In our previous post “Digital Currency: The Global War on Cash” we have elucidated how the global war on cash is unfolding and is in penultimate phase, before a new monetary order in form of Digital Currency is implemented across the globe by nation states, central banks and corporations. We have also discussed as to how the coming of the era of Digital Currencies could substantially alter the way human race does business or earn a living in form of trade and commercial activities. We have already read how Digital Currency based on BlockChain platforms work and how various corporations, central banks across the world have called for the adoption of such technologies which could make the exchange of assets, securities much easier and transparent. Having discussed the concept of Digital Currency, in brief, earlier, let us now delve deeper into to concept of Digital Currencies based on BlockChain technology.
Digital Currency is a cryptocurrency which is created, managed and transacted through advances by use of encryption which is also known as Cryptography. Digital Currency which is traded in cryptographic encryption will be based on BlockChain technology which as extrapolated earlier will have secures digital ledgers with central banks, corporations as the case may be. The employees of the Corporations or the general public will have accounts akin to E-Wallets on these digital ledgers where assets can be transacted with just a click instead of the present clearing system. The concept of Digital Currency first evolved from an academic discussion to reality in form of Bitcoins in the year 2009. Bitcoin usage has been growing gradually over the years and it has captured significant investor attention in April 2013 when its value peaked at a record $ 266 i.e. nearly a 10 fold surge. Bitcoin market value as of date is over $ 14 Billion and its relative success in bypassing the official channels of trade of money have lead to raging debate on the future of cryptocurrencies.
Bitcoins: The Era of Digital Currencies
Bitcoin is a decentralised form of cryptocurrency which uses peer-to-peer technology enabling functions such as issuance, transaction processing and verification which can be done by the network itself. This system renders Bitcoin free of governmental interference or a third party acting as intermediaries in the whole transaction as a clearing house. Bitcoins are created digitally through a ‘mining’ process which requires computers to solve complex algorithms and do the number crunching. Bitcoin transactions provide you payment anonymity as there is no central site or organisation to which u need to register to trade on Bitcoin exchange. You can just simply run Bitcoin software which creates a pseudonymous address for you on the Bitcoin network. This address works like your bank account and anybody can send or receive money to it in form of Bitcoins. You can make any addresses and each of which will have separate Bitcoin balances. The real identity of the individual is kept away though tracking of IP address is possible but even that can be circumvented to some extent by people using VPN (Virtual Private Network) masking the locations from where such transactions were made. All Bitcoins being an open source is openly trackable on the network by the other users.
While Bitcoin as cryptocurrency has its benefits like anonymity and decentralisation, its unregulated nature has made it vulnerable to a host of criminal elements in conducting illegal activity on these digital currency networks.
Bitcoin is hosted on a digital platform and in case if people want to use Bitcoins to buy things like Prepaid Debit Cards, clothing’s or web hosting then you first need to buy some Bitcoins. There are many such places in virtual as well as in the real world where you can get Bitcoins for its value and these are called ‘Exchangers’. They offer Bitcoins at the value it is selling and you can buy them with cash, money orders, Pay Pal, credit cards and even cheques. If you have Bitcoins stored and want remonetize the digital currency you can simply go to these Exchangers to get the Bitcoins exchanged for real currency. These characteristics make Bitcoin a totally different concept from the Fiat Currency which is backed by the government as legal tender and issued by respective central banks across the world. Bitcoins provides an avenue of fast, anonymous transactions across digital networks without intermediaries like central banks, commercial banks but at the same time it has its own pitfalls like there is no assurance for Bitcoin unlike the currency issued by governments and central banks and if Bitcoin exchange folds up it may be difficult for network users to recover their balances making this channel susceptible to frauds and criminal elements.
