Blockchain Technology: Prospects and Challenges

Blockchain Technology: Prospects and Challenges

Private: Blockchain Technology and COVID-19

 

The coronavirus has impacted countries, communities and individuals in countless ways, from school closures to health-care insurance issues, not to undermine loss of lives. As governments scramble to address these problems, different solutions based on blockchain technologies have sprung up to help deal with the worldwide crisis.

 

What is Blockchain Technology?

Simply, blockchain is decentralized, distributed and public digital ledger.  Blockchains is a new type of network infrastructure (a way to organize how information and value move around on the internet) that create ‘trust’ in networks by introducing distributed verifiability, auditability, and consensus.

Blockchains create trust by acting as a shared database, distributed across vast peer-to-peer networks that have no single point of failure and no single source of truth, implying that no individual entity can own a blockchain network, and no single entity can modify the data stored on it unilaterally without the consensus of its peers.

New data can be added to a blockchain only through agreement between the various nodes of the network, a mechanism known as distributed consensus. Each node of the network keeps its own copy of blockchain’s data and keeps the other nodes honest – if one node changes its local copy, the other nodes can reject it.

imagine a blockchain as a ledger—because that’s essentially how most blockchains function. Each block of data represents some new transaction on the ledger, whether that means a contract or a sale or whatever else you’d use a ledger for.

Interestingly, blockchains leverage techniques from a field of mathematics and computer science, known as cryptography, to sign every transaction (e.g. the transfer of assets from one person to another) with a unique digital signature belonging to the user who initiated the transaction.

Blockchains and Cryptocurrency – How it all began?

A cryptocurrency is a digital or virtual currency that uses cryptography for security.  The Bitcoin protocol is built on the blockchain.

  • Bitcoin is an example of electronic or digital currency that works on a peer-to-peer basis.
  • Bitcoins can be sent digitally to anyone who has a bitcoin address anywhere in the globe. One person could have multiple addresses for different purposes – personal, business and the like.
  • A bitcoin is not printed currency but is a non-repudiable record of every transaction that it has been through. All this is part of a huge ledger called the blockchain.

There’s also a new cryptocurrency called Libra rolled out by Facebook.

  • Initially, blockchain technology was linked to cryptocurrency only but today it’s application are widespread.

Various uses of Blockchain in fighting COVID-19

Blockchain could be used to improve a variety of healthcare-related processes, including record management, healthcare surveillance, tracking disease outbreaks, management crisis situations and many more.

1) Tracking Infectious Disease Outbreaks

  • Blockchain can be used for tracking public health data surveillance, particularly for infectious disease outbreaks such as COVID-19.
  • With increased blockchain transparency, it will result in more accurate reporting and efficient responses.
  • Blockchain can help develop treatments swiftly as they would allow for rapid processing of data, thus enabling early detection of symptoms before they spread to the level of epidemics.

2) Donations Tracking

  • As trust is one of the major issues in donations, Blockchain has a solution for this issue.
  • There has been a concern that the millions of dollars being donated for the public are not being put to use where needed.
  • With the help of blockchain capabilities, donors can see where funds are most urgently required and can track their donations until they are provided with verification that their contributions have been received to the victims.

3) Crisis Management

  • Blockchain could also manage a crisis situation. It could instantly alert the public about the Coronavirus by global institutes like the WHO using smart contractsconcept.
  • Not only it can alert, but Blockchain could also enable to provide governments with recommendations about how to contain the virus.
  • It could offer a secure platform where all the concerning authorities such as governments, medical professionals, media, health organizations, media, and others can update each other about the situation and prevent it from worsening further.

4) Securing Medical Supply Chains

  • Blockchain has already proven its success stories as a supply chain management tool in various industries; similarly, it could also be beneficial in tracking and tracing medical supply chains.
  • Blockchain-based platforms can be useful in reviewing, recording, and tracking of demand, supplies, and logistics of epidemic prevention materials.
  • As supply chains involve multiple parties, the entire process of record and verification is tamper-proof by every party, while also allowing anyone to track the process.

6) Education

  • ‘Certificates’ are a means of verifying the credentials of individuals across domains and geographies. A paper-based certification is fallible to manipulation and susceptible to fraud.
  • The blockchain-based SuperCert promises anti-fraud identity intelligence blockchain solution for educational certificates.
  • The immutability feature of blockchain ensures that tampering of certificate is not feasible – both the content of the certificate and the identity of the certificate holder.

7) Finance

  • Blockchain integration in financial transactions will not only save time and money, but it will also make the transaction processing and authentication process much more seamless.
  • Furthermore, Blockchain can be an excellent tool to monitor money laundering and black money accumulation – since all transactions are permanently stored on the Blockchain network, every transaction is accountable.
  • Blockchain is also capable of dealing with issues like double spending and unauthorized spending.
  • With Covid panic on use of cash currency, here one may find alternatives too.

Various Challenges in adopting Blockchains

Any transformative technology, in its initial stages of development, as it moves out of the research/development phase to first few applications to large scale deployment, faces several challenges.

  • There is no confidence in the technology: It is still an innovation. Building trust in the network represents a challenge for blockchain.
  • High costs and complexity of blockchain.
  • Lack of understanding comes next as many executives have a vague understanding of blockchain and the changes it will bring. Many still connect it only with cryptocurrencies management.
  • A general lack of standards is also a problem. Blockchain-specific vocabulary is insufficient; its terminology is both scarce and new.
  • A lack of general regulation is a problem. The Supreme Court of India has ruled against a decision imposed by the country’s central bank nearly two years ago that stifled crypto trading in Asia’s third-largest economy.
  • Vague data regulation in countries due to poor laws and policy is one more issue.
  • Lack of blockchain talent: Whenever a groundbreaking technology emerges, the developer community needs time and resources to accommodate the new demand.
  • Energy consumption The majority of blockchains present in the market consume a high amount of energy. It requires high amounts of computation power to solve a complex mathematical problem to verify and process transactions and to secure the network. Add to this the energy needed to cool down the computers, and the costs increase exponentially.

Blockchain: the India imperative

India has a unique strategy for the Government to take the lead in creating public digital infrastructure and allowing private sector innovation to leverage Blockchain for further development.

NITI Aayog has released recommendations to establish India as a vibrant blockchain ecosystem. The suggested recommendations include:

  • Regulatory and policy considerations for evolving a vibrant blockchain ecosystem
  • IndiaChain: Creation of a national infrastructure for the deployment of blockchain solutions with inbuilt fabric, identity platform and incentive platform
  • India as blockchain hub: promotion of research and development in blockchain, in addition, to focus on skilling of workforce and students
  • Procurement process for government agencies to adopt blockchain solutions
  • Cryptocurrencies for India: Pegged stable coin for Indian Rupee for seamless exchange for blockchain solutions. This may be in conjunction with the need for re-evaluating cryptocurrencies.

Way Forward

  • Although India is still at the nascent stage in exploring Blockchain technology, it holds is immense potential for Blockchain applications.
  • The key lies in overcoming the challenges faced during the early adoption phase – if we can get past the obstacles in the initial stage, Blockchain tech can be put to good use to strengthen the Indian economy.
  • The days of blockchain application have just begun and as with any new technology, blockchain will hit a few roadblocks especially with the government’s regulators across the globe.
  • As the true essence of blockchain application is to take the power away from the hands of the powerful by decentralizing information and handing it over to the people- democracy in true sense.
  • Nonetheless as with any movement, if people see the value the technology brings into their lives they will rally behind it and blockchain application will become mainstream in most industries in the coming years.

Conclusion

By providing help in the COVID-19 crisis and recovery, blockchain can play a pivotal role in accelerating post-crisis digital transformation initiatives and solving those problems highlighted in the current system.

