Blockchain Technology: Prospects and Challenges

Blockchain Technology: Prospects and Challenges

Risks involved in investment in cryptocurrencies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Changing patterns in saving and investment

Context

We are witnessing the change where the cult of savers has changed into investors. They are looking for a good return and willing to take the risk.

Changing the behaviour of the savers

  • There is a new wave of savings and investments in the country that is evolving quite fast.
  • Crypto exchanges assure you that they are safe.
  • But it is the exchange that is safe, not the value of the coin, which will be driven by the market.
  • The equity boom is on, and all the unicorns have delivered excellent results.
  • That’s why bank deposits are no longer on our plates.
  • Banks discouraging deposits: Interestingly, banks today are discouraging deposits with low rates as this is the only way they can manage their balance sheets.
  • Low-interest rate: There are few deployment avenues and paying 5 per cent interest to savers and investing the deposits at 3.35 per cent in the reverse repo auction is a sub-optimal game.

How safe is investment in cryptocurrencies?

  • From equities, there has been a swift shift to cryptos, which is still a grey area.
  • The regulators/government are wondering what to do. The issue will be discussed in the winter session of Parliament.
  • But investments have been made and there is no stopping this global wave.
  • Currency with no underlying asset: Making money on a currency that has no underlying asset like a metal or other currency and is traded on faith is unique; especially Bitcoin, whose originator is not known by face but by just a name.

Gaming as a skill

  • There is another door to a new kind of gaming where you make money by making teams and following the matches.
  • The law was first silent, and then confused.
  • But it finally accepted gaming as a skill.
  • Logically, soon we should be able to bet on matches too, if all this is in order.

Conclusion

We are witnessing a change in the pattern of holding onto money, where savings get transformed to investment and risk appetite changes from conservative to aggressive. Will this change? Probably not, in the near future, as long as conventional deposits continue to give inferior returns.

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Blockchain Technology: Prospects and Challenges

Is crypto mania more a symptom than a cause?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Blockchain technology

Mains level : Paper 3- Approach towards cryptocurrencies

Context

The draft legislation on crypto currency being introduced in Parliament and the stance of the RBI suggest that consideration is being given to banning crypto currencies in India.

What fascination with crypto reveals about our society?

  • It is about faith in that value is largely a matter of belief.
  • It is about politics because money is always about the allocation of power.
  • The money itself may not be material, but it is still embedded in a materiality.
  • The fact that money is subject to politics is actually the advantage of money.
  • It allows a modicum of collective control over our future, and allows distributive questions to be posed.
  • It is mania because the alchemy of creating something out of nothing is always deeply alluring.
  • Cheap money: The global economy is awash with cheap money.
  • Seeking return: In an Indian context small savers are desperate for return.
  • In this context it is easy for the powerful to misallocate money and the small saver to express desperation by speculation.

Background

  • Faced with the inflation of the 1970s, thinkers like Friedrich Hayek theorised about reasserting the dominance of private currencies, protected from the state.
  • Crypto currencies are a fascinating technological innovation.
  • Part of their initial attraction was that they promised a new governance order. 
  • It is at the confluence of faith, politics, and psychological mania.
  • Solving the problem of trust: This project crucially depended on solving the problem of “trust” on which every currency depends.
  • Crypto seemed to solve that problem, with its decentralised architecture and community and self-verification protocols.

How cryptocurrency poses challenges to the state?

  • No state was going to let go of its power to assert control over the monetary system.
  • Significance of fiat money: The sustenance of state-sponsored fiat money is one of the great achievements of modern state formation and the foundation of its power and legitimacy.
  • Cryptocurrency requires material infrastructure: There was a delusion, as if crypto is conjured out of thin air: It actually requires substantial material infrastructure, which a state could always control.
  • States can shut down mining as China has done.

Way forward

  • We allow people to invest in all kinds of things. Why ban this, especially now that so many investors are in it?
  • Analyse the risk to the financial system: The answer to this question depends on how much risk the existence of crypto assets pose to the stability of the rest of the financial system.
  • Insulate financial system: One answer is if you can insulate the financial system from the gyrations of crypto markets there are few systemic risks.
  • This is why it was a good idea of the RBI to prohibit the entanglement of financial institutions with this market.
  • Instead of just focussing on issues of fraud, money laundering, and private risks, the RBI’s case would be strengthened if it spelled out the systemic risks that crypto might pose to the stability of the real economy.
  • Avoid ban with exception scenario: For political economy reasons, the RBI should avoid a scenario where it bans but then carves out exceptions.
  • Ensuring that trade does not go offshore: The second thing is that if it somehow allows Indians to invest then it has to ensure that trade does not go offshore. 
  • Not fully banning and allowing it offshore will be the worst of both worlds.

Challenges in insulating the crypto market

  • In practice the insulation of crypto markets will be difficult to achieve.
  • Political economy: The first reason is political economy. Once you have a large number of investors, and some influential ones, they will be a vested interest in their own right, potentially demanding the socialisation or mitigation of losses.
  • Impact of volume: The second reason is that it is difficult to pretend that a major new class of assets, especially if volumes grow, does not have systemic effects on the rest of the economy.

