The Asia Blockchain Summit that was held in July 2019 saw an interesting sequence of events that was played out between two equally, if not more, interesting protagonists. At the venue in Taiwan, Professor Nouriel Roubini, the economist popularly known as “Dr. Doom” for, among other things, predicting the Financial Recession of 2007, took on Arthur Hayes, the chief executive of the BitMex exchange on the pros and cons of Bitcoins. Mr. Roubini likened Bitcoin to a “cesspool”. But Mr. Hayes had the last laugh. Being the controller of the rights to the footage of their debate, Mr. Hayes blocked the release of a video to the event. This move made Mr. Roubini apoplectic and in a post on Twitter, Prof Roubini claimed he “destroyed” Mr. Hayes in the debate and also called him a “coward” for not making it available.
This vociferous and somewhat peculiar exchange provides monument to the chasm that divides the views nursed by various parties on the future of cryptocurrencies. Esoteric, complex and almost ephemeral, the world of cryptocurrencies has birthed what can rightfully be termed a vertical divide. On one side of the chasm stand sworn pessimists such as Mr. Roubini, while facing them from across the divide are rational optimists rooting for a legalized promulgation in cryptocurrencies.
In his book “From Cowrie to Crypto: Blockchain and the Future of Money”, author and journalist, T C A Sharad Raghavan attempts to set the record straight in so far as cryptocurrencies and Bitcoins are concerned. Proceeding to provide an illuminating and easily comprehensible overview of the nature of Bitcoins, the author dwells on the advantages and disadvantages innate in their usage, before providing a critical overview of various legislative pronouncements across the world regarding the treatment of Bitcoins. Here’s encapsulating the book in the form of a few key takeaways:
- ‘Block chains’ refer to immutable networks that function based on the consensus of its participants;
- In order to understand the concept of a block chain in depth, it is essential to grasp the notion of a Distributed Ledger System (“DLS”). In a DLS, multiple copies of a central ledger are maintained across the network by a number of individual entities. These entities are called nodes. Each of these individual copies are simultaneously updated each time a new ‘block’ is added to the ‘chain’ of transactions. This chain is immutable—which means once a transaction is recorded, that record cannot be altered or deleted;
- The process by which new units of Cryptocurrencies are created is known as ‘mining’. This process requires a huge amount of powerful computer hardware and a resilient software;
- The most obvious and apparent advantages conferred by Block chains are according to the author in the realm of Smart contracts. A smart contract employs block chain to digitally verify and facilitate the terms of a contract. To quote the author, “for example, in a supply chain, a smart contract can help in automatically executing functions—such as the deployment of a shipment—once a payment is made. Smart contracts remove the need for buyers and sellers to chase each other for the goods or the payment. These block chain-based contracts can be set up in any manner, and don’t require a central agency to back them up.”
- Raghavan also informs the reader about the formidable use of block chains to effect payments. Payments Blockchain experts have repeatedly said that the block chain has a near-perfect use-case scenario for the payments infrastructure, especially for cross-border payments. “First of all, a block chain-based system removes the need for paper-based documentation. All identities, transactions, and histories are stored on the relevant block chain, along with the linked bank accounts. While conventional banking systems don’t have a seamless process to trace a transaction from source to destination when multiple countries are involved, the block chain does away with this problem. Every node on the block chain is not only aware in real time of what is happening on the chain, but also has a constantly updated history of all the transactions on the network. Thus, the adoption of block chain technology can render cross-border payments instant, transparent, and cheaper by reducing the need for intermediaries.”
- The father of Bitcoins is somebody known as Satoshi Nakamoto. At the time of this writing no one even knows whether Nakamoto is an individual or a collective entity;
- The genesis behind bitcoins takes one back to 31 October 2008 and a link to a paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ on a cryptography mailing list;
- Nakamoto released the Bitcoin software in January 2009. There were lots of intrepid efforts to unearth the identity behind the founder of Bitcoin. As Mr. Raghavan educates his readers, “the New Yorker narrowed its search to two people, one of whom is an Irish computer science student named Michael Clear who had been ‘hired by Allied Irish Banks to improve its currency-trading software, and [who] coauthored an academic paper on peer-to-peer technology’. Michael Clear denied being the creator of Bitcoin, but also, infuriatingly, said that he would not reveal it even if he was. The second ‘suspect’ was a Finnish professor named Vili Lehdonvirta. Professor Lehdonvirta has gone on record saying that he has no knowledge of cryptography and that his knowledge of computer programing is rudimentary, at best.”
- But Bitcoins are not free from a few attendant perils. This was illustrated in gory detail by the hacking of Mt Gox a Bitcoin exchange that accounted for about 70 per cent of all Bitcoin transactions by 2014. In February 2014, approximately 850,000 Bitcoins that belonged to its customers went ‘missing’. The value of this loss at the time was a mind boggling $450 million. As a result of this, the exchange was forced to halt Bitcoin withdrawals;
- India, is one of the more conservative nations when it comes to accepting cryptocurrencies. In fact, the Reserve Bank of India has banned all banks and financial institutions from providing services to any entity dealing with cryptocurrencies. However, the Internet and Mobile Association of India (IAMAI)while filing an appeal with the Apex Court against this decision argued that “the RBI had admitted, in a reply under the country’s Right to Information (RTI) law, that it had not conducted any study or formed any committee to look into cryptocurrencies before laying down its prohibition on the banks. In a move that should give some hope to the cryptocurrency industry, the Supreme Court asked the IAMAI to prepare a report and cite instances and judgements from other countries which have regulated cryptocurrencies instead of banning them. There is ample material from around the world on cryptocurrency regulation and the IAMAI should have no trouble showing how the industry can best be regulated”;
- But the Indian Government’s skepticism stems from facts such as possibility of the cryptocurrencies being used for illegal purposes, diverted to finance terror activities and money laundering schemes and the probability of the entire chain getting hacked. Another concern is the embedded volatility characterising Bitcoins. in December 2017 Bitcoin was valued at around $20,000 per coin, which subsequently crashed to $3,800;
- While countries such as Japan and South Korea have chosen to adopt a more ‘benevolent’ view towards cryptocurrencies, nations such as India have abhorred them with disdain. But the stringent position of countries like India is also depicting a change;
- India’s government think-tank, “Niti Aayog, is in the process of setting up the country’s largest block chain network called IndiaChain, as a means to reduce frauds, speed up the enforcement of contracts, and increase the transparency of transactions. The government reportedly wants to use the block chain to digitalise land records, supply-chain management, identity management, the distribution of government benefits, the digitisation of educational certificates, power distribution, and cross-border finance.”
While we are a long way off from wholeheartedly adopting Bitcoins and cryptocurrencies as legally recognized tender, it is only a matter of time before its utility really makes policy mavens sit up and take note. Meanwhile authors such as Mr. Raghavan are doing an indelible service in educating laymen about both the potentials and pitfalls associated with this virtual currency.