India has the unique advantage of a stable financial system and a mature digital logic. It’s a combination that can help the world gain some clarity on cryptocurrency
R Swaminathan | May 13, 2014
For the finance world Bitcoins are a bit like dark matter for physicists. It’s not part of daily conversations, yet every once in a while it pops up with its seemingly brooding presence that threatens to change every single belief about money. Anthropologist David Graeber’s book Debt: The First 5000 Years literally set the cat among pigeons questioning the origins of money. Incidentally, he is also the thought guru of the Occupy Movement. He convincingly wove a counterintuitive historical narrative of money’s origins rooted in debt, as opposed to the dominant discourse of money becoming an inherent tool due to a human being’s innate need for trade. Graeber was, and still is, an outsider to the world of central bankers and finance professionals. It was his outsider’s perspective that brought in such startling insights. Bitcoins need someone like a Graeber to produce a countercultural discourse that challenges the extreme positions on display today. If one goes by what’s being written in the rarefied environs of the finance world Bitcoins are bad. But listen to the equally rarefied world of geeks Bitcoins aka cryptocurrency are all good.
Also read: Why India can't ignore virtual currency Bitcoins for long
First of all, what are bitcoins? At a fundamental level they are nothing more than computing power. In short your computer or your smartphone is a potential mint. But in order to make it worth your while you need to connect your machine to several other computers, actually millions. It’s a peer-to-peer networking system where the sum of all the connections is always greater than the whole itself. If you have ever used Kazaa or BitTorrent you will get the idea. The combined computing power of the network is digitally mined through a complex set of mathematical formulas and algorithms. The formula is such that it becomes progressively tough to mine more coins, mimicking the declining value of a real world one. It is the increasing difficulty to mine Bitcoins in which lies its value. Bitcoins first appeared in 2009 and despite the magazine Newsweek’s controversial expose of its alleged founder, Satoshi Nakamoto, no one is completely sure who thought about it and brought it to life.
There are over 12 million Bitcoins floating in cyberspace today, and though its value has dipped in recent times due to the controversies surrounding it one Bitcoin still fetches over $495. That’s over $4 billion. Interestingly, when it was first launched the average value of a Bitcoin was in cents. No wonder Bitcoins are serious business. So serious that 31-year-old Emmanuel Abidoun has bought over 200 high-end servers, buried them deep in Reykjanesbaer in Iceland near the Arctic Circle and built a business. In case you are wondering why Arctic Circle, and why the burial, the smart man has figured out a way to save a huge amount of money that would have otherwise gone into installing expensive airconditioning equipment to cool down the servers. He eventually hopes to mine 21 million Bitcoins. It’s ironical that the mining is happening underground. Mining, of course, is not the only way and you can buy bitcoins and earn them through transactions.
Second, what are bitcoins used for? It can be used as a medium of transaction with any other individual or institution that accepts them. Over 20,000 merchants across the world accept Bitcoins as a valid mode of payment. By the way 40,000 bitcoins, that’s close to $1.6 million in worth, are held by Indians. Some countries and companies have embraced it without suspicion, while others are extremely skeptical. It might surprise a lot of people, but Kenya has been at the forefront of mobile money having unveiled innovative services like M-Pesa. It has also taken the lead in mobile Bitcoin systems. A start-up company has established a separate service called Bit-Pesa to allow Kenyans working abroad to remit in Bitcoins. Virgin Atlantic of the flamboyant Richard Branson fame has started accepting bitcoins for issuing tickets, University of Nicosia in Cyprus takes fees in Bitcoins and there’s even a Bitcoins ATM in Vancouver.
Third, if bitcoins are so great, what’s the big fuss about? Bitcoins are not backed by any financial authority. Neither are they underpinned by any physical asset. While it makes Bitcoin extremely tactile, morphing into several entities at once – from a commodity, investment instrument, speculative trading platform to digital currency, alternative transaction mechanism and democraticised money – its tactility also makes it difficult to track, monitor and regulate. The lack of any connection to a real asset base poses a different kind of problem. It leads to valuations that cannot be justified by conventional economics. Critics of bitcoins often refer to the Tulipomania that gripped the Netherlands in the 1630s. At the peak of Tulpenmanie, as the Dutch call it, one Tulip bulb sold for over ten times the annual wages of a skilled craftsman. But the biggest problem, as with any digital form of exchange and transaction, relates to security. It has acquired alarming proportions ever since Mount Gox, one of the largest Bitcoin exchange in the world, wound down operations when it found out that over 850,000 bitcoins valued at over $450 million were ‘missing and likely stolen’. That, by the way, is the entire budget for the American cyber command for this year.
