With the restrictions imposed by the RBI on PMC Bank in the previous month, the confidence of general depositors has taken a hit. which has led us to ask more prying questions such as can we trust money with our bankers much the same way as in the past? What is the future of money itself given its vulnerability in modern times? Todays column is an insight in the not so well-known world of alternative currency ie cryptocurrency.
Cryptocurrency or what’s popularly known as Bitcoin, Litecoin, ripple etc is an alternate mode of payment that takes place over the web. To understand what these codes do, we should first understand the problems that he tried to address.
The most important objective was to eliminate the role of banks. Essentially, the role of banks, to put it crudely is to stand as a guarantor for the promissory note (the currency in the modern age) that is exchanged between a payer and a payee for some transaction between them. Now how do banks do that? They debit the receiver and credit the giver. This is the double entry method of bookkeeping. For this guaranteed service and the record maintained by them which is considered sacrosanct due to the fact that it’s a bank, the banks charge a transaction fee based on the amount of money exchanged. Now Satoshi thought of a simple way to eliminate this process.
What if every person who gets into any form of financial transaction first opens an online wallet and then maintains his own book. Now the speciality of this book is that it contains details of not just the individual’s own transaction but the detail of every transaction that has ever taken place over the web. Every transaction that happens between any two individuals is updated in everyone’s book. Who does that? This job is done by miners. Miners are people who check the validity of transactions that take place online and approve it for updation in everyone’s book. They are rewarded with bitcoins for their services. Bitcoin is therefore like virtual cash. The words bitcoin and cryptocurrency are often used interchangeably. So, in effect crypto is a self-sustaining system that functions on the basic assumption that there will always be individuals online that are working on mining (validating and approving) the transactions.
As it stands today in most parts of the world, even if you are not a miner, you can still own bitcoins by buying them online with actual cash at the rate at which they are being sold however kindly note they are not legal tender in India.Let’s look at the pros and cons of this system.
Cons first: Firstly,Transaction costs can be very high. The cost of sending 1 dollar or 100 dollars in the same. So, it makes sense to use them for larger transactions. Secondly 90 per cent of the bitcoins is concentrated in the hands of a few 0.6 percent of the total holders of the bitcoins who stand to make insane amounts of money if crypto makes it big. And lastly the traditional concept of cash has been modelled on certain rules regarding the number of currencies that can actually be printed by the central banks and this is based on a number of factors including the gold, bullion and bond reserves that are held by the government.
The governments that don’t adhere to these rules run a risk of rising inflation in their respective economies which means the purchasing power of one unit of currency will keep falling over time. Imagine the value of ten rupees ten years back versus now. This is the greatest perceived disadvantage of bitcoins, there is no underlying security for the same.
The Pros now: Cryptocurrency has been modelled on the blockchain concept. This is basically an answer to the traditional double-entry method of bookkeeping. It’s basically triple entry, the books of the sender, receiver and every other third person gets updated. So, in effect, the third person can transact with any other person without using an intermediary like a bank. Obviously, banks and governments are not going to like this.
Conclusion: Cryptocurrencies could be a probable option to printed currency. So, to remain relevant in the future, the governments worldwide could look at a phased approach to formally adopting cryptocurrency without drastic consequences to the economy and the bond markets by creating its own crypto base.Formal adoption of the concept of crypto by the governments will not only ensure a fair play for all but also that the existing currency becomes a top player in the crypto world before letting people become prey to the expensive bitcoin. This could also address the cons associated with the current system. We as mankind have evolved trade and commerce by constantly finding ways to transact with way other be it the barter system in the evolutionary phase to the currencies that we use today. Necessity is the mother of allinventions, who knows maybe someday cryptocurrencies and its probable regulatory framework become the currency of tomorrow.
