Bitcoin has captured the imagination of the world recently. Bitcoin (BTC) is the most famous of Cryptocurrencies.
What is a Cryptocurrency?
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies.
Bitcoin is just one of the cryptocurrencies. Innate human nature of competitiveness and herd mentality has resulted in variety of cryptocurrencies in the last 5 years. You will be surprised to see their market capitalisation & values tracked by Coinmarketcap
Let’s get some attributes straight. Cryptocurrencies are 1) Digital, 2) Private, 3) Decentralised, 4) Not legal tender recognised by governments of most countries (at least not yet)
An example to illustrate – Today if Sharma wants to pay Aqib INR 5000, he most probably might pay through e-wallet like Paytm or UPI account with his bank. Here Paytm / the bank acts as Centralised Intermediary maintaining the accounts, ledger and in ensuring that there is appropriate balance to execute this transaction. In case of Bitcoin, this transaction does not require a centralised intermediary. The global peer-to-peer network, composed of thousands of users, takes the place of an intermediary.
The technology invented by founders of bitcoin to execute this, is commonly referred as BLOCKCHAIN.
Real World Context
Medium of exchange is critical for mankind survival. Humans have come a long way from Barter system and have continuously innovated – exchanging animals, then cowry shells, metal plates, coins, notes, bills of exchange, credit card, NEFT, RTGS, IMPS and now UPI & e-wallets.
Convenience & control within regulations have been at the epicentre of each innovation.
Just looking at numbers, the world has 197 countries recognised by UN in various capacities. These 197 countries have 158 individual currencies (ISO-4217 standard). So we are nowhere close to a universal currency – one currency for the whole world.
We might wonder “Is there a need for one more currency – Cryptocurrency”?
Interestingly there have always been discussions & innovations around ‘Alternate’ currencies – a currency other than the legal tender for exchange backed up by Government. A crude example of alternate currencies would be ‘Airline’ miles, credit card points or gift cards that various users accumulate and exchange for other products. However, owing to practical usability of these, these alternate currencies are always pegged to legal tender (e.g $100 spent = 1 credit card point). So, I believe that cryptocurrencies will not replace the legal tender currencies of various countries but could it remain as an alternative ?
My take on what next for Cryptocurrencies
A lot of organisations in the world have started accepting Cryptocurrencies as a medium of exchange. Beyond the novelty aspect, these cryptocurrencies are highly secure, make the transactions efficient and cheap. Merchants around the world have an alternative to cumbersome, bureaucratic & expensive processes involving credit card companies or e-wallets. This is so relevant that one of the world’s leading e-commerce market player Amazon, is conceptualising its own Amazon coin .
These cryptocurrencies will serve as the catalyst for disruptive financial innovations. Already, BLOCKCHAIN is one such disruptive technology. The applications of Blockchain have gone beyond digital money exchange to ‘Smart Contracts’ – ETHEREUM. They are computer protocols that have the main purpose of executing the terms of a contract, to satisfy common contractual conditions without the need for trusted intermediaries. This way, smart contracts can be used as the deepest layer of any kind of application development and not just to set payment-related transactions.
Cryptocurrencies & Regulations
Regulators are playing the catch-up game with Cryptocurrencies and are figuring out how to deal with them. In future, Cryptocurrencies could be conceived as a currency or a commodity. Indeed, economist George Selgin has called Bitcoin “synthetic-commodity money.”
I feel that in the next few years, some governments would ban these cryptocurrencies. Some countries would treat this as a commodity or asset like gold. This would attract capital gains tax. Some countries would recognise them as a foreign currency and subject it to regulations applicable to any foreign currency for that country. Interestingly a cryptocurrency will not have a domicile country and would be a foreign currency for every country in the world.
There are a few negative criticisms of cryptocurrencies on grounds of cyber security, price volatility, complexity to understand, and use in illegal activities. These criticisms are not just limited to cryptocurrencies, and can be applied to existing legal currencies as well. People getting involved with Cryptocurrencies must be extra vigilant, careful and should do proper due diligence. There is no established grievance redressal process. All this will change but will take time.
Like how Space research is a symbol of excellence in engineering, Cryptocurrencies are a symbol of excellence in digitalisation.