Source: The Hindu
UPSC concentrates on the mechanisms and regulation of new and emerging technologies like blockchain, cryptocurrency, Fintech and other Industry 4.0 aspects. These are relevant for both prelims and mains
Blockchain in Governance
Placing it in syllabus
- What is blockchain?
- Role of blockchain in Fintech
- Use of blockchain in governance
- Block chain and cryptocurrency
- Cryptocurrency in india
The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 has proposed stringent penalties, including 10 years of imprisonment, for holding, selling or dealing in cryptocurrencies such as Bitcoin. Given the high chances of cryptocurrencies being misused in money laundering, various government bodies such as IT, CBDT, and the customs departments have endorsed this endeavour
What is blockchain?
- A Blockchain is a public ledger of information collected through a network that sits on top of the internet.
- It is a new way of documenting data on the internet.
- The information is packaged into blocks, which link to form a chain with other blocks of similar information.
- The information recorded on a blockchain can take on any form, whether it be denoting a transfer of money, ownership, a transaction, someone’s identity, or an agreement between the two parties.
- Once a consensus is reached between these devices to store something on a blockchain, it cannot be disputed, removed or altered, without the knowledge and permission of those who made that record.
- On a blockchain, once a transaction is sent it is sealed and cannot be reversed.
- Rather than keeping information in one central point, as is done by traditional recording methods, multiple copies of the same data are stored in different locations and on different devices on the network, such as computers or printers.
- This is known as a peer to peer (P2P) network. This means that even if one point of storage is damaged or lost, multiple copies remain safe and secure elsewhere.
- The technology can be used to develop blockchain applications, such as social networks, messengers, games, exchanges, storage platforms, voting systems, prediction markets, online shops etc
Distributed ledgers have 3 key attributes:
Recorded: stored information is time-stamped
Transparent: anyone can see the ledger of transactions.
Decentralized: the ledger exists on multiple computers, often referred to as nodes.
The first recorded mention of blockchain technology came in a document, or whitepaper, published in 2008 by the mysterious founder or founders of Bitcoin, only known as Satoshi Nakamoto
Role of blockchain in Fintech:
This technology covers the essential needs of the FinTech industry, helping companies to
- track the complete lifecycle of a financial transaction;
- create secure financial products at minimal cost;
- make financial services both functional and technologically sophisticated
The promising cases of the blockchain in the financial sector are:
- Blockchain-powered payments are hyper-secure and private. The principle is that each user has personal cryptocurrency keys that they can use to conduct transactions safely. The blockchain ensures that only participants involved in a particular transaction know the details of this transaction. The blockchain spreads changes across the entire network in real time so that participants stay informed constantly. A blockchain records and validates each and every transaction and administers transactions in a way that no one can tamper with or delete them post-execution.
- It eliminates the need for an intermediary to handle financial services like money transfers. This is a huge relief for businesses that provide peer-to-peer (P2P) transactions as well as for individual payers.
- The blockchain can efficiently streamline remittances and save costs during cross-border transactions. There are many blockchain FinTech startups offering crypto-based money transfers, including Ripple, OkCoin, BitPesa, Sentbe, and Abra.
- The trade financing sphere involves lots of tedious paperwork and bureaucracy. The blockchain can exempt traders from burdensome checks of counterparties and optimize the whole lifecycle of a trade. Using a blockchain, companies can enhance trade accuracy, speed up the settlement process, and reduce risks.
- Blockchain immutability diminishes the possibility of errors and guarantees integrity of records for financial reporting and audits. Since all data is stored in one location, a blockchain can standardize reporting and accounting. Auditors can access all data in real time with read-only nodes on chains.
- Financial institutions don’t have a standardized set of documents that clients must submit to prove their identities. The blockchain offers a digital identity system. Using this system, clients need to go through validation just once and can then use this verified identity document to conduct transactions all over the world.
Use of blockchain in governance:
Governments today remain the principal authorities in charge of maintaining trusted records. Registers containing citizens and businesses’ information are stored in government agencies’ centralized databases. Each agency is responsible for maintaining and storing its own respective data.
