When India’s Covid-19 pandemic was raging towards its peak in mid-May, Vitalik Buterin, the 27-year-old founder of Ethereum, donated cryptocurrency worth $1 billion to support pandemic relief work in India. Our astonished media didn’t know what to make of this: Some reported it as the single-largest philanthropic contribution to help Covid-afflicted Indians, whereas others thought it was a bit of a joke, especially since the cryptocurrency donated was Shiba Inu, one of a growing number of “meme digital currencies”.
Many Indians are understandably sceptical about the very idea of crypto-currency. How can there be any kind of currency that isn’t backed up by a sovereign state and a public institution like a central bank? But there is, and it’s valuable enough to shake up financial markets. The pioneer cryptocurrency, Bitcoin, which traded at just $ 0.0008 in 2010, commanded a market price of just under $65,000 this April. Many newer coins were introduced since Bitcoin’s launch, and their cumulative market value touched $ 2.5 trillion this May. Within a span of just over a decade, their value has surpassed the size of economies of most modern nations.
China’s recent crackdown on cryptocurrency had far-reaching consequences. An astounding trillion US dollars were wiped out from the global cryptomarket within a span of 24 hours. Remarkably, this is a reversal of a fraction of the gains made by this sector since the onset of Covid-19 in January 2020. The “cryptomarket” grew by over 500 per cent, even while the pandemic unleashed global economic carnage not seen since the Great Depression. Within two days of the China-provoked crash, the value of the cryptomarket again recovered by over 10 per cent.
This kind of extreme volatility has always been a concern for regulators and investors alike. When Satoshi Nakamoto created the most popular cryptocurrency, Bitcoin, in 2008, as a fully decentralised, peer-to-peer electronic cash system that didn’t need the purview of any third-party financial institution, he was responding to the lack of trust in the existing banking system reflected in the global financial crisis that year. Initially, governments did not know how to react, but as with the growth of the internet, the advent of cryptocurrency has been one of the extraordinary stories of modern economic history and no country can remain untouched by it.
In India, as always, the reflex action is to bar what you can’t understand, ban what you can’t control. Law enforcement and taxation agencies have clamoured for a ban, expressing wariness of these being used as instruments for illicit activities, including money laundering and terror funding. In 2018, the Reserve Bank barred our financial institutions from supporting crypto transactions — but the Supreme Court overturned it in 2020. Yet, Indian banks still block these transactions, and the government has circulated a draft bill outlawing all cryptocurrency activities, which has been under discussion since 2019.
Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams. But like all effective regulation, it needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve. Nobody in India has been able to tick these boxes, and we’re in danger of missing out in the global race altogether.
Despite there being no announced policy in place, the Reserve Bank has announced the launch of a private blockchain-supported official digital currency, similar to the digital Yuan. India is increasingly mimicking China’s paradoxical attempt to centralise a decentralised ecosystem. Our government is trying to decouple cryptocurrencies from their underlying blockchain technology, and still derive benefit. Unfortunately, this is impractical, and shows a lack of understanding of this disruptive innovation.
The basic architecture of blockchain is a network where people share the extra space and computational power in their computers to create a global super-computer that is accessible to everyone. This network performs functions such as verification of transactions and contracts, and the updating and maintenance of these records in the form of tamper-proof ledgers. These tasks are normally done by large intermediary organisations like banks, law firms, and public institutions. Participants of a network are known as validators, and they are rewarded for their efforts by transaction fees in the form of tokens or coins.
At the moment, intermediaries (including banks, credit card and payment gateways) draw almost 3 per cent from the total global economic output of over $100 trillion, as fees for their services. Integrating blockchain into these sectors could result in hundreds of billions of dollars in savings. Blockchain could make every aspect of e-governance, judicial and electoral processes more efficient and transparent.
Tech firms, including titans like Google and Facebook, derive most of their value from their multitude of users. Blockchain could enable these internet customers to receive micro-payments for any original data they share in the digital space including ratings, reviews, and images. Our digital space would thereby become more redistributive and fairer. Thousands of companies across the globe are working on projects that could bring in such paradigm changes. In just the first quarter of 2021, blockchain start-ups worldwide received venture funding of $ 2.6 billion, more than what they raised in all four quarters in 2020.
Meanwhile, the funds that have gone into the Indian blockchain start-ups are less than 0.2 per cent of the amount the sector raised globally. The current central government approach makes it near-impossible for entrepreneurs and investors to acquire much economic benefit.
Any new regulations made in this sector should prevent the misuse of these digital assets without hindering innovation and investments. Provisions have to be made to route the value extracted from these networks transparently into our financial system. Indian investors are said to hold some Rs 10,000 crore in digital currency already. As the financial pages report mounting anxiety among investors about the regulatory uncertainties plaguing India’s position on cryptocurrency, the need for clear-headed policy-making has never been greater.
India was a late adopter in all the previous phases of the digital revolution – when semiconductors, the internet and smartphones made their mark, we had to play catch-up, as we are still doing on 4G and 5G. We are currently on the cusp of the next phase, which would be led by technologies like blockchain. We have the potential to channel our human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. All we need to do is to get our policymaking right.
This column first appeared in the print edition on May 31, 2021, under the title ‘Catch the new tech wave’. Tharoor is MP for Thiruvananthapuram and an author. Antony is a public policy commentator and digital technology expert