Focus on bitcoin misplaced

Indians love gold. And almost everything with glitter and gleam. The year 2017 will be remembered for Indians transferring their affectionate gaze to the virtual glitter of cryptocurrency bitcoin. For many Indians, a bitcoin is now the shiny, gleaming symbol of investment that promises instant treasures.

A young couple in Bengaluru asked their friends to present them a bitcoin for their wedding. Indian movie icon Amitabh Bachchan’s investment in a bitcoin management company came good. And the value of bitcoin crossed $1500 amid busy trading.

Often used interchangeably and not really understood by most, bitcoin and blockchain have captured the imagination of India. Investors, current and potential, are excited about this new curious form of investment that seems to offer thousands in return for hundreds.

But bitcoin as an investment carries as much risk as any other financial investment. Putting money in bitcoin needs research and understanding, much as you would apply when investing in stocks, commodities or real estate.

If you don’t understand, don’t invest. This is a simple rule to be followed in all investments and is even more applicable for new categories like cryptocurrencies.

The fundamental point to understand about cryptocurrencies is that they are not issued by a government. They are created and managed by private entities in a purely online form. There is no physical coin or currency. And they don’t have government backing. Pick up a Rs 500 currency note and read what it says: “I promise to pay the bearer a sum of five hundred rupees,” Governor, Reserve Bank of India (RBI). This is an inviolable promise. Every single currency note issued by RBI or any other central bank carries this promise to every single currency note holder.

There is no such promise in cryptocurrencies. There is no such promise in any other type of investment in the world. No one promises to protect your principal investment and nobody promises guaranteed returns.

According to financial information website MarketWatch, digital currencies were worth $100 billion in June 2017. In December, the value has crossed $400 billion. Bitcoin alone is worth more than $100 billion but there are other popular cryptocurrencies too. These include Ethereum and Ripple. More than 800 cryptocurrencies are listed with Coindesk.com, a digital currency information resource. About 18 of them have a value of greater than $1 billion and over 90 cryptocurrencies are worth more than $100 million.

Cryptocurrencies are based on blockchain technology. This technology is simple in its concept. Each ‘block’ is a packet of digital data that is constantly updated and secured. This ‘block’ can move between entities and individuals without the need for constant verification. The information carried in this block is secure and authentic. In some ways, it is like a currency note that can’t be copied and is trusted by everyone. In the financial sector, transactions are carried out through intermediaries who verify an instrument. Without intermediaries and their verification of instruments, transactions are not accepted.

The real glitter and value lie in the blockchain technology. Cryptocurrencies are just one of the applications of the technology. Many companies in India have begun using blockchain already. Many are applying it to improve efficiency and security in business processes. India’s largest bank, State Bank of India (SBI), has deployed blockchain as a platform for know your customer (KYC) due diligence for their consumers and for issuing smart contracts. 

The Pune-based start-up Primechain Technologies will implement the solutions for SBI. Primechain has created a community of bankers on the platform of Bankchain to promote the use of blockchain within the financial industry. Apart from SBI, other members include ICICI Bank, Kotak Bank and the National Payments Corporation of India. Many other companies have begun to use blockchain for paying salaries and managing other financial transactions.

Blockchain can be used in different activities like managing land registration, patient record management and digital supply chain. “Blockchain technology is generating significant interest across a wide range of industries in India. As the field of applications for blockchain grows, industry leaders are customising and tailoring the technology to fit multiple use cases,” says a recent study by Deloitte about blockchain in India. The company itself is using the technology for employee-recognition programme.

Naturally, there is an ongoing debate and discussion among policymakers and regulators about blockchain in India. Market regulator Securities and Exchange Board of India has taken a progressive view. Its chairman Ajay Tyagi said that the government and regulators should encourage the technology even as it keeps a sharp eye on the potential bubble in bitcoin investments. The RBI has already issued a warning note to investors about bitcoins.

This caution is important. However, the exciting opportunities of blockchain should not be undermined by worries about cryptocurrency bubbles.

The writer is an economic analyst and author of Kranti Nation: India and The Fourth Industrial Revolution