However, at the present moment, blockchain is not the panacea of all the problems. While the promise and potential of blockchain are undoubtedly transformative, it is still in the nascence of its evolution.

Keeping a tab on this technology and our capacities is the right direction we can head towards.

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E-Renminbi: China’s Official Digital Currency

Note4Students

From UPSC perspective, the following things are important :

Prelims level : e-RMB

Mains level : Cryptocurrency and its feasiblity

China in a significant move has launched a trial of digital yuan in four urban centres of the country for specific services even as the world grapples with the containment of Covid.

What is a cryptocurrency? Discuss how a vibrant cryptocurrency segment could add value to India’s financial sector. (250 W)

Prelims Perspective:-

1. Subtle differences btn digital and virtual currency – e.g. Regulatory issues

2. Which countries have official virtual currency – e.g. Petro of Venezuela

e-RMB

  • It will be the electronic form of the renminbi, with a value equivalent to the paper notes and coins in circulation.
  • The People’s Bank of China, the country’s central bank, will be the sole issuer of the digital yuan, initially offering the digital money to commercial banks and other operators.
  • It will be launched in major cities of Shenzhen, Suzhou and Chengdu, as well as the Xiong’an New Area.
  • It aims to change the financial system in big ways — by cutting costs and making transactions easier, more convenient and more transparent.
  • The public would be able to convert money in their bank accounts to the digital version and make deposits via electronic wallets.

Back2Basics: Cryptocurrency

  • A Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions.
  • It leverages blockchain technology to gain decentralization, transparency, and immutability.
  • The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralized nature of the blockchain makes cryptocurrencies theoretically immune to the old ways of government control and interference.
  • It can be sent directly between two parties via the use of private and public keys.
  • Unlike decentralized cryptocurrencies, such as bitcoin, that allow users to transfer value with no central authority or third party involved, the government-backed digital currency is preferred.

What are Blockchains?

  • Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
  • Blockchain consists of three important concepts: blocks, nodes and miners.
  • Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
  • Miners create new blocks on the chain through a process called mining.

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India can use Yes Bank debacle to chase China in Crypto

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Is cryptocurrency solution to bad governance in the banking system in India?

Context

There’s an opportunity to stabilize the financial system and prevent a rival power from widening its lead.

The backdrop of YES bank failure time for cryptocurrency

  • Perfect time for cryptocurrency: Confidence in the Indian financial system has been breaking down for some time. Instead of trying to restore trust, it may be time to require less of it — with the help of an official rupee cryptocurrency.
  • The last straw: The collapse of corporate lender Yes Bank Ltd. was the last straw, which failed in slow motion in full view of authorities.
    • Depositors have been assured that their $20 billion-plus in stuck funds will be released after a rescue by the government-controlled State Bank of India.
    • What could be the impact on the sentiment of the people? While that may help prevent widespread panic, even temporarily stopping people from accessing their funds would mean that from now on, not all savings and current accounts will be treated by individuals and businesses as a perfect substitute for cash.

Why it would be costly and difficult to revive the public faith?

  • It will be both difficult and costly to revive the public’s dwindling faith.
  • Nationalisation not an option: A nuclear option is to nationalize the banks and non-bank finance firms that provide $1.75 trillion in annual funding. Doing so would be a doomed throwback to the late 1960s when India lurched toward stultifying socialist-style state controls.
  • Corruption in banking won’t go away: Similarly, it would be unrealistic to assume that the Yes Bank embarrassment would trigger an improvement in the status quo.
    • Deep crony-capital relationship: The crony-capital relationships between financiers and borrowers in India are steeped in its colonial history.
    • Basel III won’t solve the problem: Putting on the gloss of Basel III capital requirements, which are supposed to make lenders less prone to failure, doesn’t make corruption in banking go away.

Can cryptocurrency be an answer?

  • It offers hope: Blockchain technology, which the Indian establishment is trying to snuff out in finance, offers hope. Government should consider official crypto to obviate the need for trusted intermediaries, which are in short supply, anyway.
  • China expected to launch digital currency: Before the coronavirus outbreak, China was widely expected to start its own central bank digital currency this year.
    • But India’s need is greater, and its motivation very different from Beijing’s desire to shake the hegemony of the dollar.
  • After the Yes Bank debacle and botched rescue, deposits in India will probably gravitate toward four or five large lenders, whose managers may be emboldened to make risky bets with other people’s money. The remaining banks will struggle for liquidity. A perennially unstable credit delivery network will always be one misstep away from the next blowup. While every country has its share of manias, panics and crashes, to be gripped by absolute financial mistrust every few years is not an environment where growth can flourish.
  • Opportunity to think afresh: Earlier this month, India’s highest court set aside the Reserve Bank of India’s directive that asked banks to not offer services to cryptocurrency traders and exchanges.
    • A legal defeat has provided the opportunity to think afresh.
    • But in parallel, the government is considering a blanket ban on private virtual tokens. The crypto activity could get slammed again.
  • Possibility of misuse: To be sure, one popular use of technology is money laundering.
    • But to kill the industry and send practitioners packing would be to lose out on a valuable innovation at a time when India needs to build on the globally recognized successes of its digital payments industry, which has gained users’ trust just as banks and shadow banks have lost it.

Implications for deposit in the aftermath of Yes bank debacle

  • Deposits may gravitate towards big banks: After the Yes Bank debacle and botched rescue, deposits in India will probably gravitate toward four or five large lenders, whose managers may be emboldened to make risky bets with other people’s money.
    • The remaining banks will struggle for liquidity.
  • Next blowup: A perennially unstable credit delivery network will always be one misstep away from the next blowup.
  • Impact on growth: While every country has its share of manias, panics and crashes, to be gripped by absolute financial mistrust every few years is not an environment where growth can flourish.

Possible pathways for central banks digital currency

  • Pathways suggested by BIS: After surveying 17 projects around the world — from Norway and Sweden to China, Cambodia and South Africa — the Bank for International Settlements (BIS) has identified four possible pathways for a central bank digital currency.
  • Starting point- Rupee token: Of the pathways suggested by the BIS, a rupee token that doesn’t require the holder to have an account with anyone but has value guaranteed by the Reserve Bank of India could be a starting point.
  • Who should enable the fund transfer? Cryptography (“I know a secret, therefore I own the funds”) rather than an account relationship (“I am who I say I am, therefore I own the funds”) would be used to enable transfers.
    • Later, the RBI can open up the validation of transactions to authorized parties on distributed ledgers.
  • What is the current system and issues with it? Currently, a deposit holder has to rely on everyone from the bank’s management and board to the auditors, the rating firms and the regulator to do their jobs.
    • When they all fail, as in the case of Yes, the bank’s chequebook, ATM card, and online banking password cease to generate liquidity.
    • Deposits stop being the same as cash, even if the state guarantees their safety.
    • It would be far less painful if deposit owners only had to trust the RBI, not as a banking regulator but as a money-printing authority that could never run out of resources to settle its IOUs.

Conclusion

  • China’s ambition challenge dollars position as a reserve currency: China wants the yuan to take over from the dollar as the world’s reserve currency. A tech-enabled global alternative to the greenback — of the kind that Facebook Inc.’s proposed Libra had threatened to be — would have been an obstacle. Hence, Beijing accelerated its tokenized currency initiative.
  • India should jump the bandwagon: India needs to jump on the bandwagon for self-preservation. If the RBI doesn’t make easy-to-transact digital rupees available and leaves ordinary folks at the mercy of poorly run and supervised banks like Yes, people would rather store their wealth in Silicon Valley-sponsored tokenized money — or Beijing’s digital yuan — whenever they arrive.

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Supreme Court ruling on Virtual Currency

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Virtual Currency, Cryptocurrency

Mains level : Issues with Blockchain Technology

The Supreme Court in a significant move has set aside a ban by the Reserve Bank of India (RBI) on banks and financial institutions from dealing with virtual currency holders and exchanges.

