Context: Blockchain and its impact on Indian economy.
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- The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 has proposed stringent penalties, including 10 years of imprisonment, for holding, selling or dealing in cryptocurrencies such as Bitcoin.
- Recently Facebook announced its own cryptocurrency to facilitate payments globally with minimal fees and no dependency on a central bank.
- Digital: Cryptocurrency only exists on computers. There are no coins and no notes.
- Decentralized: Cryptocurrencies don’t have a central computer or server. They are distributed across a network of (typically) thousands of computers.
- Peer-to-Peer: Cryptocurrencies are passed from person to person online. Users don’t deal with each other through banks, PayPal or Facebook. There are no trusted third parties in cryptocurrency.
- Pseudonymous: This means that you don’t have to give any personal information to own and use cryptocurrency. There are no rules about who can own or use cryptocurrencies.
- Trustless: No trusted third party means that users don’t have to trust the system for it to work. Users are in complete control of their money and information at all times.
- Encrypted: Each user has special codes that stop their information from being accessed by other users. This is called cryptography and it’s nearly impossible to hack.
- Global: Countries have their own currencies called fiat currencies. Sending fiat currencies around the world is difficult. Cryptocurrencies can be sent all over the world easily. Cryptocurrencies are currencies without borders.
- Blockchain was first introduced as the core technology behind Bitcoin (designed by Satoshi Nakamoto), the headline-grabbing decentralized digital currency ecosystem proposed in 2008. The appeal of blockchain technology lies in its use of peer-to-peer network technology combined with cryptography.
- A blockchain is a database of every transaction that has ever happened using a particular cryptocurrency. Groups of information called ‘blocks’ are added to the database one by one and form a very long list. So, a blockchain is a linear ‘chain of blocks’. Once information is added to the blockchain, it can’t be deleted or changed. It stays on the blockchain forever and everyone can see it.
Potential of Blockchain Technology:
- Industries where interest in blockchain technology and its potential transformative benefits has been high, as demonstrated by significant investments from both venture capital firms and large enterprises. Facebook, for instance, recently announced its own cryptocurrency to facilitate payments globally with minimal fees and no dependency on a central bank. Venture capitalists invested $2.4 billion in blockchain and cryptocurrency start-ups in 2018. So far, 2019 is poised to exceed this benchmark.
- Blockchain technology has the potential to create new industries and transform existing ones in ways we cannot imagine. For instance, it has the capacity to facilitate nano-payments proportionate to an individual’s contribution and value creation in the Internet, making it an ideal wealth redistribution tool for our digital age.
- Financial services: Several stock exchanges around the world are piloting a blockchain platform that enables the issuance and transfer of private securities. Additionally, multiple groups of banks are considering use cases for trade finance, cross-border payments, and other banking processes.
- Consumer and industrial products: Companies in the consumer and industrial industries are exploring the use of blockchain to digitize and track the origins and history of transactions in various commodities.
- Life sciences and healthcare: Healthcare organizations are exploring the use of blockchain to secure the integrity of electronic medical records, medical billing, claims, and other records.
- Public sector: Governments are exploring blockchain to support asset registries such as land and corporate shares.
- Energy and resources: Ethereum is being used to establish smart-grid technology that would allow for surplus energy to be used as tradable digital assets among consumers.
- Nascent technology: Blockchain is still a nascent technology and there are issues such as complex verification process, data limits etc.
- Large energy consumption: Blockchain technology uses substantial amount of computer power.
- Security and privacy: Though considered highly secure, there are still cyber security concerns that need to ensured before general public trust Blockchain technology with their personal data
- Cost: High initial capital cost is a deterrent.
- Role of bad actors: The high chances of cryptocurrencies being misused in money laundering.
- Highly tech savvy: Start-ups have already built thousands of apps on blockchain platforms like Ethereum. However, these apps aren’t easily available to non-tech savvy consumers through an app store, and hence their usage remains low.
- Technical snags: The apps built face technical problems including scalability and slowing down of the network when many people use these apps simultaneously. New companies such as Algorand and CasperLabs are investing millions in research and development and are close to solving these issues.
Overview of Selected Countries Regulations on Cryptocurrencies
Overview of Selected Countries Regulations on Cryptocurrencies:
As virtual-currency market and transactions are sky rocking and these digital monies are non-legal tenders with different standards in most of the jurisdictions. Global regulators are divided on how to responses on it. As of now there is no international regulator to regulate virtual-currency. Following picture shows the regulation in G20 countries.
Cryptocurrency in India:
Recently, ‘The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ has proposed stringent penalties, including 10 years of imprisonment, for holding, selling or dealing in cryptocurrencies such as Bitcoin. However, a law to ban holding or transacting in cryptocurrency would not only prevent Indians from reaping economic benefits by participating in blockchain networks as validators and earning transaction fees, but also stifle any innovation related to this disruptive emerging technology.
What India can learn from Europe?
On June 19th, 2018, the fifth EU Anti-Money Laundering Directive (AMLD 5) was published in the official journal of the European Union. In particular, the AMLD5:
- extends the scope to virtual currency platforms and wallet providers, tax related services and traders of art
- grants access to the general public to beneficial ownership information of EU based companies
- makes it an obligation to consult the beneficial ownership register when performing AML due diligence
- obliges member states to create a list of national public offices and functions that qualify as politically exposed (PEP)
- introduces strict enhanced due diligence measures for financial flows from high-risk third countries
- ends the anonymity of bank and savings accounts, as well as safe deposit boxes and creates central access mechanisms to bank account and safe deposit boxes holder information throughout the EU
- makes information on real estate holders centrally available to public authorities
- lowers thresholds for identifying purchasers of prepaid cards and for the use of e-money
- Further enhances the powers of the FIUs and facilitates cooperation and information exchange among authorities.
The European Union approach seems to be more reasonable. India instead of banning it completely can follow the European suit judiciously.
Way forward: As blockchains can be accessed from every corner of the world that has a PC/cell phone (and a good network coverage), the technology has the potential to bring the unbanked on track, expanding the horizon for trade and commerce from remotest parts of the world. If the government and industry work together to create a proper blockchain ecosystem, blockchain will help to realise a distributed, transparent and truly democratic economy.