Governments, Cryptocurrency, Block chain and the use case

Came across a recent article about the government mulling introducing its own cryptocurrency on the lines of Bitcoin and other similar products (i call them products and not currency intentionally) and i went back to a use case i had written about around the time of demonetization in the November-2017 period which proposed paper currency integrated with the digital technology stack of block chain to bring to the offline world the advantages on the digital chain – India’s fight against corruption and the the case for digital paper currency

A “digital paper” currency seems illogical when you consider how can digital and paper go together but that was the very thought behind the use case where the digital world steps into the offline and brings its own advantages with it.

Now in context of the current article on the government mulling its own currency, a quote regarding block chain needing some kind of cryptocurrecny to work and since the banks want to use block chain and the government doesn’t trust bitcoin hence the use case for its own cryptocurrency caught my attention. This as far as i understand the technology, is not correct reading. Cryptocurrency works on a technology stack like block chain which is a distributed trust network and not the other way round. Blockchain is the technology stack and cryptocurrency is one of the implementations of the same. Also bitcoin and other similar currencies are more like a product (or an asset) the way they behave with value appreciating and declining with demand flow, a classic asset class behavior. The process of ‘mining’ the currency is also more in line with an asset (Gold and diamonds are mined) while currency is minted.

A digital currency within the ambit of a ‘currency’ definition and regulated by bodies which are constitutional though makes sense. With the government intent to control cash in the economy and the problems associated with tracking of hard cash primarily from a unaccounted and malicious intent context, a digital currency which has a breadcrumb trail does comes handy.

The government can instead of creating a parallel digital currency and all the associated governance paraphernalia may as a pilot allocate a certain portion from the total currency minted in form of paper to be converted to cryptocurrency. It basically allows a certain portion of paper ₹ to be held in digital form either with institutions or individuals.

There are three major aspects which need detailing out with the said approach which are covered briefly below but needless to say need much more amount of detailing and scenario testing before being viable. These though would need much less brain scratching than an approach which mulls a parallel currency to one which already exists and is institutionalized.

The primary tenant of cryptocurrency is anonymity and a mechanism which allows transaction outside the purview of any intermediary. A true P2P mechanism so as to speak. Cash transactions by its nature provide utmost privacy while online transactions are always under the purview of intermediaries and regulatory bodies. Digital currencies need to behave like cash though in the online world. They should have a degree of anonymity built into them within the context of privacy laws existing across jurisdictions.

The transaction and currency attributes must have a governance mechanism which is easily demonstrable and backed by a wide array of institutional bodies for it to be deemed mainstream. The governance principles should stand true in a court of law or similar entities across jurisdictions.

Unless a currency is able to demonstrate its ability to hold a value and on transaction pass on that very value, they do not qualify as true currency. There should be more than one way to transact with a digital currency just like cash supports multiple mechanism where its value is authenticated implicitly(we can buy with cash, we can deposit cash in bank, we can exchange cash). The value held in the transaction also has to be a fixed value and not a negotiated value for the digital currency to behave like normal currency and not as an asset or product.

A crypto-rupee meets the governance and transactional qualifications as it is but a digital representation of the paper currency. While from a privacy perspective, government can facilitate a mechanism within the ambit of UPI to carry out encrypted P2P transactions where the intermediary does not have access to the parties carrying out the transaction. These transactions though just like cash transactions come under the jurisdiction of courts and can be investigated with proper warrants in place.

With advances in technology and advent of data science in fraud risk analysis and big data number crunching a targeted approach to narrow down on the proverbial needle in the haystack in the form of non standard transactions is but manageable. The use case is a balance between the governments need of moving away from a humongous unmanageable cash economy with that of a citizens need to privacy and a regulatory need to maintain governance. It is not a win-win more like a you move ahead one step and extend your hand while i do the same scenario.

All said, exciting times in the digital space.