Block Chain can change the world
Bitcoins will spark India’s financial innovation
By Roopen Roy Nov 24 2015
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)