Consider the question “What are the risks and advantages provided by the cryptocurrencies? Suggest the approach India should adopt in dealing with cryptocurrencies.”

Conclusion

As the RBI makes the case for banning crypto, we also need to ask, why it is alluring in the first place. What does this mania reveal about our politics and economics?

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Blockchain Technology: Prospects and Challenges

Cryptocurrencies regulation across the World

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Need for Cryptocurrencies regulation

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was listed for introduction in Parliament’s Winter Session.

About the Bill

  • The bill aims to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”.
  • It seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

How are cryptocurrencies regulated in countries around the world?

The stance of countries and regulators has ranged from:

  1. A total ban on these financial assets Ex. China
  2. Allowing them to operate with some regulations
  3. Allowing virtual currency trading in the absence of any guidelines Ex. El Salvador
  • Governments and regulators remain divided on how to categorize it as a currency or asset — and how to control it from an operational point of view.
  • The evolution of the policy and regulatory response has been uncharacteristically discordant, with no apparent coordination in the responses of countries.

Among the countries that haven’t issued detailed regulations, there are those that have recognized and defined these currencies.

[A] CANADA

  • It defines virtual currency  under its Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, as:

(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a).

  • The Canada Revenue Authority (CRA) generally treats cryptocurrency as a commodity for purposes of the country’s Income Tax Act.

[B] ISRAEL

  • Israel in its Supervision of Financial Services Law includes virtual currencies in the definition of financial assets.
  • The Israeli securities regulator has ruled that cryptocurrency is a security subject, while the Israel Tax Authority defines cryptocurrency as an asset and demands 25% on capital gains.

[C] GERMANY

  • In Germany, the Financial Supervisory Authority qualifies virtual currencies as “units of account” and therefore, “financial instruments”.
  • It considers Bitcoin to be a crypto token given that it does not fulfill typical functions of a currency.
  • However, citizens and legal entities can buy or trade crypto assets as long as they do it through exchanges and custodians licensed with the German Federal Financial Supervisory Authority.

[D] UNITED KINGDOM

  • In the UK, Her Majesty’s Revenue & Customs, do not consider crypto assets to be currency or money.
  • It further notes that cryptocurrencies have a unique identity and cannot, therefore, be directly compared to any other form of investment activity or payment mechanism.

[E] UNITED STATES

  • In US different states have different definitions and regulations for cryptocurrencies.
  • While the federal government does not recognize cryptocurrencies as legal tender, definitions issued by the states recognize the decentralized nature of virtual currencies.

[F] THAILAND

  • In Thailand, digital asset businesses are required to apply for a license, monitor for unfair trading practices, and are considered “financial institutions” for anti-money laundering purposes.

Conclusion

  • While most of these countries do not recognize cryptocurrencies as legal tender, they do recognize the value these digital units represent.
  • Almost all countries consider their functions as either a medium of exchange, unit of account, or a store of value (any asset that would normally retain purchasing power into the future).
  • Like India, several other countries have moved to launch a digital currency backed by their central bank.

 

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Blockchain Technology: Prospects and Challenges

Cryptocurrencies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies and Legal Tender Currency

Mains level : Need for Cryptocurrencies regulation

With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Centre has been compelled to take a stance on the legal status of cryptocurrencies.

Background

  • The Union Government is said to be considering a proposal to tax cryptocurrency transactions in the country.
  • The move would bring cryptocurrency trading, which has till date happened outside the ambit of the law, into the formal economy.

Defying RBI ban

  • RBI has been vehemently opposed to the idea of legalizing cryptocurrencies.
  • It had banned financial institutions such as banks from facilitating transactions involving cryptocurrencies back in 2018.
  • The RBI’s order was overturned by the Supreme Court in 2020, and this led to a tremendous surge in cryptocurrency transactions through exchanges.

Why did RBI propose a ban?

  • Financial stability: The RBI has characterized private cryptocurrencies as a threat to financial stability.
  • Threat to the sovereignty of Rupee: It perceives cryptocurrencies rise as a threat to the sovereignty of the rupee.
  • Beyond regulatory scope: The widespread acceptance of cryptocurrencies could interfere with the ability of the RBI to conduct monetary policy effectively.
  • Digital currency in the pipeline: It should be noted that RBI and other central banks are also looking to come up with digital versions of their own currencies.
  • Competition of currencies: The rupee or central bank digital currencies may not be able to outcompete cryptocurrencies just because they are digital.

Legislative opinion on Cryptocurrencies

  • Not in favour of ban: This week, a Parliamentary Standing Committee recommended that cryptocurrencies be regulated rather than banned.
  • Making a legal framework: The Government is also expected to table a bill that clarifies its position on cryptocurrencies in Parliament next year.
  • Taxing cryptocurrencies: There is a proposal to classify cryptocurrency exchanges as e-commerce platforms and tax them under the GST framework comes.

