Tales of cryptocurrency

Imagine a currency that is not regulated by any government. A currency that cannot be manipulated by a central bank. Until a decade back, even the keenest futurists might have dismissed this as a capitalist’s utopian dream. But then, someone made it happen.

The Genesis
On October 31, 2008, a paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ was published on a cryptography mailing list by someone going by the name Satoshi Nakamoto. The paper proposed “a system for electronic transactions without relying on trust”.

Coming close on the heels of the global financial market meltdown, the radical new proposal aimed at eliminating the intermediation responsibilities of the banks. Instead, it proposed “an electronic payment system based on cryptographic proof”.

No one knew who is Satoshi, but with trust in financial institutions at a rock bottom, Bitcoin quickly built a community of enthusiasts, who believed that it had the potential to change the world.

And Then There Were Others
The first real-world transaction using Bitcoin took place in May of 2010 when a programmer offered to pay 10,000 BTC for two Papa John’s Pizzas. In those early days of Bitcoin, that amount was approximately equal to 25 USD. Today, the same amount of Bitcoin is worth almost 28 million USD (over 180 crore rupees).
Bitcoin’s popularity has also led to the creation of numerous alternate cryptocurrencies that are collectively known as ‘Altcoins’.

Each of these cryptocurrencies is built on the concept of blockchain pioneered by Bitcoin but differ in the implementation details. There are currently over 900 cryptocurrencies, but only Etherium has so far emerged as a competitor to Bitcoin. However, Bitcoin continues to be the market leader with a total market capitalisation approaching 45 billion USD, which is more than double of Eherium’s market cap.

From Currency to a Commodity
Over the years, the worth of Bitcoin has soared, fuelled by increasing mainstream media coverage and political and economic instabilities around the globe. The increasing valuation, in turn, has drawn more people who hope to realise hefty financial gains and set up a virtuous cycle.

What was originally conceived as a democratic currency aimed at replacing traditional money has morphed into a commodity. A 2016 study by Ark and Coinbase found that a majority of Bitcoin users use it solely for investment purposes. It argued that Bitcoin is a new asset class and not a currency.

Bitcoin is truly global in nature. Not beholden to any government, transferring money across the globe is fast and cheap with Bitcoin. It’s easy to envision why it would be a perfect currency for online business’ that have a global clientele.

Unfortunately, Bitcoin’s greatest strength is also its greatest weakness. Bitcoin lacks a central agency capable of regulating and stabilising it. While the price volatility of Bitcoin makes it great for speculative investment – within a span of a year its value has increased by over five times – it makes it a terrible currency.

Bitcoin has also been plagued by scams large and small. In an international survey conducted by ‘Bitcoin in Ireland’, one in four respondents admitted that they have lost money to frauds and hacks. Deposits in banks are often insured, and credit card companies offer a grace period during which fraudulent transactions can be reversed. On the other hand, Bitcoin transactions that have been added to the blockchain are designed to be irreversible.

Add to this the learning curve associated with Bitcoin and you’ve a currency that seems destined to exist in the fringes. Many of the enthusiastic adopters of Bitcoin are security and privacy oriented products like VPN services that share overlapping user demographics.

There has also been a trickle of household names like Microsoft and Dell that have announced support for Bitcoin. However, transaction volume with Bitcoin is still quite low, and most of the merchants that accept Bitcoins do so either to ‘support the cause’ or to gain media exposure. Even among these, most actually implement Bitcoin support by tying up with a middle-man that accepts Bitcoin and converts it into a stable currency like the dollar.

Legality of Bitcoin
While a few countries like Bangladesh have strictly banned Bitcoin, most countries either don’t have a defined policy surrounding Bitcoin or discourage its usage but not entirely prohibit it. Others like Japan have introduced laws recognising Bitcoin as a legal payment method. In the United States, the Treasury denotes it as a ‘convertible decentralised virtual currency’, while the IRS taxes it as a property and CFTC classifies it as a commodity.

