Bitcoins were once again in news over the past month following Australian entrepreneur Craig Steven Wright’s sensational claim that he was the inventor of bitcoins. As supporters of the crypto-currency pounced to disprove his claims, he withdrew the statement with a blog-post saying, “I’m sorry.”
The buzz around this announcement and the debates that raged in various forums highlight the fascination that bitcoins evoke for geeks around the world. Those fed up with the unrestrained printing of money by global central banks think Bitcoins are an alternative — money that is created by the people, for the people, sans the interference of central banks and other regulatory authorities.
Why Bitcoins are a no-go
Despite their popularity, there are many reasons why Bitcoins, created by the elusive Satashi Nakamoto in 2008, are unlikely to turn into an acceptable medium of exchange any time soon.
Bitcoins are created through a process called “mining”, in which this virtual currency can be earned by solving complex mathematical problems. The coins are then stored in digital wallets. Those wishing to buy or sell this currency can do so on the many Bitcoin exchanges that have mushroomed across the globe.
But the software is designed to mine only 21 million units of this currency. So far, 15.5 million Bitcoins have already been mined. The value of Bitcoins is likely to turn quite volatile as the 21 million-mark nears. While the supporters say that each Bitcoin can be further split, this is unlikely to help much.
Since there is no underlying asset and the value is determined purely based on demand and supply, Bitcoins have been quite volatile. For instance, prior to December 2012, the value was just $13.4. But in the two months between September and November 2013, the value raced from $118 to $979. With greater regulatory vigilance, value fell from $979 to $239 by August 2015. The currency has pepped up since then, with the value almost doubling from those lower levels.
Nakamoto, while introducing this new currency, said its best feature is its ability to transfer money quickly and cheaply without the intervention of any government or regulatory authority. Unfortunately, Bitcoin’s strength has proved to be its greatest undoing. Money-launderers, drug traffickers, arms dealers and other criminal elements have been quick to adopt this currency for their cross-border transactions, lending it notoriety. It is mainly for this reason that many central banks including the RBI, People’s Bank of China and the Federal Reserve had issued statements and warnings against Bitcoins in 2013.
The Blockchain brigade
While the excitement created in 2013 died with the crash in Bitcoin value, supporters are now back with another disruptive idea — the Blockchain.
Promoters of Blockchain say the technology that helped create Bitcoins — an open ledger that is maintained by the users without any intermediary or regulatory intervention — can be used in many consumer-related applications. Since the technology is tamper-proof and disallows counterfeiting, it can be used in back-office applications for storing documents and sharing such information. Many banks are reported to be seriously considering this option for back-office applications.
The RBI too has given a tacit go-ahead in its Financial Stability Report by stating, “the key technical concept of ‘blockchain’ which underpins such crypto-currency systems, is drawing more attention now. With its potential to fight counterfeiting, the ‘blockchain’ is likely to bring about a major transformation in the functioning of financial markets, collateral identification (land records for instance) and payments system.”
The potential here appears to be immense. Internet users can create blockchains for any need. For instance, those who want to let out homes for rent can form a network where they insert the relevant details. Those wanting to rent homes can enter these Blockchains to check out the property details.
Similarly, a centralised database for land records can be created by all property owners. Since it is maintained by the users, it is likely to be credible. Perhaps in the distant future, elections can also be held on Blockchains.
Block and tackle
Blockchains’ journey in India, though, will not be entirely smooth-sailing.
One, the internet-savvy population in India is quite small. Since Blockchains are networks of consumers or users, shortcomings in computer literacy can be a drag.
Two, Blockchains are based primarily on trust. The users have to trust other users to put details relating to their assets in the public domain. Since there will be no intermediary or authority verifying the users’ backgrounds, many Indians could hesitate to take to these platforms.
Three, since there will be no regulatory oversight, users have no one to turn to if there is any trouble. There will be no legal backing either, which means complaints cannot be filed for any loss suffered.
Given the number of Bitcoin-related money laundering instances, miscreants are likely to find ways to misuse the Blockchain networks too. While it is not right to write these off altogether, it is best to wait for a couple of years to see how it evolves before jumping on the Blockchain bandwagon.