India must not miss the cryptocurrency bus
As India’s Covid-19 pandemic peaked in mid-May, Vitalik Buterin, the 27-year-old founder of Ethereum, donated $ 1 billion worth of cryptocurrency. dollars to support pandemic relief work in India. Our astonished media did not know what to think: some reported it as the greatest philanthropic contribution to help Indians affected by Covid, while others thought it was a bit of a joke, especially since the Cryptocurrency donated was Shiba Inu, one of a growing number of “digital meme currencies”.
Many Indians are understandably skeptical of the very idea of cryptocurrency. How can there be a kind of currency that is not backed by a sovereign state and a public institution like a central bank? But there are, and it’s valuable enough to shake up the financial markets. The pioneering cryptocurrency, Bitcoin, which traded at just $ 0.0008 in 2010, commanded a market price of just under $ 65,000 in April. Many newer coins have been introduced since Bitcoin’s launch, and their cumulative market value reached $ 2.5 trillion in May. In a little over a decade, their value has exceeded the size of the economies of most modern nations.
China’s recent crackdown on cryptocurrency has had far-reaching consequences. An incredible US $ trillion was wiped out of the global crypto market within 24 hours. Remarkably, this is a reversal of a fraction of the gains made by this sector since the start of Covid-19 in January 2020. The “cryptomarket” has grown by more than 500%, even though the pandemic has triggered a unprecedented global economic carnage since the Great Depression. Less than two days after the crash caused by China, the value of the crypto market has again recovered by more than 10%.
This type of extreme volatility has always been a concern for regulators and investors. When Satoshi Nakamoto created the most popular cryptocurrency, Bitcoin, in 2008 as a fully decentralized peer-to-peer electronic payment system that did not need the skill of any third-party financial institution, he was reacting to the lack of confidence. in the existing banking system reflected in the global financial crisis that year. Governments initially did not know how to react, but as with the growth of the internet, the advent of cryptocurrency has been one of the extraordinary stories in modern economic history and no country can remain unmoved by it. .
In India, as always, the reflex is to forbid what we cannot understand, to forbid what we cannot control. Law enforcement and tax authorities have called for a ban, expressing distrust of their use as instruments for illicit activities, including money laundering and terrorist financing. In 2018, the Reserve Bank banned our financial institutions from supporting crypto transactions – but the Supreme Court overturned it in 2020. Yet Indian banks are still blocking these transactions, and the government issued a bill banning all transactions. cryptocurrency activities, which has been under discussion since 2019.
Regulation is absolutely necessary to avoid serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams. But like any effective regulation, it must be clear, transparent, consistent and driven by a vision of what it seeks to achieve. No one in India was able to tick those boxes, and we risk missing out on the global race altogether.
While there is no announced policy in place, the Reserve Bank has announced the launch of a blockchain-supported private official digital currency, similar to the digital yuan. India is increasingly mimicking China’s paradoxical attempt to centralize a decentralized ecosystem. Our government is trying to decouple cryptocurrencies from their underlying blockchain technology, while profiting from it. Unfortunately, this is impractical and shows a lack of understanding of this breakthrough innovation.
The basic architecture of blockchain is a network where people share the extra space and computing power of their computers to create a global supercomputer accessible to all. This network performs functions such as verifying transactions and contracts, as well as updating and maintaining these records in the form of tamper-proof registers. These tasks are normally carried out by large intermediary organizations such as banks, law firms and public institutions. Participants in a network are called validators, and they are rewarded for their efforts with transaction fees in the form of tokens or coins.
Currently, intermediaries (including banks, credit cards, and payment gateways) derive nearly 3% of total global economic output of over $ 100,000 billion, as fees for their operations. services. The integration of blockchain in these sectors could lead to hundreds of billions of dollars in savings. Blockchain could make all aspects of electronic governance, judicial and electoral processes more efficient and transparent.
Tech companies, including titans like Google and Facebook, derive most of their value from their multitude of users. The blockchain could allow these internet customers to receive micro-payments for all the original data they share in the digital space, including ratings, reviews, and images. Our digital space would thus become more redistributive and fairer. Thousands of companies around the world are working on projects that could bring about such paradigm shifts. In the first quarter of 2021 alone, blockchain startups around the world received $ 2.6 billion in venture funding, more than what they raised in the four quarters of 2020.
Meanwhile, the funds that have been invested in Indian blockchain start-ups represent less than 0.2% of the amount raised by the sector globally. The current approach of the central government makes it almost impossible for entrepreneurs and investors to gain much economic benefit.
Any new regulations adopted in this sector should prevent the misuse of these digital assets without hampering innovation and investment. Arrangements must be made to channel the value extracted from these networks seamlessly into our financial system. It is said that Indian investors already hold some Rs 10,000 crore in digital currency. As financial pages report growing anxiety among investors over regulatory uncertainties over India’s stance on cryptocurrency, the need for lucid policymaking has never been greater. .
India has been a late follower of all previous phases of the digital revolution – when semiconductors, the internet and smartphones made their mark, we had to catch up, as we always do with 4G and 5G. We are currently on the cusp of the next phase, which would be driven by technologies like blockchain. We have the potential to channel our human capital, expertise and resources into this revolution and become one of the winners of this wave. All we need to do is get our policies right.
This column first appeared in the print edition on May 31, 2021, under the title “Catch the New Tech Wave”. Tharoor is MP for Thiruvananthapuram and author. Antony is a public policy commentator and digital technology expert