Bitcoins may not be a flash in the pan

The Finance Ministry's latest cautions to people against risks in investing in VCs which are like "Ponzi" schemes and that both the Government of India and the apex bank, the Reserve Bank of India (RBI), have not authorised any VCs as a medium of exchange are but understandable. In its defense, the Government said VCs are "stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack etc., which may also result in permanent loss of money. As transactions of VCs are encrypted, they are also likely being used to carry on illegal/ subversive activities, such as terror-financing, smuggling, drug trafficking, and other money-laundering acts".

Be that as it may, notwithstanding the wild volatility of bitcoin prices, which peaked a record of 19,511 dollars on December 18, 2017 and traded at 13,624.56 in New York on the evening of the New Year on January 1, 2018 or close to nine lakh of Indian rupees for one bitcoin, the reasons behind this swing is ascribed to speculation and the entry into the market of numerous people hired by the lucre of quick and easy profits. Indian investors with an appetite for risks have naturally followed the universal pattern. This is despite the government's warning, which came close on the heels of three precautionary flags hoisted by the RBI way back from 2013. Bitcoin exchanges do not concur with the government's contention to trading in cryptocurrencies as a Ponzi scheme. No doubt, bitcoin prices are volatile, but that does not make it Ponzi because Ponzi is something where someone guarantees a return. Here no one guarantees any return to the traders of bitcoins and countries such as Japan and the United States, which allow bitcoins trading with the latter recently opening trading in bitcoins derivatives in Chicago Board of Exchanges (Cboe), are not running a Ponzi scheme!

A little background is in order as to the origin of this new investor craze—be it for trading, speculation or accumulation of wealth! Bitcoin is a stateless digital currency that was created a decade ago by an anonymous coder or congeries of coders, who went by a bizarre nomenclature Satoshi Nakamoto. Abruptly, the new-fangled financial exotica has generated high demand in America and this mania has wrought an explosion in other cryptocurrencies with about a fifth of the 1000 plus cryptocurrencies in circulation having been created in the second half of 2017! They all promise to become a new medium of exchange enabling transactions sans such as a bank or a fiat currency such as the dollar/pound/rupee! While many cryptocurrencies would end up being nugatory like the dotcom bubble of 2000, many are betting that bitcoin would emerge the strongest survivor from the wreckage!

Economic analysts contend that the more turbulence plunges the world—be it from the Trump Presidency in the US, Brexit, the secessionist conflict in Spain or the unsettled conditions in the West Asian region with ISI wrecking the Middle East peace policy by its medieval tactics, the greater the allure of a currency not bound to any single institution or government! To boot, bitcoin is also benefitted by its relative scarcity. There are now 16.7 million bitcoins in circulation, with the supply being fixed at 21 million. With only a fifth left to be issued, the scarcity spawns value. As more digital currencies are paid for with other digital currencies, basically bitcoin, the price of the latter surged with many holders recycling their gains into new cryptocurrencies, thereby augmenting turnover and letting others to buy in. So the value of bitcoin, which was 771 dollar in December 2016, zoomed to 14,965 dollars in December 2017 at a particular comparable point The aggregate value of all bitcoins in circulation as reported in authentic western media is 250 billion US dollars!

The potential features of cryptocurrencies—both as a medium of exchange and as a store of value—is still being studied with giant tech firms such as IBM fostering their own cryptocurrency platforms to expedite cross-border transactions in a safe, secure and transparent fashion. Alongside, there are also moves afoot to widen regulatory watch of the VCs market with South Korea recently unveiling legislation to either solidly regulate exchanges or debar them outright!

Indian authorities should not resort to any knee-jerk reaction in condemning bitcoin lock, stock, and barrel without intensifying the existing institutional safeguards for investors who have been left high and dry for being prudent enough to put their nest-egg savings in IPOs or brownfield expansion of firms for modernisation and technological upgradation. India should also be circumspect enough to differentiate between cryptocurrencies and the blockchain technology they are based on.

Bitcoin is the best-known application of blockchain, a technology with implications that may go much beyond one wildly fluctuating currency. Blockchain is a decentralised, digital public ledger that logs peer to peer transactions in a system secured by complex cryptographic conundrums. It is immutable and logged on hundreds and thousands of computers across the universe. While it is true that the blockchain that underlies bitcoin has seldom been hacked, cyber criminals have fobbed off billions from the online wallet where people hold their digital cards and the exchanges where bitcoin and other currencies are traded. It is time that efforts were made to build safeguards against digital thefts so that confidence of the users in the digital economy gets reinforced.

This is par for the course and crucial in an emerging economy like India, where the authorities are starting to link everything from pension and bank accounts to mid-day meals for school children and Amazon deliveries to a humongous pan-India biometric database. While extreme centralisation is welcome from the authorities, viewpoints in tracking things and rectifying mistakes of leakage such data analytics permit, blockchain is fostering its opposite. There are many wise people who hold the belief that customer's data should be owned by the customer and not by any intermediary and that is the reason why Microsoft Corp and IBM are leading the battle in backing a decentralised digital ecosystem to ensure that individuals are in control of their information. But this is a greater debate entailing the sovereignty of nations. But cryptocurrencies do hold the potentials to vastly enhance the payments machinery manifestly transparent and to the extent let us not throw the baby out with the bath water.

(The author is a freelance commentator on economic issues. Views expressed are strictly personal.)