While Bitcoin as cryptocurrency has its benefits like anonymity and decentralisation, its unregulated nature has made it vulnerable to a host of criminal elements in conducting illegal activity on these digital currency networks. Illegal activities like money laundering, drug peddling, smuggling and weapons procurement can be possible by nefarious elements using these digital currency platforms which are outside the domain of the government and their enforcement agencies across the world. Many such actions have been initiated in the United States where the host of Bitcoin exchanges have been closed down due to its unregulated nature of promoting illegal activities. This has led to a raging debate across the world about the secured use of digital currencies on BlockChain platforms. The Western democracies like the US & the UK have responded positively and cautiously to the development of Digital Currency like Bitcoins yet many other countries like Canada and Australia are still deliberating on the use of Bitcoins. The Central Bank of Bangladesh has recently banned trading in digital currencies like Bitcoins making it punishable with 12 years in prison. Some other countries that have totally banned the use and the trade in the Bitcoins are Bolivia, Vietnam, Iceland and China, whereas India has largely remained off the Bitcoin digital currency network. While in Russia, a recent legal victory has set up a new opening for Bitcoins.
The concept of BlockChain technology will revolutionise the world of finance, trade and how states and corporations manage seamless transactions over peer-to-peer networks instead of the present long tedious clearing system.
Of late, many alternatives have come up to Bitcoin in cryptocurrencies like Lite Coin which was founded in October 2011 by Charles Lee, or Ripple launched by Charles Larsen in 2012. Despite Bitcoin and other alternate forms of digital currency, the cryptocurrency needs to be tweaked substantially before it can be mainstreamed for the larger financial system specifically related to concerns about privacy, consumer safeguards and some regulation to avoid it becoming another haven for tax evaders, money launderers and other criminal elements. This is where the concept of BlockChain technology has gradually evolved over time and the idea of Digital Currency trade over such system been has toyed around by corporations and financial institutions like Goldman Sachs which have been developing its own BlockChain based Digital Currency like SETLcoin etc.
Digital Currency: The New Monetary Order
Digital Currency in form of BlockChain technology has slowly over time evolved making financial industry and leading investments giants embracing this new technology for faster and seamless transactions. R3 CEV a banking partnership coordinated by the Wall Street launched in September 2015, currently comprises of Barclays, BBVA, The Commonwealth Bank of Australia, Credit Suisse, State Street, The Royal Bank of Scotland and UBS. The stated goal of this consortium of banks and financial institutions is collaboration in researching, designing and developing the BlockChain technology for financial service Industry. The consortium had expanded to more than 75 members but recently some of the prominent banks and financial institutions like Goldman Sachs, JP Morgan and Banco Santander SA have quit the R3 CEA consortium on fundraising issue with research and the amount of equity that was being offered in the project.
The above move of Goldman Sachs one of the world’s leading invest bank leaving the R3 CEA consortium is not surprising given that fact that Goldman Sachs has developed its own form of BlockChain based Digital Currency called SETLcoin. Goldman Sachs has filed for a patent of its cryptocurrency SETLcoin in 2014 with US Patent & Trademark Office. Goldman Sachs is expected to launch its cryptocurrency SETLcoin which is likely to be used for instant trade settlement through the use of BlockChain technology against the usual clearing system. The clearing procedure in the normal case requires securities clearing agencies to match the instructions of the buyer and seller after the trade transaction has been completed with, upon which the amount is transferred from buyer’s to seller’s accounts thereby completing transaction which could take up to minimum one to three business days after the transition was affected. These clearing procedures also consume time and risk for parties during the period of settlement compared to BlockChain technology where it happens in an instant click on a digital network.
Goldman Sachs patent application for SETLcoin says about settlement procedures carried through a cryptographic currency facilitating fast, secured transactions across the network eliminating the intermediaries or requirement for clearance. This technology would provide multi-asset virtual wallets that would store new cryptocurrency i.e. SETLcoin and facilitate the exchange of assets via a peer-to-peer network. The patent application of Goldman Sachs states, “A trader no longer trades securities by meeting at an exchange with an indication of cash for security and then settles the transaction seconds, hours, or days later, meanwhile bearing all of the associated credit risks in the interim. Traders using the described technology exchange securities by presenting an open transaction on the associated funds in their respective wallets.” The ownership of SETLcoins will immediately transfer after the transaction has been verified and authenticated between digital ledgers on the network.