Why has the Government chosen to regulate rather than ban cryptocurrencies?

  • Popularity amongst Public: The growing popularity of cryptocurrencies among citizens may have played a role in the Government opting for regulation over an outright ban.
  • Lack of evident threat: There is no clear evidence of the misuse of cryptocurrencies and their risks.
  • Boosting with policy: The Union govt may also not want to kill the nascent cryptocurrency industry which many believe can be a hub for financial innovation.
  • Revenue generation: Fiscal revenues can be adversely impacted by the increased tax evasion opportunities that crypto-currencies can facilitate.
  • Capitalizing the market: The govt wants to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.
  • Financial innovation: Blockchain technology has multiple uses beyond just facilitating cryptocurrency transactions.

Issues with the ban

  • Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban.
  • Capital inflows will be restricted: If cryptos begin to get mined onshore, they will induce capital inflows.
  • Killing financial innovation: A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world.

Other generic concerns:

  • Safety (cyber-attacks and fraud)
  • Financial integrity (money laundering and evasion of capital controls)
  • Energy usage (outsized energy needs to mine cryptos)

Way forward

  • Thus it can be inferred that cryptocurrency is better classified as an asset rather than as a currency, in order to gain acceptance and avoid a ban.

Conclusion

  • There is no doubt that the acceptance of cryptocurrencies by the Government is likely to be limited.
  • While cryptocurrencies may be accepted as speculative assets, it is highly unlikely that they will be accepted as full-fledged currencies competing against the rupee.

 

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Blockchain Technology: Prospects and Challenges

Taproot upgrade in Bitcoins

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Taproot upgrade in Bitcoins

Mains level : Cryptocurrencies regulation in India

Bitcoin went through a major upgrade that enables its blockchain to execute more complex transactions, potentially widening the virtual currency’s use cases and making it a little more competitive with Ethereum for processing smart contracts.

What is the new upgrade?

  • The enhancement, called Taproot, is the most significant change to the bitcoin protocol since the SegWit (Segregated Witness) block capacity change in 2017.
  • SegWit effectively increased the number of transactions that could fit into a block by pulling data on signatures from bitcoin transactions.
  • Smart contracts are self-executing transactions whose results depend on pre-programmed inputs.

What is Taproot?

  • The Taproot upgrade consists of three separate upgrade proposals.
  • However, at its core, the upgrade introduces a new digital signature scheme called “Schnorr” that will help bitcoin transactions become more efficient and more private.
  • Schnorr can also be leveraged to let bitcoin users execute more complex smart contracts.

When was Taproot officially activated?

  • Taproot was officially activated on block 709,632.
  • Blockchains settle transactions in batches or blocks.
  • Each block can contain only a certain number of transactions.

What is its impact on Bitcoin?

  • The biggest impact would be the bitcoin network’s ability to process more smart contracts, similar to what Ethereum does.
  • Bitcoin has historically been much more limited in processing smart contracts compared with Ethereum.
  • Taproot increases privacy by obscuring what type of transaction is being executed.

What are the other enhancements?

  • The Schnorr signatures can make more complex transactions on the bitcoin protocol, such as those from wallets that require multiple signatures, look like just any other transaction.
  • This makes transactions more private and more secure.
  • Bitcoin transactions will also become more data-efficient, optimizing block capacity and leading to lower transaction fees.

What does Taproot mean for investors?

  • Large-scale upgrades have paved the way for the next phase of innovation in the bitcoin network.
  • The last major upgrade in 2017 helped launch the Lightning Network, which facilitated much faster and cheaper bitcoin payments than before.
  • Taproot to lead to a similar wave of innovation in bitcoin centered around smart contracts.

Also read:

Cryptocurrency

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What is a Bitcoin Hardware Wallet and how it works?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Issues with Cryptocurrencies

Last week, Twitter CEO announced his payments firm Square would soon build a hardware wallet to store bitcoin.

Bitcoin Hardware Wallet

  • The wallet will be a type of plug-in device, much like a USB pen drive that stores, manages and secures a user’s crypto assets.
  • Each digital asset is linked to a cryptographic password called a ‘private key’ to allow users to access it.
  • This key safeguards cryptocurrencies from theft and unauthorized access.
  • The asset owner, with the help of a secure hardware wallet, can access the private key to buy and sell crypto assets from anywhere.
  • Most hardware wallets allow users to manage multiple accounts; some even allow users to connect to their Google or Facebook accounts.
  • Popular hardware wallets include Trezor, Ledger, KeepKey and Prokey.

How is it different from a software wallet?

  • Cryptocurrency keys can be stored in two kinds of wallets – software and hardware.
  • Software wallets are like smartphone apps that digitally store private keys.
  • Most software wallets don’t charge users to store private keys but may collect a commission for trading via the app.
  • These wallets can be vulnerable to malware.
  • Hardware wallets and physical devices act like cold storage for confidential keys. The passwords are protected by a PIN, making it difficult for hackers to extract private keys as the information is not exposed to the Internet.

