Ever since the RBI banned transactions in cryptocurrency in 2018 and the Supreme Court later revoked it in March 2020, there has been constant back and forth on the subject. The Government, at times influenced by the RBI, thinks crypto is bad and decides to ban all private cryptocurrency. At times, influenced by investors and other interest groups, decides to take on a calibrated approach. This has left investors and blockchain developers uncertain. Recently, Finance Minister, Nirmala Sitharaman, mentioned in an interview that the cryptocurrency bill is ready and could potentially be taken up in the ongoing monsoon session of the Parliament. The bill is said to have been prepared with inputs from stakeholders. It is also expected to have a window for fintech experimentation.
However, cryptocurrency is not just about fintech, even though that is a major part of it. The underlying technology of cryptocurrency is blockchain, which is a distributed ledger technology (DLT). Blockchain has the potential to disrupt several areas such as supply chain management, contract management, data sharing, voting mechanisms etc. For example, Ethereum, a decentralized blockchain platform, through its native cryptocurrency Ether supports the development and running of smart contracts. A smart contract is essentially a computer program that gets triggered to execute when certain conditions are met. It reduces the need of intermediaries and lowers cost of enforcement and arbitration. In developing countries like India, contract enforcement is a huge challenge. By automating contractual decisions, smart contracts reduce the scope for discretion.
A use case is rainfall insurance for farmers. Researchers have found that the take up of such an insurance is low despite its benefits. This is because of distrust towards insurance companies, among other reasons. A smart contract, linking claims to rainfall data, can solve this problem. Smart contracts can also be used in contract farming to facilitate instant payments to farmers when quality of produce is met, thus, reducing discretion after harvest.
Another area where blockchain can be useful is supply chain management. Once again, we can look at the example of agriculture. Agriculture in India is plagued with several inefficiencies such as food loss, fragmented supply chains, missing markets etc. Blockchain can help in the creation of an integrated supply chain, enabling real-time monitoring and traceability of produce. This helps stakeholders in the supply chain to share data with each other and make efficient decisions. By managing records on blockchain, post-harvest loss can be reduced by targeting the right services to farmers at the right time. This can make agriculture more remunerative, thereby increasing farmers’ income.
Blockchain platforms such as Cardano with its internal cryptocurrency ADA allows building of decentralised apps with better security and privacy features. Many common applications we use on our phones such as social networks, messaging, news apps can be built on blockchain. This can completely change the way we store and exchange data.
All these fast-rising innovations may not directly involve cryptocurrency but still use the underlying blockchain technology. Cryptocurrency being the most popular use case of blockchain is also the most common way of operating on the blockchain. Hence, banning cryptocurrency can have an unintended effect of not being able to deploy blockchain technology. This can be bad for the technology overall. Cryptocurrency being an asset class, in a way helps fund innovations in blockchain. It draws the attention of investors and institutions, and also enables developers to innovate.
Fintech is at present the leader in blockchain based innovations. The government has to allow this innovation to permeate into other sectors. The only way to do that is through regulation. Regulation provides clarity for investors, developers, start-ups and other stakeholders in the ecosystem who will now start to think for the long term. Banning cryptocurrency but expecting blockchain to flourish is like banning the internet but expecting computers to flourish. Even having a window for experimentation may not be sufficient for the long term. It only delays innovation. The government must instead provide a comprehensive regulatory environment for cryptocurrency to thrive in its natural state. This will in turn allow blockchain and its innovations to flourish.
With the monsoon session of the Parliament underway, all eyes of the Indian crypto and blockchain community are on the government. Have they been influenced enough to stay on the forward path? Or have they gone back to the status quo?
The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.