Why did the Supreme Court ban virtual currencies?

  • In a circular in 2018, the RBI had banned banks from dealing with virtual currency exchanges and individual holders on the grounds that these currencies had no underlying fiat.
  • RBI held that it was necessary for the larger public interest to stop banks from providing any services related to these.

Why was the ban unjustified?

  • The court held that the ban did not pass the “proportionality” test.
  • The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1) (g) which states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.

What are virtual currencies?

  • There is no globally accepted definition of what exactly is virtual currency.
  • Some agencies have called it a method of exchange of value; others have labelled it a goods item, product or commodity.
  • In its judgment the apex Court observed- Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism, who attempt to describe an elephant but end up describing only one physical feature of the elephant.

Similarities with Bitcoin

  • Satoshi Nakamoto widely regarded as the founder of the modern virtual currency bitcoin and the underlying technology called blockchain defined bitcoins as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”.
  • This essentially meant there would be no central regulator for virtual currencies as they would be placed in a globally visible ledger, accessible to all the users of the technology.
  • All users of such virtual currencies would be able to see and keep track of the transactions taking place.

Are they different from cryptocurrencies?

  • Virtual currency is the larger umbrella term for all forms of non-fiat currency being traded online. Virtual currencies are mostly created, distributed and accepted in local virtual networks.
  • Cryptocurrencies, on the other hand, have an extra layer of security, in the form of encryption algorithms.
  • Cryptographic methods are used to make the currency as well as the network on which they are being traded, secure.
  • Most cryptocurrencies now operate on the blockchain or distributed ledger technology, which allows everyone on the network to keep track of the transactions occurring globally.

Are cryptocurrencies dangerous?

  • The jury is out on that. Organisations across the globe have called for caution while dealing with virtual currencies.
  • A blanket ban of any sort could push the entire system underground, which in turn would mean no regulation.
  • In June 2013, the RBI had for the first time warned users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security-related risks that they were exposing themselves to.
  • The following year, the FATF came out with a report that highlighted both legitimate uses and potential risks associated with virtual currencies.
  • In a different report, it again said the use of such virtual currencies was growing among terror financing groups.

Why did the RBI ban virtual currencies?

  • Owing to the lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules, the RBI initially flagged its concerns on trade and use of the currency.
  • Risks and concerns about data security and consumer protection on the one hand, and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand, also had the RBI worried about virtual currencies.
  • In its arguments, RBI said it did not want these virtual currencies spreading like a contagion, and had, therefore, in the larger public interest, asked banks not to deal with people or exchanges dealing in these non-fiat currencies.
  • The RBI perceived significant spurt in the valuation of many virtual currencies and rapid growth in initial coin offerings as a risk.

Proponent’s stance

  • They said the RBI action was outside its purview as the non-fiat currency was not a currency as such.
  • They also argued that the action was too harsh and there had been no studies conducted either by the RBI or by the central government.
  • Arguing that the ban was solely on “moral grounds”, the petitioners said the RBI should have adopted a wait-and-watch approach, as taken by other regulators such as SEBI.

Faring the Proportionality test

  • In its judgment, the Supreme Court held that the RBI directive came up short on the five-prong test to check proportionality.

It includes:

  • the direct and immediate impact upon fundamental rights
  • the larger public interest sought to be ensured; a necessity to restrict citizens’ freedom
  • inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public
  • the possibility of achieving the same object by imposing a less drastic restraint

Way Forward

  • The Supreme Court’s judgment could lead to the RBI rethinking its policies surrounding virtual currencies.
  • It is expected that the RBI will reconsider its approach to cryptocurrency and come up with a new, calibrated framework or regulation that deals with the reality of these technological advancements.
  • The decision will help those investors who had used legitimate money through banking channels.

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[op-ed snap] The IMF should take over Libra and make the most of the idea

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Libra

Mains level : A new currency system

Context

The Libra Association is fragmenting. Visa, Mastercard, PayPal, Stripe, Mercado Pago and eBay have abandoned the Facebook-led corporate alliance underpinning Libra.

Libra

  • It is the asset-backed cryptocurrency meant to revolutionize international money.
  • Anyone with a mobile phone would be able to buy Libra tokens with domestic currency by standard methods such as debit cards and online banking. 
  • Those tokens could then be used to make payments to other Libra users, whether to purchase goods and services or repay debts. 
  • To ensure full transparency, all transactions would be handled by blockchain technology. 
  • In sharp contrast to Bitcoin, Libra tokens would be fully backed by copper-bottomed assets.

Financial mechanism 

  • To anchor Libra to tangible assets, the association backing it promised to use its revenues, along with the seed capital contributed by its member companies to buy highly liquid, highly rated financial assets. 

Challenges with Libra

  • Privatising – Humanity would have suffered if Facebook is allowed to use Libra to privatize the international payments system. The sole beneficiary would be the Libra Association, which would collect tremendous interest income on the assets from around the world using the large portion of global savings on its platform. 
  • Too big – Libra association would soon advance credit to individuals and corporations, graduating from a payments system to a global bank that no government could ever bail out, regulate or resolve.
  • Out of financial system – 2.4 billion monthly active Facebook users would suddenly have a new currency allowing them to transact with one another and bypass the rest of the financial system.
  • Criminal misuse – There is every possibility for high potential criminal uses of Libra. 
  • Volatility issues – Countries have invested a lot in minimizing the volatility of the purchasing power of domestic money. As a result of those efforts, 100 euros or dollars buy today more or less the same goods that they will buy next month. But the same could not be said of 100 euros or dollars converted into Libra.
  • Business cycles – Since the 2008 financial crash, authorities have struggled to manage inflation, employment and investment with the fiscal and monetary levers. Libra would further diminish states’ capacity to smoothen the business cycle. 
  • Fiscal policy challenge – Fiscal policy’s efficacy would suffer as the tax base shrinks with every payment shifting to a global payments system residing within Facebook. 
  • Impact on monetary policy – Central banks manage the quantity and flow of money by withdrawing or adding paper assets to the stock held by private banks. The more successful Libra becomes, the more money people will transfer from their bank account to their Libra wallet and the less able central banks will be to stabilize the economy.

Potential of Libra – to the IMF

  • The core concept of Libra can be handed over to the International Monetary Fund (IMF).
  • It can be used to reduce global trade imbalances and rebalance financial flows. 
  • A Libra-like cryptocurrency could help the IMF fulfil its original purpose.
  • Entrust implementation of the idea to the IMF to reinvent the international monetary system in a manner reflecting John Maynard Keynes’ rejected proposal at the 1944 Bretton Woods Conference for an International Clearing Union.
  • IMF would issue a blockchain-based, Libra-like token, say Kosmos, whose exchange rate with domestic currencies floats freely. 
  • People continue to use their domestic currency, but all cross-border trade and capital transfers are denominated in Kosmos and pass through their central bank’s account held at the IMF. 
  • Trade deficits and surpluses incur a trade-imbalance levy, while private financial institutions pay a fee in proportion to any surge of outward capital flows. 
  • All international transactions become frictionless and fully transparent.
  • Small but significant penalties keep trade and capital imbalances in check and fund green investment and remedial North-South wealth redistribution.

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[op-ed snap] Cryptocurrencies could constrain a country’s choices

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Bitcoins

Mains level : Libra; cryptocurrency and impact on monetary policies

CONTEXT

Facebook announced launching a cryptocurrency called Libra, designed to appeal to its global user base of over 2 billion. 

Libra

  • It will be backed by a basket of fiat currencies. 
  • It is supported by a consortium of large-scale corporate houses, financial services firms, and venture capitalists. 
  • Millennials have little patience for expensive traditional banking methods for cash transactions. They would likely flock to alternatives like Libra.

