| May-12-2021

An Introduction to Blockchain Technology & Cryptocurrency

Blockchain – Technology of The Future

A new technology is redefining the way we interact. If that sounds incredibly far-fetched, that is because it is. It combines the openness of the Internet and the security of Cryptography. It will change the way we interact with each other in our daily lives. It is the underlying technology which was originally developed for a digital currency which created a storm across the world – Bitcoin. The same technology can be used for a wide range of activities in the fields of Banking, Insurance, Supply Chain Management etc.

This technology is designed to store information in a manner which is virtually impossible to add, modify or delete by all other users of the Blockchain. Blockchain aims to decentralise any and every process which is currently centralised. When the control of a particular process is centralised, an authority can exercise its powers to decide on the validity of a transaction. When we talk about a scenario, where the processes are decentralised, we are looking at a scenario, where all these powerful organisations which had power to validate a transaction shall become redundant.

Some examples of such organisations are the Central Banks of various countries (Like the Fed in US), Stock Exchanges, Clearing Houses, Insurance Regulators and many more. At the core of this technology is the recording of data. This data could be financial transactions, details of ownership of assets like cars & property or non-financial data like health records & biometric records.

This Technology has the possibility to transform lives and simplify existing processes which may be cumbersome. Let’s take an example. If you want to send money from your country to another country, the number of documents that may be required to be submitted to the banks; and compare that with a virtual currency like Bitcoin. Bitcoins can be transferred from any place on this planet to any place on this planet within a fraction of seconds. That brings us to the larger question, how important is it for organisations to exercise their control and authority over transactions. Can we have a scenario, where governments and other authorities come together on a single platform and regulate Footer Blockchain.

How it Works

To understand the concept of Blockchain, let us take an example. Mr. A buys a property from Mr. B. Now this transaction gets recorded in the Blockchain. For simpler understanding, a blockchain is like a cloud-based network. Each transaction is time-stamped. That is to say that each transaction gets a unique stamp like a message that we receive in WhatsApp. Two people may reply at the same time, but 1 may appear before the other. All transactions keep getting recorded till when there is space in a particular block. Just the way a particular pen drive has a fixed capacity, each block in a blockchain also has a fixed capacity. Once the block is full, no new transaction can be added to that block. Moreover, even the block gets its own unique time stamp once it is full. The completed block is now sent across the network, where it is linked to the chain. This is how, the name blockchain was derived. At the same time, other users may also upload their blocks to the network, with their unique timestamp. The chain is then secured using a hash function. Hash from 1 block gets added to the next block. When the next block goes for hash, a trace from the earlier block gets embedded on to it. It is a continuous process. Let us understand this with the example of a bank statement. At the top of the page, you have the opening balance of your account. Then there are debit and credit transactions in the month, at the bottom, you have the closing balance. The closing balance of the 1st month becomes the opening balance of the 2nd month. If any amount during the entire month is changed, it affects the opening balance of the 2nd month. Hash Function secures the chain in a manner that if any value of any transaction is changed, every other user will be notified of the change, since each block contains a trace from the previous block.

Cryptocurrency

At present there are around 1600 cryptocurrencies having a total market cap of around US$197 Billion, which is more than the total forex reserves of France, Germany & Italy. The most widely accepted cryptocurrencies are Bitcoin, Etheruem, Ripple & Tether, mainly because of their large market cap. Trading in cryptocurrencies is not legally permissible in some countries. However, if it is permitted, one must consider multiple factors before investing in cryptocurrencies. Some of the factors are total quantity of currency in circulation, maximum quantity of currency that can be issued, is it specific to a particular country, price movement in recent months, acceptability across platforms, it is traded on which c r y p t o c u r r e n c y exchanges. Having complete knowledge about such factors can help one take an informed decision.

The way companies come with their IPOs on the stock exchanges, cryptocurrencies also have something similar which is known as ICOs – Initial Coin Offerings. It is a technique by which crowd sourcing of funds is done for a new cryptocurrency. A car rental company named ‘Drivezy’ launched its ICO in Singapore, where the subscribers of the ICO would get a fixed number of days of car rental per annum as a part of their scheme. It can help companies with a proven model for consumption of its product or service to take a benefit of ICOs and not part away with any equity. However, there is ambiguity on the legality of such ICOs in many countries.

Moreover, there are many scams in ICO listings which have been unearthed till now. According to reports, 72% of all ICOs were scams. Such ICOs had inappropriate accounting practices and misleading information, specifically to deceive the investors.

Whether one should deal in cryptocurrencies or not totally depends on 2 major factors. Firstly, whether it is legal in your country & secondly if the investor has the risk appetite. Major economies like US have regulated the investments in cryptocurrencies through the Securities & Exchange Commission (SEC), similarly in India SEBI (like SEC in US) has not recognised any exchange which deals in cryptocurrencies. East European countries on the contrary have Bitcoin ATMs where you can encash your Bitcoins for money.

Cryptocurrencies can lead to Money Laundering activities and have financial repercussions. Cryptocurrencies are most widely used today by hackers and other for illegitimate activities since the source & its destination cannot be traced. Anonymity is maintained in the transaction.

Application of Technology

Blockchain Technology can be applied in many fields such as Stock Exchanges, Supply Chain Management, Food Distribution System, Insurance, Medical Records and many more. Let us understand how it would work in the stock exchanges. For example, if one person wants to buy the shares of Apple, he would purchase the shares and the amount would get debited to bank account. What if the same person also wanted to sell his car at the same time and buy the shares of Apple. In such a case a SMART CONTRACT would have to be deployed on the blockchain. A smart contract would sell the car first, transfer the ownership of the car on blockchain, integrate itself with the banking blockchain, transact on the stock exchange and automatically buy the shares and pay the money. All of this can be deployed with a single code written to execute the transaction.

Various government & private organisations will have to integrate with each other to allow the smooth flow of transactions. In our example above, we were looking at 3 blockchains – 1. The Bank 2. The Stock Exchange & 3. The Vehicle Registration Department. Each blockchain will have to give limited access rights to the other blockchains with which it is required to deal. Without the integration of blockchains, transactions would not be processed easily.

When multiple blockchains integrate, it raises a security issue. Common security standards will have to be adhered to by all blockchains. The blockchain is only as strong as the weakest link in the chain. Cybersecurity experts will have to work closely with all stakeholders to address their concerns.

Implementation of blockchain will required software and hardware upgradation. Initially only large corporates will be able to develop their own blockchains, mainly due to the cost involved. As an when the technology advances, the cost of developing tit shall reduce.

Blockchain will create massive unemployment. People by the millions will lose their job if they don’t upgrade their skills. Most importantly, this technology is not ‘unhackable’. There have been numerous cases of blockchain thefts, where hackers have evaded in thin air by siphoning funds worth millions of Dollars.

About the author

CA Vivek Shah – Owner at M/s Vivek Shah & Co. He is a National Speaker, Global Tax Expert and an Author. He can be reached at info@shahvivek.com