Implications of banning blockchain technology GS:3 "EMPOWER IAS"

 

In news:

• The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to ban cryptocurrencies. Banning cryptocurrencies would have several implications for India. This article deals with this issue.

 

Soaring value of Bitcoin

• Recently, Tesla announced that it will soon accept cryptocurrency as legitimate payment for its cars.
• Mastercard followed by announcing that it will incorporate ‘select cryptocurrencies’ on its global payment network.
• BNY Mellon, incidentally the US’s oldest bank, announced holding and transferring digital currencies for asset management clients.
• JP Morgan and Goldman Sachs announced executive positions to look at cryptocurrencies.
• All of this resulted in a soaring value of Bitcoin, and its younger sibling, Ethereum.

 

What is Blockchain Technology?

• A Microsoft Excel Sheet file in your computer or laptop with the details of some of your transactions is known as a ledger.
• If your Excel file is copied to hundreds of your friend's computers and connected to each other forming a network is known as distributed ledger. And if there will be a technology to update this Excel sheet whenever you or your friends update a ledger.
• Therefore, blockchain is nothing but a digital ledger. That is a book containing accounts to which debits and credits are posted from books of original entry.
• A blockchain is an anonymous online ledger that uses a data structure to simplify the way we transact. Without the help of third party blockchain allows users to manipulate the ledger in a secure way.
• It protects the identities of the users. This way blockchain is a more secure way to carry out transactions. Each list of records in a blockchain is called a block. That is why it is known as blockchain because the various growing list of records i.e. blocks are linked and secured.

 

Advantages of blockchain technology:

1. Integrity of the whole process: Blockchain technology ensures integrity of the entire process. It means that any block or even a transaction that adds to the chain cannot be edited which ultimately provides a very high range of security. They provide an unalterable document of the history of every transaction.
2. Traceability: With the blockchain ledger, each time an exchange of goods is recorded on a Blockchain, an audit trail is present to trace where the goods came from. This improves security and prevents fraud in exchange-related businesses. It can also help verify the authenticity of the traded assets. In industries such as medicine, it can be used to track the supply chain from manufacturer to distributor, or in the art industry to provide an irrefutable proof of ownership.
3. Security: Blockchain is considered to be a highly secure system due to its digital signature and encryption. This ensures that the owner of the account himself is operating the transactions. The block encryption in the chain makes it tougher for any hacker to disturb the traditional setup of the chain.
4. Faster processing: Before the invention of the blockchain, the traditional banking organisation took a lot of time in processing and initiating the transaction but after the blockchain technology speed of the transaction increased to a very high extent. Before this, the overall banking process takes around 3 days to settle but after the introduction of Blockchain, the time reduced to nearly minutes or even seconds.
5. Fraud prevention: A system that is based on data stored in a number of places is immune to hackers. Its not that easy to get access to it, and if so, any piece of information can be easily recovered
6. Transparency: Banks, as well as the clients, are immediately notified about the completion of transactions, which is both convenient and trustworthy. In financial systems and businesses, this adds a layer of accountability, holding each sector of the business responsible to act with integrity towards the company’s growth, its community and customers.

 

 

Potential applications of blockchain technology:

1. Governance: Blockchain technology can help in ensuring good governance. It ensures transparency of the public records through the usage of a digital form platform and allows auditing of government documents. Moreover it allows to maintain the authenticity of the document and clearly reduces the processing time.
2. Banking: Blockchain can help in avoiding risk of payment losses involved in banking transactions by adopting secure distributed ledger platform. It reduces transaction fees across cross-borders, corporate payments and remittances.
3. Food & Supply Chain: It creates a tamper proof record to check the real information about expiration date, product journey from the farm to the shop. The real information of the product can help in improving the reliability and efficiency of the supply chain system.
4. Insurance: Blockchain technology can change the ways the insurance documents, claim settlements and fraud handling’s are carried out. It allows the creation of transparent, secure, decentralized and immutable insurance network.
5. Healthcare: It helps to prioritize patient health at all costs without compromising the quality of the health care service. By establishing a secure chain of network blockchain can help in handling the patient records, consent forms, billings and public health monitoring.
6. Automotive: Blockchain can solve the challenges in automotive manufacturing, car deliveries, billings. It can help in the creation of an after sales support ecosystem to keep track of the maintenance record of vehicle owners.
7. Tourism: Blockchain can reduce the delay time of passenger document handling, creates a decentralized hotel booking ecosystem at the least transaction fee and also keeps passengers private information safe

 

India’s governments stand on cryptocurrencies

• India’s government sought to ban cryptocurrency through a proposed legislation, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
• The Bill also provides to also set up a legal structure for an “official digital currency”.
• The Bill promises to “allow for certain exceptions to promote the underlying technology of cryptocurrency (blockchain) and its uses.”
• The way the technology is built, an ownerless, consensus-driven, distributed ledger like a blockchain needs cryptocurrency to grease its wheels.
• India tried to ban cryptocurrency once before, in 2018, before it was reversed by the Supreme Court.

 

Challenges of Blockchain Technology

• To verify all the transactions huge power i.e. electricity is required.
• There should be security about the private key. Every time private key must remain secret because revealing it to third parties is equivalent to giving them control over the bitcoins secured by that key. Also, it is necessary to have a back up of the private key so that it can be protected from accidental loss. We know that if it is lost ones cannot be recovered and the funds secured by it are lost forever.
• We know blocks in a chain must be verified by the distributed network and it can take time. So, transaction speed can be an issue.

 

Implications of banning cryptocurrencies

• The banning will kill innovation.
• India has more than 30,000 blockchain innovators and practitioners.
• These innovators will now be looking at moving out to friendlier regimes like the US, Switzerland, Singapore and Estonia.
• International tech companies will freeze blockchain and crypto-exchange investments in India and the step will undermine India’s reputation as a technology hub.
• India is the second-largest Bitcoin trading nation in Asia, and all those trades will move to overseas exchanges.
• China has large crypto trading and mining operations, and an Indian ban on Bitcoin will leave that space open for it.