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Bitcoin Gains Popularity

Given its inherent nature of offering immense anonymity, bitcoin is booming in India and how!

Given its inherent nature of offering immense anonymity, bitcoin is booming in India and how!

The Internet era has generated a requirement for low-cost, anonymous, and rapidly verifiable transactions to be used for online barter and fast settling money has emerged as a consequence. For the most part, e-money has filled this role, but the last few years have seen the emergence of crypto-currencies, which aim to eliminate the need for financial intermediaries by offering direct peer-to-peer online payments.

The blockchain/trust economy trend represents a remarkable power shift from large, centralized trust agents to the individual. While its broader implications may not be fully understood for years to come, it is hardly a death knell for banks, credit agencies, and other transactional intermediaries. It may mean, however, that with blockchain as the gatekeeper of identity and trust, business and government will have to create new ways to engage the individual – and to add value and utility in the rapidly evolving trust economy.

Given blockchain’s starring role in the Bitcoin hype cycle, there may be some lingering confusion about what this technology is and the value it can potentially bring to business. A recent Deloitte report explains it well. Simply put, blockchain is a distributed ledger that provides a way for information to be recorded and shared by a community. In this community, each member maintains his own copy of information, and all members must validate any updates collectively. The information could represent transactions, contracts, assets, identities, or practically anything else that can be described in digital form. Entries are permanent, transparent, and searchable, which makes it possible for community members to view transaction histories. Each update is a new “block” added to the end of the “chain.” A protocol manages how new edits or entries are initiated, validated, recorded, and distributed. Crucially, privacy can also be selectively enforced, allowing varying degrees of anonymity or protection of sensitive information beyond those who have explicitly been given access. With blockchain, cryptology replaces third-party intermediaries as the keeper of trust, with all blockchain participants running complex algorithms to certify the integrity of the whole.

As the need for portable, manageable digital identities grows, individuals and organizations can use blockchain to:

Store digital records. To understand blockchain in the context of the trust economy, think of it as the tech-charged equivalent of the public ledgers that would be used in towns to record everything of importance: the buying and selling of goods; the transfer of property deeds; births, marriages, and deaths; loans; election results; legal rulings; and anything else of note. Instead of a bearded master wielding a long-stemmed stylus to record miniscule but legible entries in an oversized ledger, blockchain uses advanced cryptography and distributed programming to achieve similar results: a secure, transparent, immutable repository of truth – one designed to be highly resistant to outages, manipulation, and unnecessary complexity.

In the trust economy, the individual – not a third party – will determine what digital information is recorded in a blockchain, and how that information will be used. With an eye toward curating a single, versatile digital representation of themselves that can be managed and shared across organizational boundaries, users may record:

  • Digitized renderings of traditional identity documents such as driver’s licenses, passports, birth certificates, social security/medicare cards, voter registration, and voting records
  • Ownership documents and transactional records for property, vehicles, and other assets of any form
  • Financial documents including investments, insurance policies, bank accounts, credit histories, tax filings, and income statements
  • Access-management codes that provide any identity-restricted location, from website single sign-on to physical buildings, smart vehicles, and ticketed locations such as event venues or airplanes
  • A comprehensive view of medical history that includes medical and pharmaceutical records, physician notes, fitness regimens, and medical device usage data

As a repository of valuable data, blockchain can provide individual users with unprecedented control over their digital identities. It can potentially offer businesses an effective way to break down information silos and lower data management costs.

Exchange digital assets without friction. Using blockchain, parties can exchange ownership of digital assets in real time and, notably, without banks, stock exchanges, or payment processors – all applications requiring trusted digital reputations. Many of blockchain’s earliest use cases for business involved facilitating cross-border payments and intracompany transfers. Applying that same basic transactional model to P2P transactions, blockchain could potentially become a vehicle for certifying and clearing asset exchanges almost instantaneously. What once took T + 3 days to clear now takes T + 3 milliseconds.

Though broad acceptance of P2P asset exchanges via blockchain may still be a few years away, the exploratory steps some companies are currently taking offer insight into where blockchain deployment may be headed. For example, Microsoft and Bank of America Merrill Lynch are jointly developing a cloud-based “blockchain-as-a-service” offering that will execute and streamline asset exchanges between companies and their customers.

Execute smart contracts. Smart contracts represent a next step in the progression of blockchain from a financial transaction protocol to an all-purpose utility. They are not contracts in the legal sense, but modular, repeatable scripts that extend blockchains’ utility from simply keeping a record of financial transaction entries to implementing the terms of multiparty agreements automatically. The fact that they are not legally binding makes trust even more important.

