Eshita Porwal Date - 11/3/2018
It isn’t more than eight or nine years - a period when very few had heard of the word ‘cryptocurrency’ and only even a fraction of the few actually knew what it meant. Now, there hasn’t been a single day where we couldn’t find flattering articles, reviews from market gurus, pros and cons of cryptocurrency flooded all over the national dailies. The bitcoin boom mania has raised the level of interest for cryptocurrencies among a lot of Indian investors in the last couple of months.
Apparently now everyone wants to know more about ‘cryptos’ (just for short) and invest their savings. Surely some got lucky - those who had invested few thousand rupees in Bitcoin in 2010, probably by now, have made fortune worth a few hundred crore rupees. This digital currency delivered stellar returns to its investors as its price marked a tenfold rise from a few cents in 2010 to a lifetime high of $17,900 in December 2017.
This scenario reminds of the movie ‘The Social Network’. How?? The drastic return in a brief tenure from investment in bitcoin was something analogous to the return on investment that you luckily got to make in Facebook along with Mark Zuckerberg, when it was still a simple programming project at Harvard. Yeah! Something that was unexpected.
Unfortunately, the start of 2018 was not as easy going as before for most of the cryptocurrencies in the market, also the Bitcoin value crashed to $9000 in January 2018. If you are among the ones who are rueing their decisions to choose stock market instead of cryptos then wait, read here to get insights on its technical and legal aspects. Also read about its consequences in Indian capital market environment.
What is a currency?
A. According to Reserve Bank of India Act ‘Currency’ is defined as a stable store of value which is non-perishable and can be subjected to trading between nations in foreign exchange markets.
What is cryptocurrency?
A. Digital currency + cryptography = cryptocurrency
Over 1,300 cryptocurrencies are presently in existence but the largest by market cap and the most commonly used are Bitcoin, Ethereum, Ripple, and Litecoin. Let's take a very quick look at each:
Bitcoin is the big daddy of cryptos, based on Blockchain technology, and the one that most people are aware of. It was created in 2009 by the still pseudonymous Satoshi Nakamoto.
Ethereum also known as Ether, uses Blockchain technology but mainly for ‘smart contracts’, which replace the paper contracts between parties while making an agreement.
Ripple is aimed at payments made between financial institutions like exchange of currencies which involve high volume payments. The Blockchain makes those transactions faster and cheaper.
Litecoin is mostly same as Bitcoin for use as cryptocurrency.
Laxmicoin developed by Raj Dangi along with Mitts Daki in 2013, is yet to be called as India’s first digital cryptocurrency. However, the launch was suspended after RBI’s press release over cryptocurrency. The startup will be officially launched in 2018.
So why don’t we use them as legalised currency? Is this anything different?
First, neither they are issued by the government nor they have any regulatory body like SEBI or RBI. They are based on Blockchain technology.
- Digital cryptocurrencies like Bitcoin, Ethereum and others are strings of cryptic hexadecimal computer codes just like identification marks of currency notes which have serial numbers printed on them.
- The existence of cryptocurrencies relies purely on solving complex mathematical puzzles requiring vast computing power. Each solved puzzle mines one coin at a time.
- For Bitcoin generation is limited to 21 million and roughly about 16 million have been mined presently.
- The transaction is maintained between peer-to-peer network rather than banks.
- The existence of every coin and every transaction ever made is recorded in the Blockchain.
Crypto-exchanges allows to trade cryptocurrencies. Moreover, as long as the investor recalls his passwords, he can log in and transact crypto coins from anywhere. In case he forgets then those coins are lost permanently.
Second, the must be understood, is that - Simple economics tells us that as the supply of something is increased, the value of each unit falls.
That explains why, for example, a house that costed lakhs a few decades ago will now cost crores. It is what is known as inflation and fiat currencies work on an inflationary model. Whereas cryptocurrency works on a deflationary model. Something that costs one coin now will cost only a fraction of a coin in the future as the economy (the supply of goods and services) grows because the number of coins in circulation remains static.
