slightly higher risk than federal government
bonds. Cities do default on occasion.

d) Corporate Bonds
Companies of all shapes and sizes issue corporate bonds. As they are riskier than government-
backed bonds, they pay higher interest rates. The representative bank sells them.

e) Savings Bonds
The Treasury Department also issues savings bonds. Individual investors are supposed to buy
these bonds. They are printed in small enough quantities to be inexpensive to individuals.
Bonds are similar to savings bonds, but they are inflation-adjusted every six months.
E. Commodity Market
A commodity market is a marketplace where investors trade several commodities like spices,
energy, precious metals, crude oil within a country.
In recent times, the Forward Market of Commissions allowed around 120 commodities to
perform future trading within India.
Investors who is focusing on diversifying their portfolio can invest in both perishable and non-
perishable products.
It will help all the investors face lesser risks and provide a boundary against the growing
inflation rate in the country.

Types of Commodities in the Market

Commodities are divided into two different categories: hard and soft commodities.
Hard Commodities
Hard commodities consist of natural resources that is mined or extracted. The hard
commodities are classified into two categories:
1) Metals – Gold, Silver, Zinc, Copper, Platinum
2) Energy – Natural gas, Crude oil, gasoline, heating oil

Soft Commodities
Soft commodities refer to those commodities that are grown and cared for rather than extracted
or mined. The soft commodities are classified into two categories:
1) Agriculture – Rice, Corn, Wheat, Cotton, Soybean, Coffee, Salt, Sugar
2) Livestock and meat – Feeder cattle, live cattle, Egg

How Many Exchanges Are Available In The Commodity Market of India

India has 22 different commodity exchanges that have been formed under the Forward Markets
Commission. There are 4 popular commodity exchanges for trading in India:
1) Indian Commodity Exchange (ICEX)
2) National Multi Commodity Exchange of India (NMCE)
3) Multi Commodity Exchange of India (MCX)
4) National Commodity and Derivative Exchange (NCDEX)
Why Invest in the Commodity Market
Investing in the commodities market has some advantages and disadvantages. Let us look at the
advantages first:

Advantages
Diversification
The performance of the commodity market is inverse as compared to the returns of stocks and
bonds. Therefore, investing a small percentage of your funds into the commodities market is
beneficial to several individuals.
It will help them achieve a high return on investment even if stock prices have a downward
trend. This helps them to compensate for negative or lower profits generated mainly by the
capital sector.
Margin Trading
Compared to bond and stock market dealings, commodity brokers offer a lower margin in terms
of trading.
It grants brokers to trade on borrowed funds that allow both the speculators and hedgers to
profit from each transaction.
While commodity traders can benefit from bulk orders by promising repayment later, thus
helping speculators to earn higher returns from such investments.
Real Returns
As per the economic and capital market conditions, specific goods are stable, while several
commodities tend to remain volatile due to economic and capital market conditions.
A real example of commodities being volatile is crude oil. Its price does not remain stable due to
large fluctuations in supply, mining problems, or economic conditions.
Stockholders invest in such commodities to book profit even there the trade is volatile and
attain a long or short position as per their prediction towards the market.
Disadvantages
Limited Returns
Commodity investments only aim to accumulate capital profit, whereas stock and bond markets
have periodic payouts such as coupon, payments and dividend coupons.
However, real expertise is required in the commodity market to gain high returns. Individuals
can trade via any established commodity exchange by registering with a particular commodity
broker.
High Risk
The commodity market is really volatile, and any changes in the demand or productive capacity
can badly hurt the prices.
Due to such high volatility, the prices cannot remain stable, thus causing investors to lose high
returns.
Hence individual dealing in the commodity market should be well versed with internal and
external factors such as the internal working of the company or international trade before
selecting to trade in commodities.
Also, an individual must keep the supply and demand patterns to lessen the further risk.
F. Derivatives
It means financial contracts that earn their value from a group of assets or underlying assets are
called derivatives. Depending on the market conditions, the value of derivatives keeps on
changing.
The primary principle of entering into derivative contracts is to earn a large amount of profits
by contemplating the underlying asset's value in the future.
Imagine you've invested in an equity share and the market price of that equity share fluctuates
up and down continuously. If the market falls, you may suffer a loss due to a stock value
downfall.
In this type of situation, you may enter into a derivative contract, either make to profit by
placing an exact bet, or simply take a rest from yourself from the losses that occurred in the
stock market where the stock is being traded.

