The latest technological novelty that raised the curiosity of the whole world, last year is “virtual currency” or “cryptocurrency. The most popular one amongst these is “Bitcoin”.
Bitcoin which operates like a wallet has gained significantly in last 1 year. The value of 1 bitcoin has increased from $1000 last year to around $8000 this year with a high of $19,000 in December 2017.
Inspite of being such a big gainer, there are continuous efforts by the government to discourage people from dealing in bitcoins or other cryptocurrencies.
In February 2018, FM announced that bitcoin or such other crypto currencies will not be considered as legal tender in India.
On April 6, 2018, RBI made an announcement that “…any bank or financial institution regulated by RBI will not deal in virtual currencies.”
What led the authorities to take such decision and what is the future of such cryptocurrencies…. Here is my take on it:
♦ Bitcoin:
Bitcoin is the first decentralized digital currency or cryptocurrency which was invented while building a decentralized cash system.
A digital cash system needs a payment network with accounts, balances, and transaction. To complete any transaction, there are approvals or checks to ensure avoidance of any duplicate transaction etc. In any other digital cash system these transactions are recorded on a centralized server which keeps records, checks and balances. However, in a decentralized network, you don‘t have this server. So, you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid. But how can all the entities keep the same record and come to the same conclusion of the transaction? The solution to this lead to the invention of cryptocurrency. “Cryptography” is used to secure the transactions and to control the creation of additional units of the currency. Confirmation / approval of a transaction is a critical requirement in a crypto currency. This approval can be done only by “Miners”. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain. For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. The innovative technology / cryptography used in all this process is now more familiar as “blockchain technology”. Using blockchain as a digital network, where every single transaction (called a block) is securely linked together makes transactions verifiable, available to everyone and more secure.
Without going into the further technical aspects of the working of the currency, I would just corelate it to the any other digital currency in the wallet (of course- the digital wallet). So to own a bitcoin, the first thing you need is a Bitcoin Wallet. The bitcoins can be traded in many currencies. You can buy a bitcoin by paying the current ongoing price of the bitcoin using your currency. Certainly, there is a KYC process and you need to register your bank for the transaction. But you can buy / sell or trade in this currency like you trade in stock market or carry Forex trades.
However, there is a major roadblock to this:
1. Crypto currencies are no longer considered as legal tender in India: US, China and many other countries except Japan has taken the similar stand as India. And
2. The government also banned banks and financial institutions regulated by RBI to deal in cryptocurrencies.
So technically, if you decide to trade in bitcoins, you cannot use your money in India to buy or sell the bitcoins as no bank in India can do that for you. And if you already hold bitcoins, you cannot use it in India or convert it in Indian currency.
This is a significant decision and resulted in a significant fall in bitcoin prices. However, we should understand the need for this decision:
- The intangible nature of cryptocurrencies and decentralized location makes it really difficult (if not impossible) to track down the transaction and its details. For eg: A payment or transfer is made it is sent from an address To an address that appears in some alphanumeric combinations like this: “23nodf7utj3v4ofn6uidn3u” So once the currency has been transferred to a new location it is virtually untraceable.
- This can lead to the numerous illegal transactions. It can be used for activities like buying and selling of drugs or weapons etc. Cryptocurrencies make it easier for criminals and online fraudsters to demand payment.
Cryptocurrencies can also be used for money laundering or terrorism.
- Tax evasion: the taxability of the transaction using cryptocurrencies is not perfectly evaluated and can lead to tax evasion.
- Regulation: Virtual currencies are self-governed, meaning they are not controlled by any government, person or a central authority. This makes monitoring almost impossible and poses a threat to financial stability
- Parallel currency: Some people also feel that rising popularity and wide usage of virtual currencies can create a parallel economy and will reduce the importance of banks and the current currency of the country.
What lies ahead:
Bitcoin and other cryptocurrencies are an outstanding technological innovation of the decade. The blockchain technology makes decentralized operations secured. Having said that, the difficulties in regulating the transaction refutes the use of the cryptocurrencies. Hence the action taken by regulators is completely justified.
However, in my opinion someone needs to strike a balance. There is a need for the government and regulating authorities to study and understand the working of a cryptocurrency. At the same time, the cryptocurrency organizations can also look at what they can do to avoid regulatory concerns. Cryptocurrency organisations along with the Policy makers can create a significant and secure currency exchange and hopefully it will not lose its charm till then.
Nevertheless, the “blockchain technology” can be used by banks or real estate or other regulators to create decentralized platforms and secure the transactions. There are many records in India which are centralized kept in the offices of banks or real estate offices or government offices. These registers or papers or documents can be easily altered or tampered. With the use of blockchain technology the documents or transactions can be decentralized and can be more secured.
In short, the legitimate use of Bitcoin or other crypto currencies in near future is doubtful, but the use of blockchain technology certainly has a long way to go..
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