Impossible trinity

  • It is the “trilemma” of monetary policy. It states that it is impossible to have all three of the following conditions fulfilled at the same time: 
    1. a fixed foreign exchange rate
    2. free capital movement
    3. an independent monetary policy 
  • Even before cryptocurrencies, governments looking to control the monetary aspects of their economies have been subject to this trilemma, and have been forced to implement only two of the three conditions.
  • If you want control over both your exchange rate and monetary policy, you would have to impose controls on free capital movement. 
  • Hence the existence of capital controls such as India’s Foreign Exchange Management Act.
  • The trilemma is a theory based on the “uncovered interest rate parity condition”.
  • It is supported by evidence-based studies where governments that have tried to simultaneously pursue all three goals have failed. 
  • Uncovered interest rate parity condition means that if a dollar can only fetch a 1% rate of return in the US, but 6% in India, investors are bound to move from dollars to rupees. The reason they don’t is that the differential of 5% will likely reduce to zero as a result of a slide in the rupee’s value to the extent of its current interest differential against the dollar.
  • Strong capital controls have meant that other means of payment have been in use before, such as the infamous “hawala” system. 
  • The ease of use and the scope of new Big-Tech cryptocurrencies are about to create global currencies of a completely different class. 
  • Economists argue that such currencies will affect the exchange rates and monetary policies of traditional currencies. This is because the introduction of a global digital currency removes the capital control levers that sovereign nations have today.

A case

  • If we assume a two-country system, both using their own national currencies as well as a global cryptocurrency.
  • Assuming markets are efficient and complete, and that the global cryptocurrency is freely used in both countries, they show that the interest rates in both countries must necessarily be equal, and the exchange rate between the two countries becomes a “martingale” – the best predictor of tomorrow’s value is today’s value.
  • This adds a further restriction to the impossible trinity, making it a dilemma. 

CONCLUSION

Thus the advent of Big Tech cryptocurrencies means that countries would have one less lever to pull.

 


Back2Basics

Blockchain Technology and Bitcoins

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[op-ed snap] Ban or regulate? — On India’s policy on cryptocurrencies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Regulation of cryptocurrencies

CONTEXT

The recommendation of an inter-ministerial committee that India should ban all private cryptocurrencies, that is, Bitcoin and others like it, hardly comes as a surprise.

Background

  • Indian policymakers and administrators have time and again made clear their distaste for them, their existence owed almost entirely to advanced encryption technologies
  • In his Budget speech in 2018, Finance Minister Arun Jaitley said the government doesn’t consider them legal tender.
  • The Reserve Bank of India has repeatedly warned the public of the risks associated with dealing with cryptocurrencies.
  • Bitcoin, the most prominent among them, has yo-yoed wildly in value, even over short periods of time.

Concerns with cryptocurrencies

  • A May 2019 article by Bloomberg, citing data from blockchain analysis firm Chainalysis, said “speculation remains Bitcoin’s primary use case”.
  • Its use in illegal online marketplaces that deal with drugs and child pornography is well-documented.
  • There have been cases of consumers being defrauded, including in India.
  • Given all this, it is understandable that the committee, under the chairmanship of Subhash Chandra Garg, the former Economic Affairs Secretary, has come across as being wary of private cryptocurrencies even while advocating a central bank-issued cryptocurrency.

No central authority to regulate 

  • Governments and economic regulators across the world are wary of private cryptocurrencies.
  • As they need neither a central issuing authority nor a central validating agency for transactions, these currencies can exist and thrive outside the realm of authority and regulation.
  • They are even deemed a threat to the official currency and monetary system. The question then is whether banning cryptocurrencies is the most effective way to respond.

Drafting a law

  • The inter-ministerial committee believes it is, going so far as to draft a law that mandates a fine and imprisonment of up to 10 years for the offences of mining, generating, holding, selling, dealing in, transferring, disposing of, or issuing cryptocurrencies.
  • But six of the seven jurisdictions that its report cites have not banned cryptocurrencies outright.
  • Many of them, including Canada, Thailand, Russia and Japan, seem to be moving on the path of regulation, so that transactions are within the purview of anti-money laundering and prevention of terror laws.
  • China, which India has taken a cue from, has gone for an outright ban.

Conclusion

  • Even there, the report says, “owing to the network-based nature of cryptocurrencies, after banning domestic crypto exchanges, many traders turned to overseas platforms to continue participating in crypto transactions.”
  • Trading in China is now low but not non-existent.
  • But why would an outright ban be a superior choice to regulation, especially in a field driven by fast-paced technological innovations?
  • The report, unfortunately, doesn’t clarify that point.

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Cryptocurrency panel for ban on private digital currencies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Blockchain, Distributed ledger technology (DLT)

Mains level : Cryptocurrencies regulation in India

  • The committee set up to look into the legality of cryptocurrencies and blockchain has submitted its report to the Finance Ministry and recommended that private cryptocurrencies be banned completely in India.

Committee on cryptocurrencies

  • The government had constituted an Inter-Ministerial Committee in November 2017, under the Chairmanship of Economic Affairs Secretary Subhash Chandra Garg and comprising senior officials of the MEITY, SEBI and the RBI.
  • The committee notes with serious concern mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these.
  • The Committee, however, leaves the door open for the central bank issued cryptocurrencies, adding that it endorsed the RBI’s stance of banning any sort of interface of cryptocurrencies with the banking system in India.
  • The Committee recommends that all private cryptocurrencies, except any cryptocurrency issued by the state, be banned in India.
  • It endorses the stand taken by the RBI to eliminate the interface of institutions regulated by the RBI from cryptocurrencies.
  • However, the report goes on to say that it would be advisable to “have an open mind” regarding the introduction of an official, government-backed cryptocurrency in India.
  • But it also added that it is currently unclear what the advantages of such a currency in India would be.

Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019

  • The committee has drafted a law which mandates a fine and imprisonment of up to 10 years for offences.
  • The draft law says that anybody who mines, generates, holds, sells, deals in, transfers, disposes of or issues cryptocurrencies with will face a fine and/or jail time of between 1 and 10 years.
  • The fine has been set at the either three times the loss or harm caused by a person, or three times the gain made by the person, whichever is higher.

Why ban cryptocurrencies?

  • All the cryptocurrencies have been created by non-sovereigns.
  • They do not have any intrinsic value of their own and lack any of the attributes of a currency.
  • That is, they neither act as a store of value nor are they a medium of exchange in themselves.
  • These cryptocurrencies cannot serve the purpose of a currency.
  • The private cryptocurrencies are inconsistent with the essential functions of money/currency, hence private cryptocurrencies cannot replace fiat currencies.

More focus on the use of distributed ledger technology (DLT) and blockchain

  • Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time.
  • Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
  • While the committee has taken a strong stance against cryptocurrencies, it has highlighted the benefits of the underlying technology—the distributed ledger technology (DLT) and blockchain.
  • The Committee recommends that blockchain based systems may be considered by MEITY for building a low-cost KYC system that reduces the need for duplication of KYC requirements for individuals.
  • Further, the report said that DLT-based systems can be used by banks and other financial firms for loan tracking, collateral management, fraud detection, claims management in insurance etc.
  • Similarly, DLT can be beneficial for removing errors and frauds in land markets if the technology is implemented for maintaining land records.
  • The Committee therefore recommends that various state governments may examine the feasibility of using DLT for land-records management.

Back2Basics

Blockchains

  • Blockchain/ DLT are the building block of “internet of value,” and enable recording of interactions and transfer “value” peer-to-peer, without a need for a centrally coordinating entity.
  • “Value” refers to any record of ownership of asset — for example, money, securities, land titles — and also ownership of specific information like identity, health information and other personal data.
  • Blockchain is one type of a distributed ledger.