Hence governments must increase digitalization of public services to increase cost efficiency while ensuring citizens’ privacy and strengthening cybersecurity
- Governments can significantly enhance the protection of critical data using blockchain. E.g Estonia, has implemented a technological platform based on the blockchain to protect the integrity of assets, including national health, judicial, legislative, security, and commercial records. It is ranked number 1 in public services by the EU Commission’s DESI Index.
- Storing registries of property and financial assets in a blockchain can impede misappropriation and ease the processing of transactions. As a result complete history of the community’s titles is securely documented in a decentralized ledger. In case of a conflict, courts can easily access the ledger to determine the legitimate owner of the title. E.g In 2017, Georgia’s National Agency of Public Registry (NAPR) moved its land registry into the blockchain.
- As government agencies currently store data in autonomous centralized databases, they tend not to interoperate in an optimal way. This “results in duplication, overlap and contradiction in the information held.” Blockchain eliminates this lack of interoperability which generates unnecessary red tape in obtaining relevant information from a user, and makes the process for sharing data between agencies clear and inexpensive.
- By managing citizens’ digital identities which contains a set of personal information that is stored in the blockchain, the government can achieve tremendous efficiency gains, while bringing the additional benefit of restoring control of identity information to citizens.
- Blockchain can be a powerful tool to combat government corruption. Registering government transactions in the blockchain helps create a trusted history for any transaction and significantly eases the auditing process. This would contribute to making public procurement more transparent
Blockchain and cryptocurrency:
- A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online.
- Cryptocurrencies use cryptography to verify and secure transactions.
- Each cryptocurrency work on the basis that it is a large data log of information, namely transactions, that are used to determine how much of a cryptocurrency each address has attributed to it.
- Cryptocurrencies are purely digital, hence there is no option to take out a cryptocurrency in paper or coin form.
- When using cryptocurrencies you have a public key and a private key, both of which appear as strings of random numbers and letters.
- It is very important that you never share your private key with anyone.
- The major difference between cryptocurrencies and traditional financial models is in the decentralized nature of cryptocurrencies.
- This means is that when one spends a cryptocurrency, the approval of the transaction does not come from one central authority, like a bank but rather from a Peer-to-Peer network of computers, coming to a consensus that the transaction is legitimate.
- Most cryptocurrencies also offer the guarantee of privacy as the identity of each individual is concealed behind state of the art cryptography, meaning everyone’s privacy remains intact.
- The commonly used cryptocurrencies are Bitcoin, Gridcoin, Litecoin, Ripple, Next, Dash etc
Cryptocurrency in India:
Recently a high-level government panel on virtual cryptocurrencies has recommended a ban on all virtual cryptocurrencies in India. By and large, these include Bitcoin and Ripple which are not under government control. The committee submitted its report on 23 July 2019, along with a proposed draft bill, Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.
In April,2018 the Reserve Bank of India (RBI) had barred banks and financial institutions from dealing with cryptocurrencies. Now if the bill is approved, India will join the countries which have banned cryptocurrencies
There are several implications, both for India and cryptocurrency traders in India
- The startups, especially, who have been in technological solutions, especially around cryptocurrencies have taken a hit. Even venture capitalists (VCs) and angel investors who have backed crypto startups will be affected.
- A move like this is likely to push cryptocurrencies into a darker place. It would drive transactions underground this resulting in a huge black economy.
- Experts believe that the draft bill, even when implemented, won’t be able to stop crypto transactions. As the transactions are completely online, it’s impossible to tell where they are happening from.
- As RBI banned banks to deal with individuals or businesses dealing with crypto, many individuals have moved such assets out of India. E.g In October 2018, India’s biggest exchange Zebpay moved out to Malta. Since the money is no longer in the regulatory system, the transactions can’t be traced.
The government has already clarified that the country has not put any blanket ban on trading in cryptocurrencies yet. The high level committee is favourable towards launching an official digital currency.
At a global level, the industry will keep on growing, innovation will keep on happening, and India might lose out its edge, if after five years it decides to make cryptocurrencies legal. Instead of banning, making virtual cryptocurrencies legal and having strict regulations would be apt