India falls in the category of countries that are still evaluating how to best regulate cryptocurrencies. In 2013, RBI cautioned that users of virtual currencies might be exposing themselves to “potential financial, operational, legal, customer protection and security related risks”. CNBC recently reported that an inter-disciplinary committee that includes finance ministry officials, NITI Aayog, and RBI are working towards a framework to legalise and regulate virtual currencies.

Earlier this year, Arjun Ram Meghwal, the minister of state for finance warned that using Bitcoins can expose an individual to an unintentional breach of money laundering laws. RBI Governor Urjit Patel has also stated that transactions involving cryptocurrencies are closely monitored to ensure there is no tax evasion.
In the absence of a clearly defined regulation, Indian Bitcoin exchange services like Zebpay and Coinsecure enforce KYC (Know Your Customer) compliance in an attempt to discourage criminal usage of the cryptocurrency.

The Dark Underbelly
While mainstream Bitcoin adoption has been slow, it has become the de-facto currency of the dark web – the hidden internet that can only be accessed through special software like Tor. Bitcoin has the distinctive trait of being both public yet private at the same time. The blockchain provides a complete log of all Bitcoin transactions, and anyone can calculate out how much Bitcoin an account holds as well as view all transactions performed by that account. However, a Bitcoin account isn’t necessarily linked to a real-world identity. Anyone can create a bitcoin id without having to provide any personally identifiable information, and there are services called ‘coin mixers’ dedicated to obfuscating the money trail afforded by the blockchain.

FBI estimates that Silk Road, the notorious dark web marketplace where everything from Heroine to AK-47 were up for sale, had a total revenue of 1.2 billion USD. Silk Road was busted in 2013, but the void has since been partially filled by numerous new comers. Pornography, stolen credit-card data, drugs and arms are just some of the things up for sale on the darkweb markets powered by cryptocurrencies.

Cryptocurrencies have also become the payment method of choice for financial scams and Ponzi schemes. Mumbai police recently filed a charge sheet against 30 promoters of Onecoin, a cryptocurrency with a private ledger that is alleged to be a Ponzi scheme that raised over 75 crore rupees from victims.

Closer home, police recently busted a drug module in Hyderabad that altlegedly peddled drugs to everyone from students to Tollywood celebs. These peddlers reportedly ordered drugs from darknet marketplaces with Bitcoin.

Another worrying trend is the rise of ransomware like WannaCry which lock down infected systems and makes all documents inaccessible unless a ransom is paid. As you might have guessed, the medium of payment, is almost always Bitcoin or other cryptocurrencies.

How it Works
The original Bitcoin design paper is a tour de force that combined concepts of Peer-to-Peer (P2P) technology, cryptography, and digital payments to decentralise something that was hitherto thought to be impossible to decentralise.

The biggest conundrum facing any digital piece of information is that it can be easily duplicated. While duplicating a five hundred rupee note accurately is difficult, duplicating few bits of information is trivial. Conventional digital payment solutions like PayPal or Paytm rely on a centralised server to maintain a log of transactions and prevent fraud. Bitcoin solves this problem through two mechanisms – nodes and blockchains.

The entire Bitcoin network runs on specialised servers known as nodes. The source code of Bitcoin is publicly available, and anyone can setup and run a node. Bitcoin is powered by this decentralised and open network of nodes.

The blockchain is the key innovation of Bitcoin. Every financial institution maintains a private ledger that keeps track of the flow of money. In Bitcoin, this ledger is public and available with every node. Every ten minutes, transactions are grouped into a cryptographically secured block. This block is validated by systems running specialised software known as miners.

The miners compete to solve cryptographic problems to validate the information in each block. The first to complete the validation receives a reward in the form of Bitcoin. A blockchain is the complete Bitcoin ledger that includes all validated transactions. Each block in a blockchain contains a link to the previous block and a timestamp, in addition to the transaction information.

