Remember the global economic meltdown of 2008? A lot of people lost both their savings and their trust in banks, making the world a deeply insecure place financially. It also changed our outlook towards banks as trusted investment destinations, forcing us to look for alternatives. Enter the era of the birth, and consequential rise, of cryptocurrencies.

An oft-heard term in the market today, cryptocurrencies are digital assets or currencies that are exchanged virtually, and use cryptography – sophisticated machine encryption techniques that are impossible to crack – to secure transactions. These decentralized digital currencies allow users to operate independently, and often anonymously, without any involvement of a traditional banking institution. Bitcoin, the first cryptocurrency that was founded in 2009, is the most popular and has touched high values of USD20,000 at the end of last year. According to its whitepaper, Bitcoin is a “peer-to-peer electronic cash system” that lets online payments move “from one party to another without going through a financial institution.” Currently there are over 1000 cryptocurrencies available in the online market.

So how do these cryptocurrencies work? Let us take a look at the technology that has made them such a resounding success. Blockchain is the unique database structure that forms the backbone of Bitcoin and other digital currencies. This technology bundles every new transaction into a block that needs to be validated by a set of people distributed globally. Once the transaction is complete, it is encrypted and added to an existing chain of prior blocks, making it totally tamper-proof. This digital information, that can be distributed but not copied, makes blockchain a decentralized and incorruptible public ledger. In the not-so-distant future, using blockchain technology could completely eliminate the need for banks, and make complex paperwork-based procedures redundant. The future demand for cryptocurrencies is only likely to rise as they give an individual the ultimate control over their own money.

However, the Indian government does not recognize cryptocurrencies as legal tender. During his recent budget speech, Finance Minister Arun Jaitley clearly stated that the government plans to clamp down on the illegitimate use of such virtual currencies. Nevertheless, the silver lining to this announcement was the government’s keenness in exploring blockchain technology proactively to usher in a digital economy. This is indeed encouraging since blockchain technology opens the door to a host of advantages across all sectors. Consider the following benefits of blockchain:

· It involves decentralised and fully transparent peer-to-peer transaction ledger and does not require any intermediaries to complete transactions

· It can pave the way for greater transparency since the system keeps a record of every digital transaction, and cannot be manipulated by any government body or financial institution

· It can lower transaction costs, since blockchain miners are directly compensated by the network

· Its transactions ensure zero possibility of frauds, or arbitrary reversals, ensuring improved security

· Since transactions are all carried out online, there is no need for maintaining physical infrastructure, thereby reducing costs and providing easy access from just about anywhere

· Enforcing digital smart-contracts could make conducting business much easier than before. E-commerce and algorithmic trading are already using this concept in India

Not just restricted to the financial sphere, there are many other potential uses for blockchain technology. Let us take a quick look at some of these:

One of the examples I like best is of real estate sale-purchase. A any deal involves multiple visits to various offices, with brokers having a field day at our expense, and despite that, there is no guarantee that the deal is transparent or the paperwork error-free. If these land titles were to be maintained via blockchain, all possible change of hands would be clearly visible to all the concerned parties, with an additional relief of zero-fraud. Even transaction charges are likely to be cheaper.

Similarly, notary and insurance services are another sector where using blockchain could provide critical security and record of transactions, making date and holder verifications easy. The freight and logistics industry, with their international supply chains, could be another example where blockchain implementation can improve both accountability and efficiency.

Identity services, underwriting, tax collection, health and medical records collection, and digital voting are some of the other focus areas where blockchain technology can be effectively utilized. In fact, the State Bank of India announced in November 2017 that it will upgrade its Know Your Customers (KYC) protocols – processes through which the bank confirms its clients’ identities – with blockchain.

When the demonetization drive was on in India, citizens worried about their savings and investments as the highest valued notes were removed from circulation. There was a notable spike in the trading volume of cryptocurrencies during that period. Hence, shutting out an emergent investment option is not quite a good idea. Rather, I feel the government should embrace blockchain technology and promote it actively. Indian regulatory bodies are currently said to be working on a legal framework for cryptocurrencies even as the government plans launching its own cryptocurrency called “Lakshmi” sometime in the future. Till then, the debate over cryptocurrencies continues…. even as blockchain is clearly a win-win for all.