The upsides of a hardware wallet

  • Hardware wallets are said to be convenient as they can be connected to trading exchanges to complete transactions.
  • Hardware wallets are often stored in a protected microcontroller and cannot be transferred out of the device, making them secure.
  • Their isolation from the Internet also mitigates the risk of the assets being compromised. Moreover, it does not rely on any third-party app.

Limitations

  • Since the wallet is in physical form, the device could be stolen or destroyed.
  • They could be used by malicious actors to steal confidential data.
  • The device can also be expensive as compared to software wallets.
  • Some hardware wallets can also have complex features, making it difficult for first-timers to understand.

Answer this PYQ in the comment box:

Q.With reference to “Blockchain Technology”, consider the following statements:

  1. It is a public ledger that everyone can inspect but which no single user controls.
  2. The structure and design of block chain is such that all the data in it are about crypto currency only.
  3. Applications that depend on basic features of blockchain can be developed without anybody’s permission.

Which of the statement given above is/are correct?

(a) 1 only

(b) 2 only

(b) 1 and 2 only

(d) 1 and 3


Back2Basics: Cryptocurrencies

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

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Why is China targeting Cryptocurrencies?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Issues with Cryptocurrencies

China’s crackdown against cryptocurrencies, which are those that aren’t sanctioned by a centralized authority and are secured by cryptography, is said to have a lot to do with the crashing of the value of cryptocurrencies.

Background

  • The price of the world’s most prominent cryptocurrency Bitcoin has more than halved in the last two months after hitting a peak in mid-April.
  • The second-most valuable cryptocurrency, Ether, has seen a similar fall from its peak last month.

What is Cryptocurrency?

  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers.
  • This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.

What has China done?

  • In recent weeks, China has reportedly cracked down on crypto mining operations.
  • The country has over the years accounted for a large percentage of the total crypto mining activity that takes place.
  • In purpose, Bitcoin miners play a similar role to gold miners — they bring new Bitcoins into circulation.
  • They get these as a reward for validating transactions, which require the successful computation of a mathematical puzzle.
  • And these computations have become ever-increasingly complex, and therefore energy-intensive in recent years. Huge mining operations are now inevitable if one is to mine Bitcoins.

Why is Crypto mining booming in China?

  • Access to cheap electricity has made mining lucrative in China.
  • According to the Cambridge Bitcoin Electricity Consumption Index, China accounted for nearly two-thirds of the total computational power last year.

For an ‘unregulated’ market

  • Actually, there is little change in the policy as far as China is concerned. It first imposed restrictions on cryptocurrencies way back in 2013.
  • It then barred financial institutions from handling Bitcoin.
  • Four years later, it barred what are called initial coin offerings, under which firms raise money by selling their own new cryptocurrencies.
  • This is largely an unregulated market.

What does China want?

  • An inter-ministerial committee report in India two years ago noted that in 2017, the government of China also banned trading between RMB (China’s currency renminbi) and cryptocurrencies.
  • Before the ban, RMB made up 90% of Bitcoin trades worldwide.
  • The fact that cryptocurrencies bypass official institutions has been a reason for unease in many governments.
  • Not just that. The anonymity that it offers aids in the flourishing of dark trades online.
  • While many countries have opted to regulate the world of cryptocurrencies, China has taken the strictest of measures over the years.
  • According to observers, the latest set of measures are to strengthen its monetary hold and also project its new official digital currency.

For a digital Yuan

  • China launched tests for a digital yuan in March.
  • Its aim is to allow Beijing to conduct transactions in its own currency around the world, reducing dependency on the dollar which remains dominant internationally.

Also read:

Legalizing Bitcoin in El Salvador and takeaways for India

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Embracing cryptocurrency

Note4Students

From UPSC perspective, the following things are important :

Prelims level : What are cryptocurrencies

Mains level : Paper 3- Regulating cryptocurrencies

As India struggles to come up with an appropriate approach towards cryptocurrencies, the growing trend of the adoption of cryptocurrencies across the world offers a lesson.

Rising global trend of embracing cryptocurrencies

  • El Salvador became the first country in the world to adopt bitcoin as legal tender.
  • The U.K. has classified cryptocurrency as property.
  • The U.K. has sought to regulate the functioning of crypto-businesses while still imposing some restrictions to protect the interests of investors.
  • On the other hand, while there is no exact legal classification of cryptocurrency in Singapore, there is now a legal framework for cryptocurrency trading.
  • In the U.S., the open approach taken by the authorities has resulted in the trade in cryptocurrency being both taxed and appropriately regulated.

India’s approach

  • Between 2013 and 2018, the government’s response to the rise of virtual currencies was cautionary, alerting users to the potential risks posed by cryptocurrency transactions.
  • Instead of developing a regulatory framework to address these issues, the Reserve Bank of India (RBI), in April 2018, effectively imposed a ban on cryptocurrency trading.
  • This ban was overturned by the Supreme Court in 2020.
  • The court reasoned that there were alternative regulatory measures short of an outright ban through which the RBI could have achieved its objective of curbing the risks associated with cryptocurrency trading.
  • India’s next move lies in the draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
  • The draft Bill proposes to criminalise all private cryptocurrencies while also laying down the regulatory framework for an RBI-backed digital currency. 

