Trade In Cryptos: The New Digital Currency
Reuters reported this month that India proposes to bring a law that bans cryptocurrencies, fining anyone trading in the country or even holding such digital assets. It seeks to criminalise possession, issuance, mining, trading and transferring crypto-assets. There are already millions of investors in this space. There are many looking to dip into the pie. How would they react to the impending law? But then they should have known that an absence of a law does not entitle them with automatic rights. In spite of the safety built into the crypto transactions, major frauds have happened questioning the very basis of blockchain technology which otherwise has several plusses. It was sheer human ingenuity that led to many of the frauds. Is this the genesis of some high-end scams and setting up parallel banking systems in future? Are there larger issues beyond commerce? Having said that, the adoption of Cryptocurrencies can also benefit the Nation by resolving a host of administrative and bureaucratic hurdles. In light of many steps taken by the government in digitisation, several innovative start-ups have come up in the crypto space, as coin miners, exchanges or aggregators.
As mobile phone internet connectivity rose manyfold, the key drivers of digitisation have been Aadhaar authentication, e-KYC, Jan Dhan accounts, internet payments and POS machines. However, intermediaries like the third parties and banks inflate the costs of such transactions. Cryptocurrencies-led transactions, can bring down costs for small merchants by cutting down these overheads.
Digital financial transactions are prone to ransomware attacks and data leaks. Still in a cryptocurrency-led economy, a person wishing to trade cryptos has complete control over the transaction which otherwise is controlled by the credit card companies or banks for a fee. Since the transactions are decentralised, transactions even across borders are instantaneous and devoid of any levies or exchange rates.
Are the enormous possibilities of Blockchain and decentralisation that it promises, driving the need for new laws? Time indeed has moved since David Chaum in 1983 conceived an anonymous cryptographic electronic money called ‘ecash’ which required a user interface to withdraw notes from a bank and assign encrypted keys before sending to a recipient. However, it allowed the digital currency to be untraceable by the issuing bank, the government, or any third party. Disruptive innovation indeed. Since it does not require a central authority to monitor, transactions being completely decentralised, would the role of State or a Central government become redundant? Its applications can be wide ranging. It can potentially redesign our business interactions, our politics and our society at large.
We often hear that cryptocurrency could take over our lives. Cryptocurrency, or crypto is a digital asset. It is a medium of exchange wherein individual coin ownership records are stored in a digital ledger or a computerized database. Bitcoin is a cryptocurrency invented in 2008. The inventor however, remains unknown. We do not even know if the inventor is one or a group of people. However, he, she or they go by the name Satoshi Nakamoto. The currency was first used in 2009 with an open-source design. Does that make sense? May be no. Bitcoin, a computer file, is stored in a 'digital wallet' app on a smartphone or a computer. People can send Bitcoins, or part of it, to anyone else’s digital wallet. Every single transaction is recorded in a public list called the blockchain, a digital record of transactions. In its structure, individual records are called blocks. When they are linked together in a single list, it is called a chain. Since every transaction of the Blockchain is validated by multiple computers on the Internet, its fraudulent trading is highly improbable.
Jan Lansky, a Professor in the Department of Computer Science and Mathematics, The University of Finance and Administration in Prague, says cryptocurrency must meet six conditions, the most important being no requirement of a central authority, its form maintained through distributed consensus. Further, it must keep an overview of cryptocurrency units and their ownership, define whether new cryptocurrency units can be created and if they can be created, then define the circumstances of their origin and determine the ownership of the new units which is done exclusively cryptographically. If it encounters two different instructions simultaneously for changing the ownership of a cryptographic unit, only one is attended to. Cryptocurrencies are far safer than the hard currency transactions since they use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party. ‘Mining’ is validation of transactions in cryptocurrency networks. Successful miners even obtain new cryptocurrency as a reward.
In centralized banking and economic systems such as the Reserve Bank of India, most of the times governments, sometimes influenced by the corporate boards control the supply of currency by printing fiat money. Fiat money, a government-issued currency, generally gives greater control over the economy. It however, is not backed by a commodity such as gold. As against this, in decentralized cryptocurrency, the government cannot produce new units.
Bitcoin ensures complete anonymity, in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys or "addresses". Hence, one cannot identify Bitcoin owners, but their transactions would be publicly available in the blockchain. Most cryptocurrency tokens are fungible and interchangeable which must ring alarm bells.
If the system is so decentralised, who controls how much currency is created? Decentralized cryptocurrency is produced collectively by the system that creates it, at a rate defined at the start. Do we then really need a Central Bank like the RBI or any other in any other country?
In February 2014 Mt. Gox, the world's largest bitcoin exchange, declared bankruptcy. This was later found to be money laundering, obstruction of justice, and extortion under colour of official right. Homero Josh Garza, who founded the cryptocurrency start-ups GAW Miners and ZenMiner in 2014, pleaded guilty to wire fraud in 2015. On 21st November 2017, the Tether cryptocurrency announced they were hacked, losing $31 million in USDT from their primary wallet. In May 2018, Bitcoin Gold and two other cryptocurrencies were hit by a successful 51% hashing attack by an unknown actor, in which exchanges lost estimated $18m. In June 2018, Korean exchange Coinrail, lost US$37 million worth of altcoin to hacking. There are also online black markets to contend with. Darknet markets present big challenges in regard to legality. There is no standardised way describing Bitcoin assets in different parts of the World. In the U.S., bitcoins are called "virtual assets". The ambiguous classification puts pressure on law enforcement agencies around the world.
There are some larger questions that arise out of technology and decentralised distributed systems. Will blockchains and decentralized platforms become super political tools? In future, would they manage large social interactions and dismiss traditional central authorities? Can Blockchain cause demise of centralized institutions? A society always rallies around the role of a State. Can decentralization through algorithm-based consensus be a reality or even a stand-alone political theory? That said, cryptocurrency is a great opportunity to the burgeoning millennial generation to be on par with the global economy. Should we then really ban cryptocurrencies?
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