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Facebook’s cryptocurrency ‘Libra’

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Libra, Calibra

Mains level : Blockchain technology


  • There’s a new cryptocurrency called Libra to be rolled out by Facebook by 2020.
  • Facebook also announced a dedicated wallet app called Calibra, which will be built into WhatsApp and Messenger as well, to let users store and use these Libra coins.

What is Libra?

  • Libra is a cryptocurrency built on a blockchain network, though Facebook was quick to insist that it will respect user privacy and transactions will in no way to be linked to the user’s real world identity.
  • Libra is like any other cryptocurrency powered by blockchain technology.
  • It wants to be a ‘global currency’, one that can be used to transfer money anywhere in the world without any transaction fees.
  • The claim is that Libra will be accessible to anyone with a smartphone, even a low-cost budget phone, and a network connection.
  • Of course, there are several mobile payment services already offering seamless payments, though with real-money.

Calibra Wallet

  • Calibra is the digital wallet from Facebook to let users store these Libra coins.
  • Facebook says this is a separate company, and data will not be shared with them and it will respect user privacy.
  • Calibra will have a dedicated team of experts in risk management to prevent fraudulent use.
  • Also if someone loses their Libra coins from the Calibra wallet, they will refund users. Libra will also work with other third-party wallets.
  • Calibra will also be added to WhatsApp and Messenger.

How will Libra blockchain work?

  • Libra is also being governed by the independent Libra Association, which is not what you see in typical cryptocurrency.
  • A new programming language is also being built for Libra called Move, which the organisation claims is more secure and private.
  • The Libra Blockchain will record the history of transactions and states over time, rather than the typical blockchain where each transaction is added a new block.

Buying Libras

  • The network is still far from ready. The Libra blockchain will be tested over the coming months.
  • While there’s no word on exactly how someone will buy Libra, the Calibra wallet from Facebook will probably be one way.
  • To purchase Libra, user will have to pay in their local currency, provided the laws allow it.

Its uniqueness

  • Libra will also be backed by a reserve of assets designed in order to “give it intrinsic value” and ensure stability, which is not seen in typical cryptocurrencies.
  • These assets includes securities and fiat currencies (like dollar, pound) etc as part of this reserve.
  • The website says Libra will be backed by “short-term government securities in currencies from stable and reputable central banks.”
  • Still the “value of the one Libra in any local currency may fluctuate,” cautions the page.
  • The idea is to ensure Libra is stable to give more users confidence in this, while ensuring that currency does not fluctuate wildly like other cryptocurrencies such as Bitcoin which had at point had reached a high of $20,000.

Is Facebook the sole company involved in Libra?

  • Facebook is not the only company, though it has leadership role for all of 2019, which means it will have a significant role in deciding the direction for Libra at least for this year.
  • Facebook’s teams have also helped build the technology for the currency.

Will Libra work in India?

  • Cryptocurrency is illegal in India and the draft bill right now is recommending a maximum of 10 year punishment for those who mine, trade, buy or sell these.
  • In India, if the bill passes, trading in cryptocurrency could result in hard punishment.
  • So one of the biggest markets, which is India, will not be able to use Libra, which could limit its potential.
  • The Supreme Court of India is hearing a matter regarding regulation of Bitcoin in India and the matter will now be heard on July 23, 2019.

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Blockchain Technology and Bitcoins

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Blockchain Technology: Prospects and Challenges

Microsoft India signs pact with NITI Aayog for AI tools in agriculture, healthcare

Note4students

Mains Paper 3: Science & Technology | Indigenization of technology & developing new technology

From UPSC perspective, the following things are important:

Prelims level: AI (artificial intelligence)

Mains level: Applications of AI & its future in India


News

Context

  • Microsoft India has signed an agreement with NITI Aayog to deploy artificial intelligence (AI) technologies to address challenges in agriculture and healthcare.

Details of the Agreement

  1. Microsoft India will support NITI Aayog by combining the cloud, AI, research and its vertical expertise for new initiatives and solutions across several core areas.
  2. Microsoft will also accelerate the use of AI for the development and adoption of local language computing.
  3. Under the agreement, Microsoft will provide NITI Aayog advanced AI-based solutions to address challenges in agriculture and healthcare.
  4. It will include farm advisory services, healthcare screening models at Primary Health Cntres, and building capacity for AI through education.
  5. Additionally Microsoft will promote STEM education in the areas of AI studies and data sciences for young women in institutes identified by NITI Aayog.

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Blockchain Technology: Prospects and Challenges

NITI Aayog, Oracle to fight fake drugs through blockchain

Note4students

Mains Paper 3: Science & Technology | Developments and their applications and effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Use of Blockchain technology

Mains level: Curbing fake drug menace in India.


News

Curbing Fake Drug menace

  1. NITI Aayog has signed an agreement with cloud services provider Oracle, hospital chain Apollo Hospitals, and pharmaceutical manufacturer Strides Pharma Sciences.
  2. It aims to curb the distribution of fake drugs using new technologies.

India at greater risk

  1. The Indian pharmaceutical industry is the third largest in the world in volume, accounting for 10% of the world’s production.
  2. A recent report by World Health Organisation estimates 20% of all drugs sold in India are fake.
  3. Also, as the largest producer of generic drugs in the world, India is reported to be the source of 35% of all counterfeit drugs sold worldwide.

Technology approach to track fake drugs

  1. The partners will pilot a real drug supply chain using blockchain decentralized ledger and IoT software.
  2. By piloting a real drug supply chain using blockchain and IoT software, they can support governments and healthcare experts to quickly detect fake drugs.
  3. These will aide authorities to enforce penalties on wrong-doers with easy, proof-based data.
  4. Oracle’s blockchain software permanently registers a drug’s record in the manufacturer’s drug supply chain (serial number, labelling, scanning), leaving no scope for record tampering.
  5. The company added that at every point of hand change, it records the drug’s movement — from manufacturer to logistics, from stockist to hospital, or from pharmacy to consumer.
  6. In case of a fake drug, the software will detect irregularity and notify the concerned nodal point.

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Blockchain Technology: Prospects and Challenges

[pib] Cabinet approves MoU on Collaborative Research on Distributed Ledger and Block Chain Technology under BRICS Interbank Cooperation Mechanism

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Blockchain technology, Xiamen Declaration

Mains level: How can blockchain technology be used across various sectors


Using blockchain in the financial sector

  1. The Union Cabinet has given its ex-post facto approval for the Memorandum of Understanding (MoU) on Collaborative Research on Distributed Ledger and Blockchain Technology
  2. This is in the context of Development of digital economy by Export-Import Bank of India (Exim Bank) with the participating member banks, under the BRICS Interbank Cooperation Mechanism

What is Distributed Ledger?

  1. A distributed ledger is a database that is consensually shared and synchronized across network spread across multiple sites, institutions or geographies.
  2. It allows transactions to have public “witnesses,” thereby making a cyberattack more difficult.

Impact of MoU

  1. The MoU intends to enhance understanding of Distributed Ledger/Block Chain technology, through the joint research efforts to identify areas within respective business operations where it may have the potential for applications aimed at enhancing the operational efficiencies
  2. Distributed Ledger/Blockchain technology holds potential for solutions to various challenges being faced in the financial sector space of the BRICS nations

Xianmen declaration

  1. The Xiamen Declaration signed in China on digital economy by the BRICS leaders had highlighted the importance of the digital economy and how the BRICS nations could leverage the thriving and dynamic digital economy that will foster global economic development and benefit everyone

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World Bank launches world-first blockchain bond

The launch of the blockchain bond is being viewed as an initial step in moving bond sales away from manual processes towards faster automation. Photo: iStock

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Bondi Bond, Blockchain

Mains level: Increasing use of blockchain technology in day to day applications


Using blockchain in bond markets

  1. The World Bank has priced the world’s first public bond created and managed using only blockchain in a $73.16 million deal
  2. This deal is designed to test how the technology might improve decades-old bond sales practices

About the bond

  1. The prototype deal dubbed as “Bondi” bond stands for Blockchain Operated New Debt Instrument as well as a reference to Australia’s most famous beach
  2. It is being viewed as an initial step in moving bond sales away from manual processes towards faster and cheaper automation

The uniqueness of this bond issue

  1. This issue of World Bank bond will be the first time that capital is raised from public investors through a legally valid bond issuance that uses blockchain from start to finish

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[op-ed snap] AI superpower or client nation?