Third, although the cryptocurrencies are not perishable, they are a medium of exchange in certain countries but they have no stable store of value. Yes, it is not forever stable.
This part deals with the legal issues around cryptocurrencies.
Is it Security?
A security is an instrument that is secured against something else or represents a right over a commodity. Now, cryptocurrencies are not a security because there is nothing underlying in it.
Is it a safe investment class?
This is still debatable. Analysing the threats and extreme volatility cryptocurrencies possess, Warren Buffett stated “I can say almost with certainty that cryptocurrencies will come to a bad end." People should consider large or mid cap mutual funds with good returns in spite of going for this, as a much safer investment class. Investing large sums of money from your savings in cryptocurrencies is not the right step. So, choose your investment class wisely.
Other legal issues
An export cannot be made by a trader in India in Bitcoins under Foreign Exchange Management Act (FEMA), such exports should be done through formal banking systems. Just imagine Nirav Modi scam which was carried despite having all possible tracking and banking norms. No wonder our economy would soon be lined up with lists of illegal disasters if such anonymous transactions of cryptocurrencies exist without any regulations.
There exist two connotations for ‘cryptocurrency’. Optimists claim that this system will fundamentally alter payments, roll in digital or cashless society and even politics around the world. On the other hand, pessimists hold a view that the so called crypto bubble will eventually burst out. Underlying these differing views there is significant confusion on taking a stand over it.
A look at Indian environment -
- In India the Bitcoin interest is catching up with 2500 users trading Bitcoin daily and the trading volume rising close to Rs 200-250 crores every month and craze will soar up significantly.
- Digital Asset and Blockchain Foundation of India (DABFI), formed by existing Indian crypto-exchanges, decides exchanges’ stand on issues concerning with cryptocurrencies.
- At present, they have also adopted for KYC and AML (anti-money laundering) as procedural formalities while registration.
While the government’s stake on the regulations and controls is still cooking like the ‘Birbal ki Khichdi.’
The most important question cryptocurrencies are facing is whether they can be referred as ‘healthy’ - specifically, one that serves not to be a highly volatile asset, encourages the development of market cap, secures and balances out the investor class and the product offering.
Are Bitcoin and other digital cryptocurrencies in a bubble?
Yes, undoubtedly. Unfortunately, the problem is at the entry level, which are not visible to the investors. Every 'investor' has been sold the idea by another investor, who has introduced them to by some broker or operator. Investors get excited by the promise of high paying profits but lack the knowledge and metrics to make sane earnings-based valuations. Real danger lies in unregulated nature of cryptocurrencies as they can be used to fund crimes for comfort.
The Blockchain is still in its infancy. However, with time and ongoing development and the involvement of traditional financial institutions, these problems will likely be eliminated sooner than anticipated.
A WAY TO GO
As per the news updates on the 27th of February, IndusInd bank announced about their collaboration with Ripple in order to strengthen its system of global payment transactions. Ripple is not a direct cryptocurrency like Bitcoin but rather a payment settling system which is far more advanced than those used currently by the banks. Conventional settlement systems use the US dollar as the medium for international transactions.
For any currency conversion, the national currency of the respective country is firstly converted to US dollars thereafter again converted to the needed state. It happens because the U.S. Dollar, the Euro, and the Yen serve as global currencies and are used for international transactions. While to be converted to any other form except these three, a two-step process is followed i.e. - Native currency -> U.S. Dollar -> Desired currency
Thus if you ever go to a currency exchange, it generally takes about 1-2 business days except at airports for conversion procedure. Now to reduce the time involved and make it more effective IndusInd bank has laid down a business deal with Ripple. Ripple will eliminate the bottlenecks and make process faster. It will act as a internet based currency exchange platform.
Blockchain technology is an untapped powerhouse of next internet revolution. Developments and collaborations will foster in optimizing its applicability with lawful impositions, which will definitely in turn transform our economy, society, and internet itself.