The Centre’s clampdown on cryptocurrencies betrays lack of understanding of the technology
The government’s antagonistic approach towards this technology even as the US, Japan, and Russia contemplate the creation of state-backed cryptocurrencies could mean that we miss out on what has the potential to be the biggest wave of innovation since the internet became popular in 1980sanalysis Updated: Feb 13, 2018 17:54 IST
The income-tax department recently clamped down on cryptocurrency exchanges and investors due to fears that these currencies may be used to launder money. This is understandable: Cryptocurrency transactions are high-risk investments and their prices are volatile. Due to a lack of regulation, insider trading is widespread. Bitcoin crashed from an all-time high of $20,000 in November to $9,000 by mid-January.
However, this clampdown and the ministry equating digital currency investments to “ponzi schemes” shows a lack of understanding of digital currencies and blockchain, the technology behind it. While it’s an oversimplification, blockchain can be described as a way for people to share the extra space and computational power in their computers to create a global supercomputer that is accessible to everyone. In layman terms, blockchain does for computers what Uber and Airbnb do for drivers and homeowners respectively.
Bitcoin is the first successful application of blockchain technology. Every computer connected to the Bitcoin network is referred to as a node, and maintains an up-to-date copy of all transactions in the network. This is different from a bank, where only a trusted authority maintains records.
Mining of data, however, consumes massive amounts of energy to record transactions on to blockchain. The Bitcoin network is limited to less than 10 transactions per second. Visa in comparison can support 40,000 transactions per second. This raises questions around how big the platform can be. Companies like Rchain are building blockchain technologies that could support more than 50,000 transactions per second and solve this problem. Moreover, the near-zero transaction cost due to the removal of intermediaries could amount to trillions of dollars in savings.
The overall value of the global cryptocurrency market surpassed $700 billion earlier this year. The trust verification technology of blockchain can further revolutionise multiple industries such as insurance, real estate and art. Tron, a startup working on a blockchain project, will let digital content creators have control and ownership of the data they create, including how it is distributed, cutting out intermediaries. With these impending innovations, it is not hard to envision a more evenly distributed economy in the future, in which every Internet user could receive micropayments for any original data they share in the digital space such as ratings, reviews and blog posts.
During his budget speech, Finance Minister Arun Jaitley, indicated government interest in exploring possible blockchain applications. This is a positive. However, with several countries including the US, Japan, Russia, UAE and Saudi Arabia reportedly contemplating the creation of state-backed cryptocurrencies, and with Silicon Valley having already made significant investments into blockchain startups, India risks lagging behind on what has the potential to be the biggest wave of innovation since the Internet became popular in 1980s.
Anil K. Antony is executive director of Cyber India and the Vice President of Navoothan Foundation; Ankur Prasad is head of marketing at Amazon App Store and partner at Exa-Hash that invests in blockchain startups.
The views expressed are personal