Note4students

Mains Paper 3: Science & Technology | indigenization of technology & developing new technology

From UPSC perspective, the following things are important:

Prelims level: AI (artificial intelligence)

Mains level: Applications of AI & its future in India


Context

AI set to transform civilization

  1. Google’s CEO compares AI (artificial intelligence) with fire and electricity in terms of their role in human civilisation
  2. Industrial revolution moved the centres of physical power from human and animal bodies to machines
  3. With the locus of intelligence now also getting disembodied, AI systems are set to transform our economic, social and political organisation

Tendency of monopoly

  1. Intelligent systems typically tend to centralise and monopolise control
  2. Sensing that an AI economy will radically concentrate income and wealth, many global digital industry leaders have called for assured basic income for all
  3. Globally, just one or two concentrations of AI power may rule the world. Currently, these are in the U.S. and China

India’s position

  1. India stands nowhere in the AI race
  2. It is fast squandering its great advantages of high IT capabilities and a big domestic market required for data harvesting
  3. Any country’s AI therefore largely exists within it’s huge, domestically owned commercial digital/data systems
  4. In the U.S. it is with Google, Amazon, Facebook, Apple and Microsoft — and in China with Baidu, Alibaba and Tencent
  5. India has no such large domestically owned commercial data systems
  6. And any chance that these could develop is being nipped by allowing takeovers like of Flipkart by Walmart

The dominance of US companies

  1. Soon, Walmart and Amazon will own between them perhaps the most significant set of India’s consumer-behavioural and other economic data, over which they will develop various kinds of AI
  2. In time, such AI will allow them to control practically everything, and every actor, along various economic value chains linked to consumer goods
  3. All the wonderful AI applications that we read about, which the Niti Aayog’s new AI strategy is also replete with — whether of increased agriculture output, precision medicine or tailored learning — are basically shop-windows of global digital/AI corporations
  4. It is just like they allured us with all the unbelievable Internet and mobile applications, provided for ‘free’
  5. These AI applications may give us spectacular one-off benefits here and there, but by gathering further data from each new instance it is the AI engine owned by a Google or Microsoft that becomes ever more intelligent about India’s problems and solutions

India needs to be a developer and not client

  1. A big nation like India cannot derive satisfaction from rapidly becoming a client country for AI, whether as ready users of AI applications in different areas or by offering out-sourced R&D for global digital/AI corporations through start-ups existentially eager to be bought out

Measures required

  1. Technologies should flow freely across the globe, and we must welcome global technology companies to help India’s digital development
  2. Data-based sectoral platforms, like in e-commerce, urban transport, agriculture, health, education, etc., should largely be domestic
  3. India has a right to provide such domestic protection through policy, especially if India begins to treat its collective social/economic data as a strategic national asset
  4. Such policy protection alone will ensure that we have large-scale data-driven Indian companies able to develop the highest AI in every sector, by employing huge Indian data to solve (equally huge) Indian problems
  5. Once enough AI proficiency and strength has been developed domestically, it should then be used to go global

Way Forward

  1. There is no other route to becoming an AI superpower
  2. With its highest IT as well as entrepreneurial/managerial competence, and a huge domestic market, India is among extremely few countries that can make it

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Blockchain Technology: Prospects and Challenges

[op-ed snap] The dream of being an AI powerhouse

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Artificial intelligence (AI)

Mains level: Use of AI in governance in India


Context

NITI Aayog’s strategy for AI

  1. In a recent discussion paper, NITI Aayog has chalked out an ambitious strategy for India to become an artificial intelligence (AI) powerhouse
  2. NITI Aayog envisions AI solutions for India on a scale not seen anywhere in the world today, especially in five key sectors — agriculture, healthcare, education, smart cities and infrastructure, and transport

What is AI?

  1. AI is the use of computers to make decisions that are normally made by humans
  2. It works on Machine learning which is the set of technologies used to create AI
  3. ML takes reams of historical data as input, identifies the relationships among data elements, and makes predictions

Problems in making AI stride in India

The first problem is data

  • India has sparse data in sectors like agriculture
  • The lack of data means that deep learning doesn’t work for all companies in India

Another problem for AI firms today is finding the right people

  • NITI Aayog’s report says that only about 50 Indian scientists carry out “serious research” and they are concentrated in elite institutions such as the Indian Institutes of Technology and the Indian Institutes of Science
  • Only about 4% of AI professionals have worked in emerging technologies like deep learning

What needs to be done?

  1. If the government is serious about AI solutions powering agriculture or healthcare, it must collect and digitize better under its existing programs
  2. To close the skill gap, NITI Aayog suggests setting up a network of basic and applied AI research institutes. These should collaborate closely with agricultural universities, medical colleges and infrastructure planners
  3. NITI Aayog’s ambitious road map does not mention deadlines or funding. Without these, it lacks accountability so this should be announced first

Way forward

  1. The NITI Aayog report talks about collaboration. But unless collaboration is the basis for the new crop of institutes, these institutes won’t make a difference
  2. The government must make haste and specify its commitments on these fronts

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Blockchain Technology: Prospects and Challenges

[op-ed snap] Open data, open government

Note4students

Mains Paper 2: Governance | Citizens charters, transparency & accountability & institutional & other measures

From UPSC perspective, the following things are important:

Prelims level: European Union, General Data Protection Regulation, application programme interfaces (APIs), Blockchain, Internet of Things

Mains level: Using new technologies to promote inclusive governance


Context

Creating a data-driven governance architecture

  1. The new wave of a technological revolution will not be from pure data or access to consumer behaviour
  2. The application of data and their assimilation with solving social problems, enabling better governance and powering elected governments to serve their citizens better is ushering in a new revolution

Ensuring privacy

  1. “Datafication” of businesses has also brought to the fore the criticality of developing data management, storage and privacy laws
  2. The European Union with its General Data Protection Regulation has been a front-runner
  3. Other countries, including India, have also adopted a collaborative model to develop privacy laws, which includes deliberations with creators of data (the consumer) and users (corporates)

Open government data movement

  1. Open government data is a silent but powerful movement unfolding globally
  2. Open government data means publishing information collected by the government in its entirety, such as government budgets, spending records, health-care measures, climate records, and farming and agricultural produce statistics
  3. Over 100 governments have already signed a charter to proactively share data collected by various government departments, for public consumption
  4. Fostering collaboration, enabling creative innovations and collective problem-solving are giving accountability and transparency a shot in the arm

Why is immediate action necessary?