What should be India’s approach?

  • The global regulatory attitude towards cryptocurrencies offers valuable insights into the alternative ways to achieve balanced regulation.
  •  In India, the absence of an existing legal classification of cryptocurrency should not be the impetus to prohibit its use.
  • The government should use this as an opportunity to allow private individuals the freedom to harness a powerful new technology with appropriate regulatory standards.

Consider the question “As India finds itself at a crossroads of prohibition and regulation in its tryst with cryptocurrencies, globally, the inclination towards permissive regulation recognises the freedom of choice given to people. In light of this, examine the advantages and concerns with the cryptocurrencies and suggest the approach India should adopt towards the cryptocurrencies.”

Conclusion

Regulations to avoid the pitfall and not the outright ban is the right way towards the cryptocurrencies.

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Legalizing Bitcoin in El Salvador and takeaways for India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Bitcoin

Mains level : Cryptocurrencies regulation in India

El Salvador, a small coastal country in Central America, on became the first in the world to make Bitcoin, a digital currency, legal.

Lessons for India

While there are many precedents El Salvador sets for a global debate on cryptocurrency, we explore what this means in the Indian context.

(1) Not a precedent for monetary policy

  • The development in El Salvador changes little in terms of Indian monetary calculations around cryptocurrencies.
  • The dynamic underpinning the whole move is that El Salvador has no monetary policy of its own and hence, no local currency to protect.
  • The country was officially ‘dollarized’ in 2001 and runs on the monetary policy of the US Federal Reserve.
  • The move is in part motivated by loose and expansionary Federal Reserve policy.

(2) Coexistence with USD

  • The dollar will continue to remain the dominant currency in the country and Bitcoin would exist side by side.
  • Indeed, some analysts have pointed out how bitcoinization might change nothing on the ground if “legal tender” is to be considered by its strict legal definition.
  • However, as a result of this development, El Salvador becomes a most interesting case study of how the dollar and bitcoin would coexist side by side, and how that would play out for Bitcoin adoption.

(3) Not merely currency but technology

  • The overall use of Bitcoin appears less motivated by its use as a currency and much more by the image and investment boost this could give the country towards innovation.
  • El Salvador believes that this move will be good for luring “technology, talent, and new ideas” into the country.
  • The move into Bitcoin ties in with larger efforts to revive a stalling economy and bring back growth into the country post-Covid.

(4) Potential shift in remittances

  • The impact Bitcoin has on these remittance inflows would be worth monitoring for India, which is home to the largest remittance market in the world.
  • Remittances make up close to 20% of El Salvador’s GDP with flows approximating $6 billion annually.
  • Many citizens lack a bank account and digital banking has low penetration.
  • In this scenario, there are multiple intermediaries in the remittance chain who take cuts of as high as 20%.

(5) Impact on money laundering

  • The implication of this move for money laundering is unclear at the moment.
  • Currently, El Salvador is not considered deficient under the FATF money laundering requirements.
  • However, with large scale cryptocurrency inflows and outflows, it would be expected that El Salvador would comply with the 2019 FATF guidance on Virtual Currencies.

Conclusion

  • The overall takeaway for India from the El Salvador case is not in the monetary sense at all.
  • This is the wealth that India has in spades and has barely protected with policy.
  • While deliberations continue in India on the monetary and financial regulations around cryptocurrency.
  • It is important that attention be paid to incentives for India’s developers working on key innovations in the space.

Back2Basics: Bitcoin

  • Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
  • Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
  • The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.
  • The currency began to use in 2009 when its implementation was released as open-source software.

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Explained: Cryptocurrency Market Crash

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency, Blockchain technology

Mains level : Acceptance of cryptocurrency

The cryptocurrency market saw a big correction with prices of major currencies, including Bitcoin, Ethereum, BNB, and others crashing as much as 30% within 24 hours.  This came in the backdrop of Chinese regulators announcing a crackdown on cryptocurrencies.

Try this question from our AWE initiative:

What is a cryptocurrency? What benefits and challenges do cryptocurrencies pose? (250 Words)

Crackdown on Crypto Market

  • China has barred financial institutions and payment companies from providing any services related to cryptocurrency transactions.
  • This means that banks and online payment channels must not offer clients any service involving cryptocurrencies, such as registration, trading, clearing, and settlement.
  • China had issued such a ban in 2017 as well, but compared with the previous ban, the new rules have expanded the scope of prohibited services, and surmise that “virtual currencies are not supported by any real value”.

Other reason behind this crash: The Tesla story

  • Tesla recently announced that it wouldn’t favor Bitcoin on ‘environmental’ concerns because Bitcoin mining requires electricity which is mostly generated using fossil fuels.
  • However, this seems to be motivated and raises a few questions like – didn’t the Tesla management already know about Bitcoin mining before diversifying into it?