Types of Derivatives in India

There are four different types of derivatives that can easily be traded in the Indian Stock Market.
Each derivative is different from the other and consist of varying contract conditions, risk factor
and more.
The four different types of derivatives are as follows:
Forward Contracts
Future Contracts
Options Contracts
Swap Contracts

Forward Contracts
Forward contracts mean two parties come together and enter into an agreement to buy and sell
an underlying asset set at a fixed date and agreed on a price in the future.
In simpler words, it is an agreement formed between both parties to sell their asset on an
agreed future date.
The forward contracts are customized and have a high tendency of counterparty risk. Since it is
a customized contract, the size of the agreement entirely depends on the term of the contract.
Forward contracts do not require any collateral as they are self-regulated. The settlement of the
forward contract gets done on the maturity date, and hence they are reserved by the expiry
period.

Future Contracts
Future contracts are similar to forward contracts. Future contracts mean an agreement made by
the two parties to buy or sell an underlying instrument at a fixed price on a future date.
Future contracts do not allow the buyer and seller to meet and enter into an agreement. In fact,
the deal gets fixed through exchange mode.
In futures contracts, the counterparty risk is low because it is a standardized contract. In
addition, the clearinghouse plays the role of a counterparty to the parties of the contract, which
reduces the credit risk in the future.
The size of future contracts is fixed, and it is regulated by the stock exchange just because it is
known as a standardized contract.
Since these contracts are standard, the futures contracts listed on the stock exchange cannot be
changed or modified in any possible way.
In simpler words, future contracts have pre-decided size, pre-decided expiry period, pre-
decided size. In futures contracts, an initial margin is required because settlement and collateral
are done daily.

Options Contracts
Options contracts are the third type of derivative contracts in India. Options contracts are way
different than future and format contracts because these contracts do not require any
compulsion to discharge the contract on a specific date.
Options contracts provide the right but not the commitment to buy or sell an underlying
instrument.
Option contracts consist of two options:
Call Option
Put Option
In call option, the buyer has all the right to purchase an underlying asset at a fixed price while
entering the contracts. While input option, the buyer has all the right but not obligation to sell
an underlying asset at a fixed price while entering the contract.
However, in both call and put option contracts, the buyer chooses to settle all the contracts on
or before the expiry period.
Thus, anyone who regularly trades in the option contract can take any of the four different
positions, i.e., short or long, either in the call or the put option. These options are traded at the
stock exchange and over the counter market.

Swap Contracts
Out of all three derivatives contracts, swap contracts are one of the most complex contracts.
Swap contracts mean the agreement is done privately between both parties. The parties who
enter into swap contracts agree to exchange their cash flow in the sfuture as per the pre-
determined formula.
Under swap contracts, the underlying security is the interest rate or currency, as these contracts
protect both parties from several major risks.
These contracts are not traded to the Stock Exchange as investment banker plays the role of a
middleman between these contracts.

F. Cryptocurrency
A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it
nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized
networks based on blockchain technology—a distributed ledger enforced by a disparate
network of computers.
A defining feature of cryptocurrencies is that they are generally not issued by any central
authority, rendering them theoretically immune to government interference or manipulation.
A cryptocurrency is a form of digital asset based on a network that is distributed across a large
number of computers. This decentralized structure allows them to exist outside the control of
governments and central authorities.
Some experts believe blockchain and related technologies will disrupt many industries,
including finance and law.
The advantages of cryptocurrencies include cheaper and faster money transfers and
decentralized systems that do not collapse at a single point of failure.
The disadvantages of cryptocurrencies include their price volatility, high energy consumption
for mining activities, and use in criminal activities.

Understanding Cryptocurrencies
Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They
enable secure online payments without the use of third-party intermediaries. "Crypto" refers
to the various encryption algorithms and cryptographic techniques that safeguard these
entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Cryptocurrencies can be mined, purchased from cryptocurrency exchanges, or rewarded for
work done on a blockchain. Not all e-commerce sites allow purchases using cryptocurrencies.
In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions .
However, cryptocurrency values have made them popular as trading and investing
instruments. To a limited extent, they are also used for cross-border transfers.