There are three basic reasons:

  1. One, such data collected by governments are for citizen welfare; hence they have an implicit right to benefit from the information
  2. Two, data sets such as government budget usage, welfare schemes and subsidies increase transparency and thereby build trust
  3. Third, and most important, it paves the way to develop technology-led innovations which can unlock massive economic value, thereby benefitting even the poorest of poor, the under-represented and the marginalised

Potential Uses

  1. Availability of data on yearly produce of crops, soil data health cards and meteorological data sets can help companies develop customised crop insurance solutions with specific risk-based pricing
  2. Data points around progress in literacy rates, demographic data and density of educators can help develop customised solutions for villages
  3. Information on the availability of facilities in public hospitals, current occupancy rates, hospital and demographic data can pave the way for curated health-care applications

5C framework 

  1. Completeness: The first step is to ensure completeness of data stacks opened for use either through machine-readable formats or direct application programme interfaces (APIs)
  • For example, soil data cards will have data on all relevant aspects as well as current emerging technologies such as Blockchain and the Internet of Things to provide the opportunity to automate data collection

Comprehensiveness: This is essential for a data stack or various data sets. Currently, data sets shared in India are somewhat disjointed and not comprehensive

  • For example, a comprehensive agri-data set would have digitised data sets on soil data, rainfall, crop production as well as market rates

Clustering: This would mean combining data sets which can lead to the creation of applications such as farm insurance from weather, soil and crop cycle/sale data

The fourth step is building anchor cases or use-cases to encourage data usage.  A case in point is Aadhaar/identity data which has seen exponential growth

Setting up a comprehensive governance framework which includes an open data council with cross-sector representation to monitor, regulate and build usage after proportionate oversight

Way forward

  1. Research by PwC in Australia estimated that open data can add an additional 1.5% to the country’s GDP
  2. In the Indian context, this could conservatively translate to about $22 billion
  3. The time is now ripe for the government to create a data-driven governance architecture by building digital trust in the economy and its intent

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[op-ed snap] Should the RBI issue a digital currency?

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Blockchain technology(read the attached story).

Mains level: Need of a government backed cryptocurrency in India.


News

Context

  1. The Reserve Bank of India (RBI), like many of its global peers, has decided to look into the possibility of issuing a central bank digital currency (CBDC)
  2. However, it It is not obvious yet why the government would launch digital currencies that would make online transactions untrackable

What is a digital currency?

  1. Currency is a subset of a broader economic concept of money
  2. Currency is the “token” which facilitates movement of money, shifting its purchasing power from the current holder to its future holder
  3. Currency has evolved into several forms; from good old cash/coins, to electronic money and, more recently, cryptocurrency
  4. Electronic money represents electronic payments facilitated by banks and payment networks
  5. It lacks physical existence and peer-to-peer exchange being trackable by authorities, thus not being anonymous

Edge over other payment methods

  1. Cryptocurrency addresses the need to enable peer-to-peer anonymous transactions on the lines of cash
  2. However, cryptocurrency provides this anonymity in online/electronic transactions which credit card/debit card/internet banking-based payments cannot

Why do we need a cryptocurrency backed by the government?

  1. Cryptocurrencies have limited social acceptance since they are neither issued by central banks nor are they a liability for anyone—even private entities, forget governments
  2. And thus comes the demand for digital currency which is expected to have the anonymity feature of cash but can be used in electronic transactions, while being backed by government

What societal need will digital currency solve?

  1. Modern fiat money, and by extension currency, is a social contract as much as a legal contract
  2. The success of any mode of payment, or a new currency, depends on wider acceptance by citizens and governments
  3. If society is comfortable with the idea that all electronic payments are trackable by authorities, prima facie, there will be limited demand for cryptocurrencies (this is different from the demand for “investment” purposes)
  4. The limited anonymous peer-to-peer transaction can be done with cash. It is not yet clear how society sees this issue

The way forward

  1. It is reasonable to expect that the technology will evolve to address the operational inefficiencies in the long term
  2. Societies and governments must decide if they should be adopting digital currency or central bank cryptocurrency just because technology can enable it

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RBI bars banks from dealing with virtual currencies

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: RBI, virtual currencies

Mains level: Surge in virtual currencies and their effects on economy


Stopping virtual currency trading

  1. The Reserve Bank of India (RBI) has asked banks to stop providing service to any entity dealing with virtual currencies, with immediate effect
  2. Regulated entities that are already providing such services should exit the relationship within three months

Introducing its own digital currency

  1. RBI said that it would explore introducing digital currency
  2. RBI has formed an interdepartmental group to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency
  3. The report will be submitted by end-June 2018

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Blockchain Technology: Prospects and Challenges

[op-ed snap] Bitcoin’s rally may be over

Image Source

Note4students

Mains Paper 3: Economy | Investment model

From UPSC perspective, the following things are important:

Prelims level: Read the attached story

Mains level: This newscard talks about the declining value of the bitcoins, which was expected by many experts. We have written many newscards on bitcoins, recently. Complement this newscard with them.


News

Declining value of bitcoins

  1. Bitcoin has lost almost half its market value in just the last month
  2. The price of bitcoin dropped from its lifetime high of over $19,300 to $9,300

Is there any chance of regaining its earlier value?

  1. Some bitcoin enthusiasts still believe that the currency may only be consolidating to regain
  2. But a look at the price chart of bitcoin, suggests that there could be some valid reasons to get worried about the strength of bitcoin’s price rally
  3. Each time it has tried to rally upwards, the price has failed to go past its previous high

Cautious time for investers

  1. A good time to buy bitcoin was when its price action showed a clear uptrend in price, which was over most of last year
  2. Now, when its price is showing clear signs of reversal, a prudent speculator is likely to keep away if not go short on the digital currency
  3. But this is not to completely rule out the possibility that bitcoin might stage a surprise comeback, as it has in the past after severe price corrections

What can we learn from these trends?

  1. Bitcoin’s present crash should come as no surprise to its sceptics
  2. First, the digital currency, has had negligible acceptance in the real world of commerce
  3. Second, it has always seemed foolish to think that governments,  would be ready to allow private currencies to compete against national currencies
    (Governments want monopoly power over the issuance of currency)

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Blockchain Technology: Prospects and Challenges

[op-ed snap] The age of crypto-economics

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Note4studfents

Mains Paper 3: Science & Technology | Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology

From UPSC perspective, the following things are important:

Prelims level: Attached newcards

Mains level: We have done many newscards on the bitcoins and blockchaing technology. But this newscard is somewhat different, as it discusses some unknown facts(both positive and negative) about the technology.


What is the issue?

  1. The Finance Ministry recently issued a statement warning against investing in bitcoin and other cryptocurrencies (CCs)
  2. [op-ed snap] The money trail: on the need for investor awarenesss on cryptocurrencies

What are Central Bank Digital Currency (CBDCs)?
Why are they becoming famous?

  1. The world’s top central bankers have finally realised the futility of trying to control CCs
  2. They are preparing to join them, by issuing their own Central Bank Digital Currency (CBDCs)
  3. A CBDC is a complex tool whose functionality is still being researched
  4. Main issue with CBDCs: There is one flaw endemic to any CBDC: the contradiction between the centralising tendency of a CBDC and the decentralising technology that underpins cryptocurrencies

Problem of double spending

  1. In order to be functional, a virtual currency must solve the problem of double spending
  2. Given that anything digital can be copied, how do you prevent someone from spending the same unit of currency twice?
  3. Solution: The creator of the bitcoins has solved the double spending problem by designing a decentralised ledger that bundles data about transactions into blocks, timestamps them
  4. And links each new block of transactions with the previous one in an immutable chain of blocks that are copied, authenticated, and updated continuously, and publicly
  5. This is done on thousands of computers — the blockchain

Bitcoins are inflation proof(for now)

  1. A major reason for which people find bitcoins attractive is its deflationary nature, which makes it inflation-proof
  2. Since there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation

How are cryptocurrencies different from fiat currencies?

  1. The blockchain uses economic incentives (payment in the form of bitcoins or other CCs) to motivate members of the network to do the work of validating every transaction
  2. It does away with the bank’s role as an intermediary, and this is what differentiates CCs from (the digital version of) fiat currencies

Importance of Artificial Intelligence and Internet of Things (IoT) for cryptocurrencies

  1. Two domains that would gain immensely from blockchain applications and CCs are Artificial Intelligence and Internet of Things (IoT)
  2. Since in an IoT world, thousands of devices would need to rapidly and seamlessly transact with each other in real time

The way forward

  1. Of course, as happened in the early days of the Internet, some of the claims being made about blockchain are plain silly
  2. It is true that the technology’s peer-to-peer orientation renders it more democratic
  3. Even the World Wide Web was supposed to be a decentralised, democratic space where everyone was equal.
  4. We all know how that turned out (Net Neutrality Debate in India)

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Blockchain Technology: Prospects and Challenges

[op-ed snap] The money trail: on the need for investor awarenesss on cryptocurrencies

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Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: B2B

Mains level: The newscard briefly discusses the concerns of the Indian Government, related to the cryptocurrencies. It also talks about positive side of this technology.