What does this fall imply?

  • A crackdown by one of the world’s biggest economy notwithstanding, those in the ecosystem has termed this decline as a short-term correction.
  • A nearly 40% dip in the bitcoin price from its all-time high looks dramatic but is normal in many volatile markets, including crypto, especially after such a large rally.
  • Such corrections are mainly due to short-term traders taking profits.
  • Long-term value investors might call these lower prices a buying opportunity.

Back2Basics: Cryptocurrencies

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

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Exit window likely for crypto holders in proposed legislation on cryptocurrencies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Banning cryptocurrency

Law to ban private cryptocurrencies

  • The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 aims to prohibit all private cryptocurrencies.
  • It lays the regulatory framework for the launch of an “official digital currency” was set to be introduced in Parliament during the Budget session, but was not taken up.
  • A high-powered inter-ministerial committee has also previously recommended the banning of all private cryptocurrencies.
  • In April 2018, the RBI banned banks and other regulated entities from supporting crypto transactions after digital currencies were used for frauds.
  • In March 2020, the Supreme Court struck down the RBI’s ban on crypto, terming its circular unconstitutional.
  • One of the SC’s reasons for overturning the ban is that cryptocurrencies are unregulated but not illegal in India.

Central bank-issued digital currency

  • The RBI had said central banks are not only exploring DLT (Distributed Ledger Technology) for its application in improving financial market infrastructure but also considering it as a potential technological solution in implementing central bank digital currency (CBDC).
  • DLT and blockchain have been explored extensively by the People’s Bank of China as a possible technology for launching CBDC.
  • Apart from CBDC, PBoC is supporting research on using blockchain for trade finance, especially after the support from the President of China for the blockchain technology, as an important breakthrough for innovations.

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Blockchain Technology: Prospects and Challenges

Carbon footprint of Bitcoins

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Bitcoins

Mains level : Feasiblity of Bitcoins as currency

At a time when investors around the world are scrambling to follow the newest financial trend, very few are bothered about the carbon footprint that the cryptocurrency is leaving behind.

If Bitcoin were a country, it would consume more electricity than Austria or Bangladesh!

Footprint of Bitcoins

  • T A recent study by Alex de Vries, a Dutch economist, has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
  • The annual carbon footprint of Bitcoins is almost equivalent to that of Mumbai, or to put it to a global perspective, as high as the carbon footprint of Slovakia.
  • A recent study has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
  • According to a study titled ‘CO2 Emissions from Fuel Combustion (Highlights) 2017’, Mumbai’s yearly carbon footprint stands at 32 Mt, while Bangalore’s is at 21.60 Mt.
  • Vries has been able to create a Bitcoin Energy Consumption Index, one of the first systematic attempts to estimate the energy use of the bitcoin network.

Relation between creating bitcoins and electricity required

  • Bitcoins are created by “mining” coins, for which high-tech computers are used for long hours to do complex calculations.
  • The more coins there are in the market, the longer it takes to “mine” a new one and in the process, more electricity is consumed.
  • As mining provides a solid source of revenue, people are willing to run power-hungry machines for hours to get a piece.
  • In 2017, the Bitcoin network consumed 30 terawatt-hours (TWh) of electricity a year.
  • As such, each bitcoin transaction roughly requires an average of 300kg of carbon dioxide – which is equivalent to the carbon footprint produced by 750,000 credit cards swiped.

Calculating the carbon footprint

  • The major problem with mining Bitcoin is not its massive energy-consumption nature; it is the fact that most of the mining facilities are located in regions that rely heavily on coal-based power.
  • Earlier, determining the carbon impact of the Bitcoin network was difficult as tracking down miners was never easy.
  • As per the estimates of De Vries, roughly 60% of the costs of bitcoin mining is the price of the electricity used.
  • The price of a Bitcoin stood at $42,000 and at this rate; miners would be earning around $15 billion annually.

Other impacts of Bitcoin mining

  • The effects of cryptocurrency mining often spill over to other parts of the economy.
  • With miners using high-tech computers for hours to formulate new blockchains, these machines do not last long.
  • Manufacturers of Bitcoin mining devices need a substantial number of chips to produce these machines and recently, during the Covid-19 crisis, the world had witnessed a shortage of these chips.
  • This shortage, now, in turn, started affecting the production of electric vehicles around the world.

What can be done to control the carbon footprint?

  • The Dutch economist asks policymakers to follow the path shown by Québec in Canada, where a moratorium on new mining operations has been imposed.
  • Although Bitcoin might be a decentralized currency, many aspects of the ecosystem surrounding it are not.
  • Large-scale miners can easily be targeted with higher electricity rates, moratoria, or, in the most extreme case, confiscation of the equipment used.
  • Governments can also ban cryptocurrencies from digital asset marketplaces as it will affect the prices of a digital currency.

