Analysing Crypto-Currencies and the Block-Chain Technology

What is the issue?

Indian Finance Ministry and the RBI had issued warning against investing in crypto-currencies (CC) and have likened them to ‘Ponzi schemes’.
The risks of CCs upending “terror-funding, smuggling, drug-trafficking, and money-laundering” were also highlighted.
Despite these factors, CCs and the “Block-Chain Technology” on which they are based, have proliferated and do indeed have massive disruptive potential.
This article is an analysis of the opportunities and challenges that have arisen in this context.

What is currently the most significant impact of CCs?

The “Bitcoin phenomenon” has shown promise of becoming the most potent challenge ever to the monopoly of states (or central banks) over currency.
While still in its nascence, on the fringes of the monetary system, CCs have already triggered the realisation that actions on controlling them is futile.
Significantly, central banks have themselves come out with their own “Central Bank Digital Currency” (CBDC) as a counter.
While CBDC is a complex tool whose functionality is still being researched, the inherent contradiction with it is its centralising tendency unlike other CCs.
On the other hand, the Block-Chain on which all kinds of CCs are based is essentially a decentralised peer-to-peer module.
In fact, the rise of CCs, inherently owe it to the “distrust of bankers” as central authorities in monetary transactions.
This was accentuated in the serious of banking collapses that occurred during the “Sub-Prime Crisis” of 2008-09.

How does the “Block-Chain Ledger” work?

In order to be functional, a virtual currency must not allow double spending of the same money by copying or cyber-theft.
Conventional cashless transations are accounted through “centralised ledgers”, who act as ‘trusted intermediaries”, which is often a bank.
But Block-Chain Modules are based on decentralised ledgers stored across thousands of computers, and transaction data is continuously updated.
Blockchains also uses economic incentives to motivate members of the network to do the work of validating every transactions.
This hence makes the central trustee reudndent and thereby eliminated banks.

What could be the larger monetary implications of the CCs?

Bitcoins, unlike a stock or a bond, are a purely speculative asset untethered to a material basis of value.
A major reason seasoned speculators find bitcoins irresistible is its deflationary nature, which makes it inflation-proof.
Since there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation.
In this regard, cryptocurrencies may herald the next stage of neo-liberal economics, which is the privatisation of currency .
Significantly, this means that the significance of fiat currencies would reduce.
Consequently, the state will have to become more fianancially disciplined as “Quantitative Easing” initiatives might become difficult.

What is the true potential of “Block-chain Technology”?

While crypto-currencies have dominated discussions about the new block-chain technology, it is but just one application of it.
In some ways, the present moment is analogous to the early days of the Internet, when internet was synonymous with e-mail.
Significantly, in a block-chain platform called Ethereum, an application that enables people to rent out idle storage space on their laptop can be setup.
This means that someone who needs cloud storage can directly pay the renter, instead of paying cloud storage intermediaries like Amazon.
This opens up a potentially monetisable resource that we didn’t even realise.
Also, two domains that would gain immensely from blockchain applications and CCs are Artificial Intelligence (AI) and Internet of Things (IoT).
Notably, IoT would require thousands of devices to rapidly and seamlessly transact without manual operator interference, which CCs would aid.
Also, enormous scope of block-chains for increased efficiency and cost-saving, is a serious threat to conventional “Fiance and Digital space businesses”.

Can block-chains be seen as liberating?

Some argue that the decentralised nature block-chains are potentially liberating both politically and economically.
While the technology’s peer-to-peer orientation renders it more democratic, it is important to realise that even internet faced the same euphoria initially.
Now, with internet maturing to the masses, albeit its insurmountable benefits, it is increasingly turning out to an unequal arena.
Hence, despite its enormous potential, some of the current claims being made about block-chain are plain silly.
Clearly, technological innovations can’t substitute actual ground work for reducing socio-economic disparities and ushering in equality.

Quick Facts

Ponzi Scam - A business model where an entity doesn’t generate any actual profit but paying its existing investors by getting money from new investors.
This is basically a bubble, which collapses when no investments dry up.
Quantitative Easing – Is an expansionary monetary policy adopted by central bank to boost the economy which is reeling under stress.
In this process, money is pumped into the economy through the purchase of government securities.
This is done when the economy is unable to recover on its own and inherently runs the risk of triggering inflation.

Source: The Hindu