News

Context

  1. The Finance Ministry’s warning to potential investors in bitcoin and other cryptocurrencies

Why has the bitcoin became popular?

  1. The price of bitcoin, the most popular of all cryptocurrencies, not only shot up by well over 1000% over the course of the last year
  2. But the price also fluctuated wildly
  3. One of the main reasons for this volatility is speculation and the entry into the market of a large number of people lured by the prospect of quick and easy profit

Why is government so serious?

  1. Most new users(of the technology) know close to nothing of the technology, or how to verify the genuineness of a particular cryptocurrency
  2. A number of investors, daunted by the high price of bitcoin, have put their money into less well-established and often spurious cryptocurrencies, only to lose it all
  3. Even some private cryptocurrency operators in India have gone on record saying that as many as 90% of the currencies are scams
  4. The use value of cryptocurrencies, both as a medium of exchange and as a store of value, is still being explored

View of other countries on this

  1. Countries like South Korea and the U.S. are intensifying regulatory scrutiny of the market
  2. South Korea, where bitcoin became something of a craze, recently proposed legislation to either heavily regulate exchanges or ban them
  3. Recently in the U.S., a court ordered a popular cryptocurrency platform to hand over information related to 14,000 accounts to the Internal Revenue Service, undermining the anonymity the digital currencies offer

India should be cautious

  1. India must be careful to differentiate between cryptocurrencies and the blockchain technology they are based on
  2. Cryptocurrencies may or may not emerge as a useful tool, especially since the government may not want to encourage the proliferation of anonymous, non-fiat currencies as its anti-black money fight intensifies

Positive side of the technology

  1. But blockchains, basically digital ledgers of financial transactions that are immutable and instantly updated across the world, are worth looking at as aids to ease doing business
  2. They have the potential to greatly streamline payment mechanisms and make them transparent
  3. Also, the Chairman of the Securities and Exchange Board of India, said, blockchain technology is useful and should not as yet have regulatory oversight

Back2basics

Block Chain Technology and Bitcoins

By Explains

Explain the News

Blockchain Technology: Prospects and Challenges

Govt rules out any immediate action against cryptocurrencies

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Cryptocurrencies, bitcoin, Ponzi schemes

Mains level: Rising usage of cryptocurrencies and its effects on economy


Not taking any knee-jerk action

  1. Finance minister ruled out any immediate action against cryptocurrencies
  2. The finance ministry is awaiting the report of a panel constituted to deal with cryptocurrencies

Government action

  1. At present, both the government and the Reserve Bank of India (RBI) do not regulate virtual currencies
  2. Last week, the finance ministry warned against investments in virtual currencies, including bitcoin
  3. It likened them to Ponzi schemes as they are not backed by any assets and do not have any intrinsic value
  4. The warning followed a surge of investments in bitcoin because of a spurt in its price
  5. Last month, the income tax department conducted a survey of bitcoin exchanges across India to secure information about transactions, parties involved and bank accounts used

Expert committee to give report on cryptocurrencies

  1. The government constituted the committee, comprising officials of the finance ministry, home ministry and RBI, among others, last year
  2. It is tasked with finding ways to deal with virtual currencies and address issues relating to money-laundering and consumer protection

By Explains

Explain the News

Blockchain Technology: Prospects and Challenges

West Bengal govt mulling ‘blockchain’ to protect records stored online

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Blockchain technology, Wannacry virus, Shadow Brokers

Mains level: Use of emerging technology in improving governance


Blockchain technology to protect documents from cyber attacks

  1. The West Bengal government is planning to introduce the blockchain technology to protect its documents from cyber attacks
  2. Earlier this year, computers at some offices of the West Bengal State Electricity Distribution Company Limited were crippled by ‘WannaCry’ virus, a global ransomware
  3. Ransomware is a type of malicious software designed to block access to a computer system until a sum of money is paid

Wannacry Ransomware attack

  1. It infected hundreds of thousands of computers worldwide in May and crippled parts of Britain’s National Health Service
  2. The WannaCry attack struck more than 150 nations in May, locking up digital documents, databases and other files and demanding a ransom for their release
  3. The WannaCry ransomware exploited a vulnerability in mostly older versions of Microsoft’s Windows operating system
  4. Security experts traced the exploitation of that weakness back to the U.S. National Security Agency; it was part of a cache of stolen NSA cyberweapons publicly released by a group of hackers known as the Shadow Brokers

Blockchain technology

  1. Blockchain is an online ledger of digitally recorded transactions which is encrypted in the form of blocks, each of which is connected by a network of computers
  2. We had covered an op-ed related to the potential of blockchain technology previously. You can read it here

A similar news related to Wannacry ransomware has been published in The Hindu with the title ‘US blames North Korea for worldwide WannaCry ransomware attack’. Important points from that news have been included above.

By Explains

Explain the News

Blockchain Technology: Prospects and Challenges

[op-ed snap] Going beyond the problems of bitcoin

Note4students

Mains Paper 3: Science & Technology | developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Bitcoin, blockchain, smart contracts,

Mains level: Usage of blockchain technology in various government processes


Context

Bitcoin demand increasing

  1. Bitcoin has dominated headlines in the financial world in recent months with a return of over 1,700% so far this year
  2. Rising prices are attracting more investors

Problems for the formal financial system

  1. If the prices of bitcoin and other such currencies keep going up for a considerable period, the fall could be painful
  • Rising prices will attract more people to start such currencies and invest in them
  • This will increase the contact of virtual currencies with formal finance, and developments in this market would affect the financial system

2. If adoption of bitcoin or other such instruments actually increases significantly, it will make things difficult for central banks

  • A central bank manages the supply and cost of money in the system to attain maximum growth with price stability
  • But in the world of unregulated cryptocurrencies, central banks may find it difficult to manage the level of economic activity
  • Bitcoin, for example, is deflationary by design
  • Greater adoption could also alter the dynamics of capital control, especially in developing economies

3. An increase in the use of such instruments could also affect financial intermediation, investment, and growth

Technology on which bitcoin works has a much wider appeal

  1. Bitcoin is an unregulated cryptocurrency which is administered by a network of users through an open and distributed ledger known as blockchain
  2. Each transaction is verified by the network
  3. Since it is a distributed ledger and no one person or organization controls it, technically, chances of someone manipulating the system are very low

Potential of blockchain technology

  1. Blockchain has the potential to end property-related litigation in a country like India
  2. The government can have a blockchain where ownership and transactions can be tracked easily
  3. Blockchain can make government spending more efficient in areas such as the social sector, as it will increase transparency
  4. The technology is also being tested in the financial sector to settle transactions
  5. This could help reduce costs for financial institutions and the working capital requirement for other firms
  6. The distributed ledger can have other usages such as smart contracts

Challenges posed by blockchain technology

  1. If automated risk management, smart contracts, and similar tools are deployed across a network, cascades of rapid and hard-to-control obligations and liquidity flows could propagate across a network
  2. This interdependence will likely call for creative organizational thinking to address the need for governance and strong risk management

Way forward

  1. The idea of blockchain deserves more attention, as it could potentially transform the way transactions are settled
  2. Blockchain be used to reduce costs and increase efficiency

By Explains

Explain the News

By Explains

Explain the News

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