India and the cryptocurrency

  • The country, at present, has around 75 lakh cryptocurrency investors who have together pooled over Rs 10,000 crore into Bitcoins and other such digital currencies.
  • The prices have surged by over 900%, courtesy of the worldwide boom – a single bitcoin that used to cost around Rs 4 lakh in 2020 now costs somewhere around Rs 41 lakh now.
  • FM Nirmala Sitharaman has said that the Centre will take a “calibrated approach” and leave a window open for experiments with blockchain technology.

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Regulate but do no ban Bitcoin

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Blockchain

Mains level : Paper 3- Implications of banning blockchain technology

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to ban cryptocurrencies. Banning cryptocurrencies would have several implications for India. This article deals with this issue.

Soaring value of Bitcoin

  • Recently, Tesla announced that it will soon accept cryptocurrency as legitimate payment for its cars.
  • Mastercard followed by announcing that it will incorporate ‘select cryptocurrencies’ on its global payment network.
  • BNY Mellon, incidentally the US’s oldest bank, announced holding and transferring digital currencies for asset management clients.
  • JP Morgan and Goldman Sachs announced executive positions to look at cryptocurrencies.
  • All of this resulted in a soaring value of Bitcoin, and its younger sibling, Ethereum.

India’s governments stand on cryptocurrencies

  • India’s government sought to ban cryptocurrency through a proposed legislation, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
  • The Bill also provides to also set up a legal structure for an “official digital currency”.
  • The Bill promises to “allow for certain exceptions to promote the underlying technology of cryptocurrency (blockchain) and its uses.”
  • The way the technology is built, an ownerless, consensus-driven, distributed ledger like a blockchain needs cryptocurrency to grease its wheels.
  • India tried to ban cryptocurrency once before, in 2018, before it was reversed by the Supreme Court.

Implications of banning cryptocurrencies

  • The banning will kill innovation.
  • India has more than 30,000 blockchain innovators and practitioners.
  • These innovators will now be looking at moving out to friendlier regimes like the US, Switzerland, Singapore and Estonia.
  • International tech companies will freeze blockchain and crypto-exchange investments in India and the step will undermine India’s reputation as a technology hub.
  • India is the second-largest Bitcoin trading nation in Asia, and all those trades will move to overseas exchanges.
  • China has large crypto trading and mining operations, and an Indian ban on Bitcoin will leave that space open for it.

Consider the question “What is cryptocurrency? What would be the implications of banning it?”

Conclusion

No doubt, there are many problems with cryptocurrency—it is volatile, sucks energy, and is often abused by criminals. But the answer is not to ban it, but regulate it.

 

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Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency, Blockchain technology

Mains level : Digital Currency

With the likely scenario of India’s government banning private cryptocurrencies, the Reserve Bank of India (RBI) is planning to introduce an official digital currency for the country.

What is the news?

  • An earlier government bill on cryptocurrency in 2019 reportedly sought to ban cryptocurrency and criminalise its possession in India. However, it was not introduced in Parliament.
  • The detailed text of the bill has not been released in the public domain so far.
  • The bill also says that there will be a regulation to help RBI create its own CBDC (central bank digital currency).

What are Cryptocurrencies?

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Hues over the Bill

  • The past year has seen a surge in the number of cryptocurrency investors in India and in trading volumes.
  • Cryptocurrency exchanges such as CoinDCX and Coinswitch Kuber have also raised early-stage funding for their operations.
  • The bill may spark an end to the nascent cryptocurrency industry in the country.

What were the provisions of 2019 Bill?

Definition of cryptocurrencies:

  • The 2019 Bill defined cryptocurrency as any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.

Ban:

  • The 2019 Bill bans the use of cryptocurrency as legal tender or currency.
  • It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency.
  • Mining is an activity aimed at creating a cryptocurrency and/or validating cryptocurrency transactions between a buyer and a seller.

In particular, the use of cryptocurrency was prohibited for:

  1. use as a medium of exchange, store of value or unit of account,
  2. use as a payment system,
  3. providing services such as registering, trading, selling or clearing of cryptocurrency to individuals,
  4. trading it with other currencies,
  5. issuing financial products related to it,
  6. using it as a basis of credit,
  7. issuing it as a means of raising funds, and
  8. issuing it as a means for investment.

Why the govt wants to ban cryptocurrencies?

Sovereign guarantee

  • Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.

Market volatility

  • Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.

Risk in security

  • A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).

Malware threats

  • In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.

Money laundering

  • Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.

Regulatory bypass

  • A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.

Power consumption

  • Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

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Private: Use Blockchain Technology to improve governance

In India, present administrative affairs grapple with leakages in public delivery of welfare and development goals on account one critical problem- manual processes that can be very easily manipulated. These are often so complex and laborious that even a well-intentioned public servant is chary of implementing beneficial decisions. Technology can cut through much of these daunting processes.

What is Blockchain Technology?

  • Blockchain technology is a structure that stores transactional records (known as the block) of the public in several databases (known as the chain) in a network connectedthrough peer-to-peer nodes. This storage is referred to as a digital ledger.
  • The three key principles of blockchain technology are transparency, decentralisation and accountability.

