Bitcoins will spark India’s financial innovation

By Roopen Roy Nov 24 2015

Tags: Op-ed

Often, when you string together two pieces of seemingly unconnected information, you get a flash of insight. According to Ericsson, by 2019, every human be­ing on this planet will have a smart phone that is connected to the internet. There is another data point. Per McKinsey, 2.5 billion people in the world today do not have bank accounts. If you join the dots, you have a powerful proposition.

If we were able to skip the landline of banks and go str­aight into the mobile world of finance enabled by the promising crypto-currency techn­ology over the internet, then our world would change dramatically. To appreciate the underpinnings of this revolution, we will need to underst­and, in simple terms, what is the block chain technology, which is at the core of crypto-currencies such as the bitc­oin. Block chain is essentially a public ledger that shows ev­ery bitcoin payment transaction ever made.

We must start with Satoshi Nakamoto who started this re­volution by writing a white paper in 2008. Nakamoto is probably a pseudonymous gro­up of people who designed an­d created the original bitcoin software. The title of this white paper was “Bitcoin: Peer-to-Peer Electronic Cash System.”

The paper argued that co­mmerce and financial transactions on the internet are unduly dependent upon financ­ial institutions and third parties who add costs without cr­eating any intrinsic value. The paper proposed: “What is ne­eded is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Bitcoin is an example of cr­ypto-currency. It is a digital c­urrency. It is stored in a digital wallet that can reside on your computer, smart phone or ta­blet. Because it is not printed or created by a sovereign authority, no bank or governm­ent has any control over the p­rice or supply of the coins. Si­nce bitcoins and other crypto-currencies are not in physical but digital format, they can be sent from one individual to a­nother nearly as easily as sen­ding a mail on the internet wi­th almost no fees or costs because you have bypassed intermediaries like credit card companies or financial intermediaries like banks.

Bitcoin is not fake internet money. It has real value. Increasingly it is being accepted all over the world. You can buy beers to diamonds, air-tickets to computers, using bitcoins and you can donate to charity and tip with bitcoins. Dell, Microsoft, Amazon and Shopify, to name a few well-known co­mpanies, accept bitcoins as a method of payment.

Why does it have the potential to revolutionise the financial system in India? Bitcoin is extremely cheap for online mo­ney transfers. In the US, a typical bitcoin transaction fee is currently less than $0.05 compared with a fee of between $20 and $40 charged by international banks. For countries like India with a vast number of unbanked people, this may mean leapfrog into low cost financial transactions.

Our prime minister asserted during the recent G20 meeting, that at $70 billion, India is the largest recipient of officially re­corded remittanc­es in the wo­rld. The transaction cost of wh­at was about 10 per cent, beca­use of sustained campaign by I­ndia, has come down to 7.5 per cent. The target is to bring it d­own to 3 per cent by 2030. With quicker adoption of block chain the costs can be reduced faster and to much low­er levels.

In India, crypto-currencies are slowly but surely gaining ground. India currently has a­round 50,000 bitcoin enthusiasts, with 30,000 of them actually owning the currency. With increasing ease of using them for purchases through mobile apps, bitcoins are qui­ckly becoming a payment currency. Believe it or not, Dharwad International School in Karnataka introduced bitcoins as an online payment facility for sc­hool fee this academic year. e­TravelSmart, which offers 80,­000-plus bus routes, started the facility in May and sees an average of five bitcoin transactions per month. “Bit for the Good Future” charity fund re­ached out to the famous footballer Roberto Carlos asking for help in the development of football for children in India. The fund’s aim is to attract hi­m to the problems of child fo­otball development.

Tata Group chairman eme­ritus Ratan Tata and American Express have made an undisclosed investment in Ab­ra, a digital currency start up, which helps in peer-to-peer money transfers. While making the investment Harshul Sanghi, American Express Ve­ntures’ managing partner sa­id, “As people and businesses transact more globally, there’s need for more convenient and affordable ways to move mo­ney, and we think the block chain could play an important role in the evolution of money transfer and commerce, especially in emerging markets.”

However, the regulators in India are worried. Rama Subramaniam Gandhi, deputy go­vernor of the Reserve Bank of India in a speech dated 25th August, said, “(Crypto-curre­ncies) have the potential to support criminal, anti-social a­ctivities like money laundering, terrorist funding and tax evasion. Crypto-currencies ha­ve been widely suspected to fin­ance criminal activities. We h­ave to be carefully and critically watching these developments. That is why I said these innovative developments whi­ch have the potential to be disruptive, may not be of so desirable, or may be questionable, relevance and merit.”

But just as King Canute could not rule the waves, regulators cannot wish away technological innovations just because they have the potential of being misused. We have not banned nuclear technology simply because atomic weap­ons can be produced harnessing it. Instead, we have the International Atomic Energy Age­ncy within the United Nations umbrella to regulate ‘atoms for peace.’ The potential of bitcoin and block chain technologies have a potential of revolutionising the internet-connected In­dia and greatly contribute to its economic development. It sho­uld not be stopped. It should be embraced and, indeed, appropriately regulated.

(The author is founder and CEO of Sumantrana, a strategy advisory firm)