Ever since Craig Wright proclaimed that he is the founder of Bitcoin, there has been renewed interest in the digital currency. Over the last eight years, Bitcoin has been at the centre of both rags-to-riches stories and controversies. Its surge, which led to copycat digital currencies sprouting, has more than moderated—the price of a Bitcoin went down from $1,242 to under $200 in just two years. Security agencies were quick to call the cryptocurrency an exchange medium for terrorists, drug dealers and hawala traders.
While Bitcoin may not be as fascinating as it once was, the technology behind it—blockchain—is generating increasing interest, with governments and financial institutions looking to revolutionise data upkeep and finance with it.
Blockchain is a digital ledger which keeps record of each and every transaction and is shared among a distributed network of computers, more like a shared spreadsheet. So, a block of data has digital records which all participants can see, but can only be altered by a majority. Blockchain dispenses, exchanges and transfers Bitcoins, much like a central regulator.
The system is not only transparent—any change made is visible to all the parties—but also secure as everyone has a personal key. In cutting out the middleman, blockchain allows for faster and cost-effective transmission of data. It is popular with payment gateways, stock markets and government records. A Santander InnoVentures report says it is set to save $20 billion in costs for financial institutions. Morgan Stanley says the technology can help reduce costs by as much as 50% of those involved in running with traditional channels.
Blockchain and banking
Blockchain can initiate faster transmission and eliminate the need of a clearing house. A digital ledger, it preserves patents, contracts and trademarks, ensuring trust amongst banking participants and reducing the potential for litigation. Each transaction can be reviewed by all the participants over a period of time, eliminating the need of auditors. Over half a decade, a dozen banks around the world have been experimenting with blockchain. The Federal Reserve has been working with IBM to simplify digital payments, the European Banking Authority has been working on transactions banking, and Nasdaq plans to launch a trading platform on blockchain.
It is finding its way into the insurance industry, where firms are able to match needs of customers and provide niche products. Some have been using blockchain for inclusion of unbanked and providing loans via P2P platforms and crowd-sourcing.
While blockchain is a digital storage platform, it can also act as a digital matchmaker, given once all records enter the system, it can present an array of services available, like health records or ride or accommodation-sharing services. In fact, it promises a boost for the sharing economy. While companies are trying to incorporate blockchain for shareholder voting, governments have been experimenting with the technology for more secure online voting. It is being used by Honduras, Isle of Man and Ghana for digitising land records, registering firms and clamping down on corruption. The UK is expected to use the technology for tracking taxpayers as each transaction can be tracked.
India: Still in chains
While RBI acknowledged the technology last year in a paper, and cryptocurrencies are slowly gaining ground, the adoption of blockchain by India is slow. To be sure, some start-ups and companies like Visa have expressed willingness to work with blockchain, but for adoption to be impactful, the government has to join the party. With various state and central departments having demonstrated nifty uptake of tech, blockchain will be a value-add for Digital India. Take, for example, the DigiLocker service the government has started. While it was expected to digitise records, it has not been received well, with just 11 government concerns using it, half of which have not carried out even a single transaction. However, given blockchain can function as a unique ledger for individuals, it can overcome the need for digital signatures, which is integral to authenticating DigiLocker documents. Moreover, by cutting out intermediaries—the DigiLocker, in a sense, is one—it makes processes like KYC verification much faster; the user doesn’t have to submit DigiLocker (Aadhaar-linked) details every single time she opens a bank account or shifts from one telecom service provider to another.
Blockchain, given its transparent data repositories, can help cut leakages in public procurement; a Punjab may no more have to face a situation where grains go missing. It can aid the disbursal of subsidy by plugging leakages. It can help the tax department expand tax net. The PM has been talking about a cashless society—blockchain, combined with Unified Payments Interface, can make this possible, while ensuring that each transaction gets recorded.
The only problem is that the technology is still new and players will have to assimilate it with other technologies to make it worthwhile for the government and private sector. There is also a gap in how one chain interacts with the other—transactions can be monitored/recorded, but to link people’s income and their income-tax records would prove to be challenging. As it evolves and is clubbed with more user-based apps, blockchain can provide solutions to such issues.
A basic problem in economics starts with asymmetry of information, i.e. one person knows more than the other. Blockchain addresses this by helping put anybody with an internet connection on a level-playing field. As for India, which is expected to see half a billion people get onto mobile internet by 2017, a good way to start would be to see how smart blockchain can make us.