The Bitcoin network is designed to be self-adjusting and self-governing. The only way new currency can be added to the Bitcoin pool is through mining. The total Bitcoin pool is capped at 21 million, out which 16.47 million bitcoins have been mined. The network automatically adjusts itself to exponentially reduce the rate at which new coins are mined, and all the coins are expected to be mined by 2040.

Bitcoin in India
Bitcoin usage in India surged after demonetisation. The unprecedented and unexpected curb on currency notes forced many to explore digital payment tools like wallets and virtual currencies. Although the transaction volume is still not comparable to countries like the United States, Bitcoin adoption has sharply increased in the recent months.

Zebpay, an Indian Bitcoin wallet launched in July 2015, recently claimed that it is adding 2,500 users per day. They recently crossed half a million downloads on Android platform, and are hoping to cross a million total downloads by September. Even though Bitcoin exchange rates in India are usually higher than international rates, almost a million people are believed to be trading in cryptocurrencies in India.

India is reported to have a few hundred small and large merchants who accept Bitcoin. Book store SapnaOnline, travel portal eTravelSmart, fashion store CyanKart, and recharge service Reload are some of the biggest names accepting Bitcoin in collaboration with Bitcoin exchanges services.

In 2014, Castle Bloom, a beauty bar in Chandigarh, became the first physical store to begin accepting Bitcoins. However, offline penetration of the cryptocurrency is still very poor. Flying Spaghetti Monster, a chain of Italian fine-dine restaurants plans to begin accepting Bitcoin soon in its Hyderabad and Bangalore outlets.

Future of Bitcoin
It’s incredible how far Bitcoin and cryptocurrencies have come in less than a decade. From being a curious social and technological experiment, cryptocurrency related startups have managed to attract venture capital of more than a billion dollars. In June, the market capitalisation of cryptocurrencies touched the 100 billion mark. As dizzying as those numbers might sound, the biggest challenge for cryptocurrencies lie ahead.

Bitcoin and its ilk have demonstrated the dangers of an unregulated financial instrument. From being vehicles of money laundering to terrorist funding to drug peddling, the societal risks associated cryptocurrencies are many. It’s worth noting that none of these crimes are exclusive to Bitcoin. All of these criminal activities originated, survived, and sometimes thrived under traditional fiat currencies. However, the high degree of anonymity associated with cryptocurrencies makes them uniquely attractive to unscrupulous elements.

Bitcoin was announced with the ambition of making banks redundant and replacing fiat currency. Instead, it has become a vehicle for investment. Getting someone to order a coffee with it has proved to be its biggest challenge. Bitcoin is also facing a unique constitutional crisis due to sharp differences between two influential groups over the best approach to address scaling challenges and the general future direction of the currency.

In the meanwhile, cryptocurrencies have continued to evolve and present new use cases. One of the more interesting applications that have recently emerged is ‘Initial Coin Offering’ or ICO. Companies looking to raise money create their own cryptocurrency and offer enthusiasts the opportunity to buy their new cryptocurrency in exchange for established ones like Bitcoin.

Companies have been increasing exploring ICO as a tool for fundraising instead of approaching traditional venture capitalists. Earlier this year, Brave – a new browser backed by the co-founder of Mozilla raised 30 million USD in just 30 seconds through its ICO.

Many believe that while cryptocurrencies will stagnate, blockchains can usher in a host of innovations. Deloitte identified faster and more accurate share trading, improved online identity management, and smart contracts as potential use cases of blockchains. IBM believes that a blockchain is a revolutionary tool that can upend several domains including shipping and logistics, infrastructure management, and supply chain. In a study of 200 banks across 16 countries, IBM found that 15 per cent expected to “have blockchains in commercial production” by 2017.

“Blockchain can bring benefits to the financial industry and beyond, given time”, claimed Moody’s in a report. The very banks that Bitcoin sought to replace might end up becoming the most influential adaptors of the technologies pioneered by it.

By: Pallab De