How can India utilize Blockchain Technology?

  • In the next decade, the business of Indian government is going to experience massive disruptions. This comes on the back of technological enhancements that reduce the need for intermediaries and ensure that the sanctity of process remains unimpeachable.
  • NITI Aayog identified use-cases where the technology can potentially improve governance ranging from tracing of drugs in the pharmaceutical supply chain to verification of education certificates.
  • One of the most productive areas of intervention for blockchain technology would be in land records.
  • A vast developing country like India, with its diverse land tenure systems, is bound to have major problems in this area.  The system is riddled with inefficiencies that reduce trust in the government.
  • Currently the United Nations Development Programme is involved in Proof of Concept pilots across India. Through this technology;
    • create an immutable history of transactional records that helps in checking authenticity;
    • create a tamper-proof system to avoid forgery;
    • create a distributed ledger so that all stakeholders see the same information and set up a secure encrypted environment, where updates are available in near real time.
  • The NITI Aayog notes that, in order to ensure that transactions are not fraudulent, the physical presence of witnesses is mandated at the time of sales deed registry.
  • Deployment of blockchain would potentially eliminate the need of these processes while maintaining the sanctity of the transaction.
  • Blockchain helps create a tamper-proof audit trail that allows for tracking decision-making and ensures that such decisions are in accordance with anti-corruption principles.
  • It addresses concerns around cyber security that come with any effort towards digitisation. Currently there are interesting pilots being conducted across the world, where deployment of blockchain is being tested for public procurement.
  • From the perspective of Internal Controls and Governance (Vigilance), blockchain is strongly recommended to employ a five-part test while assessing such deviations from process:
    1. Whether the issue being pursued has corruption connotations;
    2. The general reputation of the employee involved;
    3. Whether better options were available and ignored without valid reasoning;
    4. Whether the situation inhibited the selection of any other option but the one finally chosen;
    5. Whether the larger interest of the organisation was safeguarded.
  • However, a significant factor in blockchain’s success will be the ability to develop/reform laws and building robust data protection and maintenance regimes.
  • The general environment now is in favour of a regime which ensures that companies not only do profitable business but do so in an ethical manner.

Government Efforts:

  • The enactment of the Public Procurement Bill, Lokpal Act incorporating, inter alia, the disclosure of assets by public servants and reforms in higher judicial appointments to name a few.
  • The government launched the Government e-Marketplace (GeM) in 2016 for goods and services required by central and state governments, and public sector undertakings.
  • The price reduction of approximately 56% of goods and services coupled with demand aggregation has led to savings of ₹40,000 crores annually.
  • The government made a significant change to the Prevention of Corruption Act in 2018. In the earlier regime, even honest public officials were harassed if a decision provided pecuniary advantage to a person without any public interest.
  • The element of intention has been added under the definition of criminal misconduct. Similarly, broadening the definition of “unfair advantage” and the introduction of corporate criminal liability will go a long way in apprehending or deterring those indulging in bribery.
  • United Nations Convention against Corruption ratified by India in 2011 as well as the anti-corruption principles of the Organization for Economic Cooperation & Development (OECD) cover a wide swathe of vulnerable areas and aspects of business operations including anti-bribery, public procurement and conflict of interest.

Challenges

  • The problem of corruption in the social and political spheres has often come in for strident criticism.
  • It can be argued that corruption in public life, directly or indirectly, adversely affects the achievement of United Nation (UN)’s sustainable development goals (SDGs).
  • Governments are expectedly risk-averse in dealing with both public policies and public money while enterprises thrive on risk-taking. This often hobbles the entrepreneurial spirit in the public sector.
  • The public procurement economy in India constitutes about 20% of the Gross Domestic Product (GDP), it is imperative to build on this initiative with a view to onboard as many goods and services as possible.

Suggestions:

  • In the recent discourse on procurement methods, transparency of policy, procedure and practices is increasingly being seen as an imperative when utilising public money.
  • However, transparency is not an end in itself. The whole process must be open to public scrutiny.
  • It is important to institutionalise a system where compliance and established processes can be routinely checked and quantified.
  • A metrics-based system for oversight in governmental processes will bring about transparency, build trust with citizens and spur further digital innovation to make any administration more robust.
  • It is only through robust yet streamlined procedures that a bureaucrat can achieve the intended outcome and avoid unintended consequences.
  • India must focus on the well-intentioned public servant who finds the processes leading to greater transparency and ensuring value for taxpayers’ money cumbersome.

Conclusion:

Blockchain is likely to have a significant impact in creating an integrity-first governance ecosystem. India needs to review existing legal frameworks to address issues around, inter alia, data security, corrupt practices and corporate governance with a view to address anti-corruption objectives.

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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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Blockchain Technology: Prospects and Challenges

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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Blockchain Technology: Prospects and Challenges

[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.

 


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Blockchain Technology and Bitcoins

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Blockchain Technology: Prospects and Challenges

[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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emma johnson
emma johnson
10 months ago

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