By Sankalp Srivastava
Blockchains – as envisaged by their founder Satoshi Nakamoto, was intended to have one primary use cryptocurrencies. However, with the ever-expanding influence of this technology, it has transpired different potential uses such as on the Ethereum platform and in public institutions and governance.
Since one of the primary potential uses of blockchains is for cryptocurrencies, it is worth mentioning that the cryptocurrency market now has a multi-billion dollar market capitalization. This has essentially driven a market for real services and goods payable by cryptocurrencies, as well as the crypto-exchanges that allow for conversion to fiat currencies upon mining cryptocurrencies which themselves majorly depend on a proof-of-work but sometimes also a proof-of-stake model.
The fact that blockchain is a revolution that needs to be reckoned with is well known and can be used for other wide range of scenarios other than just cryptocurrencies. Perhaps, what is interesting is that blockchains provide the answer to a multitude of problems, thus the reaction of regulators to each of these is crucial in deciding where we are headed.
Benefits of cryptocurrencies
By providing for anonymity online in dealing with cryptocurrencies they create the first truly digital online cash which cannot be tracked, unlike others. This should be accepted for what it is, that is, a tool that gives freedom to individuals to transact online away from the prying eyes of their governments. This also ensures empowerment of the masses in a financial system that has long been dominated by wealthy financial institutions and their lobbyists.
Additionally, by providing for a consensus-based approach to the valuation of cryptocurrencies, they solve the inconsistencies inherent in the prevalent trust-based economy, which sees much larger crests and troughs associated with large risks than cryptocurrencies ever will, such as cash flow hurdles, recessions and policy-level decisions such as demonetization. In a similar manner, blockchains adopt a consensus-based approach to other applications as well thereby, providing users absolute control over their individual data, something that is appreciable in the age of rising concerns over digital privacy.
It should also be noted that blockchains provide a simplified way for enforcement of several public law and public trust-related problems in governance, finance, commerce and other associated fields, not in the least by simplifying transactions, but also by providing for methods such as self-executing or smart contracts.
A crypto-exchange basically lets users purchase cryptocurrencies for legal tender in their countries, without partaking in the painstaking mining process. Looking at it from an economic standpoint, it may be argued that the rise of crypto-exchanges has had a positive effect on the prices of cryptocurrencies. Whats more, they even allow for peer-to-peer cryptocurrency only transfer, allowing for more interoperability amongst cryptocurrencies that has security implications as well as market capabilities that are being harnessed.
Regulation approaches across the world
Countries have widely varying approaches to dealing with cryptocurrencies, but even lesser significant countries have moved in on the market, seeking to cash-in on the cryptocurrency gold rush. The best example of this would be Malta, a country that has seen a large amount of investment due to a pro-cryptocurrency regulatory move.
While Switzerland has long been considered as the best from a tax, legal and operational standpoint, it has encouraged cryptocurrencies more than other nations, with merchants, and banks adopting it as well, to the extent that it has earned the tag of Crypto Valley. In India, there has been a recent RBI notification which bans service in crypto-currency by authorized lenders and institutions. This effectively makes it impossible to run a crypto-exchange in India.
However, as stated by Anirudh Rastogi of law firm TRA Legal, regulation is preferable to a complete ban on crypto-exchanges and their dealings. Currently, the case is being heard by the Supreme Court, where it is being argued that there is no reasonable difference that exists between cryptocurrencies and other financial service providers in terms of being used for illicit activities, and creating such a differentiation by regulation in effect violates the freedom to carry on a trade or business under Article 19 of the Indian Constitution.
Potential benefits of regulating Cryptocurrencies
The security concerns associated with blockchains are multi-fold there are many instances of entire networks being compromised by 51% majority attacks, attacks on DAOs have led to a multi-million dollar theft. Similarly, a fork in the Ethereum platform has brought to the forefront the defects in the programming code itself and the problems associated with pooling of resources.
To add to this, there is the rising concern for privacy in online dealings today which are characteristic of mass surveillance, mandate that security concerns in blockchains are dealt uniformly across the world. This can be done effectively by regulating the cyber-security norms that blockchain-utilising applications must adhere to.
Secondly, regulation effectively legitimizes the currency in the eyes of merchants, potential consumers and banks. Currently, the popular perception is that cryptocurrencies are meant for non-conventional, and sometimes even illicit usage. However, not only is the illicit usage readily countered by regulation, the legitimization of such cryptocurrencies by way of regulation has long been cited by experts, and pro-regulation advocates.
Thirdly, for an industry that has gone quickly from non-acceptance, to readily adopting blockchain in their business models, it should be recognized that the banking industry still has a lot to learn in the face of misapplications and fraud suits pending against them. In this context, it will be far more beneficial for regulators to apply norms to non-conventional companies adopting the blockchain, in the form of KYC norms, blockchain security, and rules protecting investors, similar to conventional investment regulations. Finally, with regulation, there is a myriad of possibilities for research and development into the world of cryptocurrencies.
Effect of regulation on uses other than cryptocurrencies of the blockchain
With countries adopting them as legal tender and providing a favourable environment for dealing with them, it is inevitable that other countries will have to follow suit. Blockchains have various potential innovations in all fields designed to benefit governments and economies.
Indian Prime Minister Narendra Modi himself said, Embracing technology cant happen if only a few people are keen on it. E-governance as a tool for growth can only be achieved by the use of blockchain, with applications such as a public distributed ledger that can be used by citizens and governments alike to keep track of the governments actions in real time, by automating property registers, pension systems, and even securing the voting system. Not only can this make the government more accountable, it will also make governance efficient, easy, empowering and equitable.
Blockchains can also power industry and business through innovation in supply change and asset management, and smart contracts. Through the use of Ethereum smart contracts, we can do away with a lot of human resource that is employed to monitor compliance and execution of users needs.
These are just some of the uses of blockchains and there is more research being done every day. Thus, when one seeks to regulate cryptocurrency, the effects this has on other potential uses of the blockchain all of which use cryptocurrencies as their method of payment and facilitation is paramount. The rising level of skepticism in dealing with cryptocurrencies will have a detrimental effect on the research needed to power uses of the blockchain. Thus, adopting it or completely banning it, can make the difference for a nation between being a techno-finance hub or one that is held back by its own regulatory measures.
Sankalp Srivastava is a writing analyst at Qrius