How should India handle Bitcoins? The Reserve Bank of India (RBI), quite rightly so, has taken a very conservative view of Bitcoins. It hasn’t been swayed by central banks of other countries, like China, which have banned Bitcoins. Nor has it treated it with an open policy framework. At best the RBI’s approach can be seen as a ‘wait and watch’ policy. There are four specific reasons why India’s policy regulators are taking a cautious stand. The first is the obvious strands of speculation associated with Bitcoins. There are also unconfirmed reports about how Bitcoins are being used to finance illegal trade, especially the drug trade, and may be the next source of funding for globalised terrorism.
The second is the lack of clarity on establishing a standardised value for Bitcoins. It decisively challenges the current network of currencies and the manner in which their rates are established. The third is the issue of security. The protocols and systems, unlike other forms of digitalised money (net banking, payment gateways), are still in an experimental stage and no one is actually sure of how strong the security systems are after the Mount Gox episode. The fourth is more an issue of the old world not wanting to change its ways. It is this inherent resistance that is behind the current ping-pong of whether bitcoin is a currency or a commodity. The logic of cryptocurrency destroys the foundations of modern money, and the way it is controlled, channelised and used to create assets and value. In fact crypocurrency changes the definition of assets and value.
However, having said all this, it is also time to look towards the future and consider genuine and practical ways to integrate cryptocurrency into the mainstream economic system. Cryptocurrency is the first independent digital money system not foundationally linked to any conventional physical asset. Yes, server farms require real money today, but the logic of cryptocurrency ensures that money in the conventional sense can easily be contoured out of the equation. With computing power becoming cheaper every single day and processing power increasing exponentially, also every single day, the cost of producing one unit of a cryptocurrency is plummeting drastically.
It is for the first time in human history that the cost of producing currency is becoming cheaper by the day. It challenges every single notion of finance and economy that the collective human intelligence has gathered over centuries. It requires an out-of-the-box thinking, and a group of people who are able to see beyond the current systems in operations. Cryptocurrency also has immense potential to tackle age-old problems of pilferage and ensure that money reaches the right beneficiaries, especially with regard to state-sponsored welfare schemes.
Of course, the security ecosystem of digital money has to improve considerably before the concept of cryptocurrency becomes a viable and universal alternative. But when physical money was first dematerialised there were numerous shadow warriors and imaginary ghosts. Today electronic money has become a strong alternative, and is informing banking, commerce, trade and securities transactions. The biggest challenge for India is to create a progressive policy environment that allows cryptocurrency to become a viable and strong alternative to conventional money. Crack too hard and ban it, it will go underground, fester and will become an uncontrollable hawala virus. Give it a completely free hand and it will morph itself into forms that will not always be understood by policy mandarins, causing numerous methodological headaches. Cryptocurrency needs a helping hand. Opening up our minds to its possibilities can be a good starting point.
THE 5-MINUTE CAPSULE
What is Bitcoin?
Bitcoin is a consensus network that enables a new payment system and is the first complete system of digital money. It is the first decentralised peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user’s perspective, Bitcoin is pretty much like cash for the internet.
How to get Bitcoins?
One can get bitcoins either as payment for goods or services or through purchasing them at Bitcoin exchanges. One can also earn bitcoins through mining.
What is mining?
A bitcoin is generated through computers that solve complex algorithms and in return one can get certain units of bitcoins. The process performed by the computers is called mining.
Who governs it?
It is not governed by any government or international organisation. It works on a peer-to-peer fashion.
What is the worth of one unit of bitcoin?
At present one bitcoin is equal to $495. This, however, keeps changing based on demand and supply.
How many bitcoins are there in the market?
There are 21 million bitcoins.
How many bitcoins do Indians have?
Indians have around 40,000 bitcoins valued at $1.6 million.
Who designed it?
The first Bitcoin specification and proof of concept was published in 2009 in a cryptography mailing list by Satoshi Nakamoto.
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