Here is how they work: Using consensus protocols, a computer network develops a sequence of actions from a smart contract’s code. This sequence of actions is a method by which parties can agree upon contract terms that will be executed automatically, with reduced risk of error or manipulation. Before blockchain, this type of smart contract was impossible because parties to an agreement of this sort would maintain separate databases. With a shared database running a blockchain protocol, the smart contracts auto-execute, and all parties validate the outcome instantaneously – and without the involvement of a third-party intermediary.

Though smart contracts may not be appropriate for some legal agreements, they can be a worthwhile option in situations where networks of parties engage frequently, or in agreements where counterparties are performing manual or duplicative tasks for each transaction. For example, they could be deployed for the automated purchase or sale of financial instruments, parametric insurance contracts, and certain automatic market-making activities, as well as for digital payments and IOUs. In each case, the blockchain acts as a shared database to provide a secure, single source of truth, and smart contracts automate approvals, calculations, and other transacting activities that are prone to lag and error.

Blockchain Adoption

Chain is one such example. The open source Chain Protocol, which powers the Chain Core blockchain platform, is designed to create enterprise financial products and services.

The company raised over $40 million in funding from Khosla Ventures, RRE Ventures, and strategic partners including Capital One, Citigroup, Fiserv, Nasdaq, Orange, and Visa. Another open source blockchain giant is Hyperledger, a collaborative effort hosted by The Linux Foundation, intended to foster cross-industry blockchain technologies.

It was recently announced that IBM would be using Hyperledger to build a new blockchain, the digital trade chain, intended to help parties track, manage, and transact internationally, on behalf of a consortium of European banks including Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale, and Unicredit.

A more quirky use of financial blockchain comes from UK’s The Royal Mint, maker of Britain’s coins, which has started testing a blockchain-based platform for trading gold.

The platform will allow institutions to trade Royal Mint Gold, or RMG, a new digital token issued by the Royal Mint, and backed by 1 g of gold stored in the Royal Mint’s vault.

And no list would be complete without the mention of Etherium, not only the basis of an increasingly successful cryptocurrency (ether, or ETH), but also an ecosystem enabling anyone from consumers to global corporations to create smart contracts – or their own currencies – by issuing tokens based on a standard – ERC-20.

Transactions are confirmed by miners processing blocks of ether, which is hardcoded into the standard.

This combination has resulted in a recent phenomenon of the ICO – or Initial Coin Offering, a fundraising and product distribution process that has attracted significant investment in recent months.

Currencies. By far, the most widely known cryptocurrency is Bitcoin, introduced by Nakamoto in 2008. It is by no means the only cryptocurrency. CoinMarketCap lists 590 currencies with a total market capitalization of USD 4.5 billion. However, Bitcoin accounts for more than 80 percent of this amount. The distinct nature of cryptocurrency is apparent in its comparison to centralized virtual currency, and also to e-money. The issuance mechanism in Bitcoin is fixed, explains EY Global Financial Services in a 2015 report, with the coin-generation process and final available currency dictated by a mathematical proof. E-money is intrinsically linked to the underlying fiat currency, whose issuance is controlled by a central banking authority. In general, it is acknowledged that anonymity is perhaps greater with cryptocurrencies, as not all companies follow the Financial Action Task Force standards with regard to customer identification. On the other hand, Bitcoin is limited to people with Internet connections. This turns out to be significant as it precludes its widespread uptake in the third-world countries, where e-money is very popular in mobile services networks.

The Bitcoin Boom in India

The technology is fast gaining pace in India too. According to PwC, 32 blockchain firms were founded in India in 2016. In the years before that, just 23 were set up.

IT and services industry body Nasscom has started a Special Interest Group (SIG) for blockchain in the National Capital Region. This SIG is primarily powered by BlockSmiths, a Delhi NCR based firm that helps businesses leverage the blockchain technology and Quatrro, a global fintech service provider. The SIG will educate and inform the public along with working on various blockchain use cases in both fintech and non-fintech industries.

The digital currency can be used to move money inexpensively across borders within a matter of minutes without ever having a bank account. Post demonetization, India saw a rise in bitcoin demand like never before. For the first time premium on Indian exchanges crossed USD 300, leading to many arbitrage opportunities. Recently in the Aug 7–14 week, the value of one bitcoin surged past USD 4000 for the first time gaining more than 20 percent in one week. In 2010 when it was introduced, it was 8 cents to a bitcoin. India is currently doing `200–250 crore of bitcoin trading every month.

Bitcoin has had varied regulatory response, from outright ban in China to effective treatment as money in Australia. Given the borderless nature of Bitcoin, however, it is difficult to see how regulators can prevent companies taking advantage of regulatory arbitrage, by setting up jurisdictions with less restrictions. Blockchain is without doubt one of the most exciting technological innovations out there, whether you are a fintech startup, crypto-currency investor, enterprise or food producer, and in India it should fly high, given its inherent nature of offering immense anonymity.

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