Apart from Goldman Sachs, other investment banks & financial institutions like JP Morgan Chase & Co are collaborating with Digital Asset Holding on a trial project to explore the BlockChain technology. The project is named ‘Quorum’ and built over a crypto-network called Ethereum. Just like Goldman Sachs, JP Morgan & Co, even Bank of America has filed 20 patent applications with USPTO for developing its BlockChain technology of cryptocurrency. Further, Tech Giant Microsoft has entered into an agreement with Bank of America in offerings its expertise on BlockChain technology along with its cloud base system like Azure which could transform the way trade finance is carried out. Another tech giant IBM is also building a BlockChain Ecosystem with Digital Assets Holdings through its consortium named Hyperledger Fabric a consortium that is rivalling R3 CEA Consortium in developing this technology. IBM is reportedly in talks with the Kenyan government to put public records of various sectors like health, education and real estate on a BlockChain network. Similarly, BlockChain service providers like FACTOM have received grants from Bill & Melinda Gates Foundation to develop BlockChain technology to maintain the medical records of patients widely aiding the healthcare industry.
Future of the Digital Currencies
Digital Currency could further empower central banks and governments to maintain tight control over the monetary flow and using the data analytics to experiment with Social Credit System as a mode of social control which could resemble an Orwellian State.
We have already seen above as to how the advent of new technologies like BlockChain and Cryptocurrencies is changing the way the world carries out its business, trade and finance. The coming of BlockChain technology could further speed up the adoption of digital currencies on the global scale. Already countries like Ecuador which have banned the Bitcoin has become the 1st country to move towards a digital currency over a BlockChain network. Ecuadorian government in 2014 passed the monetary code to move towards a centralised Blockchain having its own Cryptocurrency called ‘Cryptocentavo’ run by its Central Bank. This will be in parallel to US Dollar which it currently uses as its currency. It will be first experiment of its kind in the world that would be watched with keen interest as to how centralised model of BlockChain performs in reality. Not only US Corporations or countries like Ecuador are adopting the Crypto-Currencies in form of BlockChain ledgers but even countries like Sweden, Singapore and China are aiming to shift towards Digital Currency replacing cash, based on this technology as explained in our previous post.
While the world pivots towards next generation financial revolution in the form of BlockChain technology, it is just and proper for states around the world to guarantee the Rights of Privacy and Economic Freedom to their citizens.
The concept of BlockChain technology will revolutionise the world of finance, trade and how states and corporations manage seamless transactions over peer-to-peer networks instead of the present long tedious clearing system (SWIFT). World Economic Forum along with Deloitte Consulting have recently come out with a report in August 2016 stating that BlockChain technology would totally change the financial service industry. According to its report, Distributed Ledger Technology i.e. BlockChain has seen more than $ 1.4 Billion investment in 3 years and 2500 patent filings for the same. It is predicted that 80 percent of banks will initiate BlockChain projects over next year with 90 plus Central Banks across the world already in discussion to implement the idea of Digital Currency on BlockChain technology. Every giant leap in technology comes with its pitfalls. When Governments and Central Banks start issuing Digital Currency, privacy will no more be part of the sales pitch of BlockChain technology as the data could very well be suspect for hackings and surveillance. Apart from the concerns of financial surveillance on citizens for every single transaction, Digital Currency could further empower central banks and governments to maintain tight control over the monetary flow and using the data analytics to experiment with Social Credit System as a mode of social control which could resemble an Orwellian State as China has recently implemented. Hence while the world pivots towards next generation financial revolution in the form of BlockChain technology, it is just and proper for states around the world to guarantee the Rights of Privacy and Economic Freedom to their citizens.