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Thursday, December 2, 2021

Blockchain technology and cryptocurrencies

Bharat has the highest number of crypto owners in the world at 10.07 crore, followed by US with 2.74 crore Russia 1.74 crore and Nigeria 1.30 crore, according to broker discovery and comparison platform BrokerChooser in an annual proliferation index.

In terms of the number of crypto owners as a percentage of the total population, Ukraine ranked first with 12.73% people of the total population owning crypto followed by Russia (11.91%), Kenya (8.52%) and the US (8.31%) whereas Bharat stood at the fifth spot at 7.30%.

Cryptocurrencies have seen an exponential increase in usage even since the Reserve Bank of India (RBI) restrictions were lifted in March 2020 consequent to the ruling of the Supreme Court, with Indian exchanges clocking impressive user additions and a sustained growth in daily trading volumes. The number of stock investors (Unique Client Codes) registered with the BSE in India has risen from 70 million in June 2021 to 80 million at present.

The third BIS (Bank of International Settlements) Survey on Central Bank Digital Currency (CBDC) indicates that most central banks are exploring CBDCs, in both wholesale and retail form, moving from conceptual stage to experimentation. Emerging Market Economies are driven by considerations of financial inclusion and safety and efficiency in payment system in their approach to CBDCs. While most central banks have no plans to issue CBDCs in the foreseeable future, several are likely to launch retail CBDCs in the next three years.  

Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies. Many experts believe that blockchain and related technology will disrupt several industries, including finance, banking and law. 

Block chain technology can be an important tool in plugging the loopholes in operational risk and improve the internal control systems in the banks. Block chain is a chain of records, called blocks, which are linked and secured through cryptography. Each block contains a cryptographic hash pointer as a link to a previous block, a time stamp and transaction data. By design, block chains are inherently resistant and insulated to modification of the data. 

A block chain is managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

15 Bharatiya banks jointly formed Indian Banks’ Blockchain Infrastructure Co Pvt Ltd (IBBIC) in May, 2021.These are 10 private banks, four state-owned banks and one foreign bank. These include RBL Bank, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, Axis Bank, IndusInd Bank, Yes Bank, South Indian Bank, Federal Bank, IDFC First Bank, State Bank of India (SBI), Bank of Baroda (BoB), Indian Bank, Canara Bank, and Standard Chartered. Each bank will have equal stake of 6.6% in company which will have capital of Rs 75 crore.

Processing letters of credit (LCs) for domestic transactions through block chain technology will be the first step in the direction of introducing this technology in Indian banking. Issuing LCs take a day or two in international trade which can be reduced to few hours through block chain technology. This technology will also reduce fraud as transactions will be encrypted via blockchain and no duplication of LCs (under the same invoice) can be done which is likely to occur in the current system.

An important feature of cryptocurrencies is that they are generally not issued by any central banking authority, rendering them theoretically immune to government interference or manipulation.

Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.

As market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of cryptocurrencies ensures a high degree of scarcity. The aggregate value of all the cryptocurrencies in existence globally is over $2.5 trillion currently.

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a financial intermediary like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys .

In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, compared to the charges levied on funds transfers by the banks and financial institutions.

 Forensic analysis of the cryptocurrencies has helped authorities in several countries to trace the criminals and in most of the cases it was observed that negligence or lapses by the crypto users have allowed the hackers to play the mischief in the first place.  

Because cryptocurrencies are virtual (i.e., digital), borderless and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to the people’s funds or their personal information who use these cryptocurrencies.

Block chain technology is typically suited for e commerce on account of its cost effectiveness, flexibility in operations in bringing all the stakeholders of the transactions on one common platform and at the same time ensuring high level of security.

The government and regulators in India have to primarily work on introducing laws on Digital payments to ensure safety and security of the transactions and more importantly making the cost of digital transactions reasonable and affordable to the common man in order to promote the digital payments in the economy. Insurance for digital frauds has to be in place so as to build confidence of the people towards digital transactions/payments.

Needless to mention that in a country like Bharat which is vast and faces challenges in building physical infrastructure that is critical for financial inclusion, promoting digital platforms and focusing on enhancing the digital literacy of the people will not only be disruptive but speed up the process of financial inclusion at a rapid pace.

Let us hope our regulators and the government will initiate the necessary steps in this direction at an early date.

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Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]

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