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Business News/ Opinion / Online-views/  Potential of bitcoin in the time of demonetization

Potential of bitcoin in the time of demonetization

Increased usage can make such currencies relatively more stable over time and offer opportunities for add-on services


The government’s recent move to demonetize currency notes of Rs500 and Rs1,000 has generated interest in digital channels of monetary transactions. Apart from internet and mobile banking, digital wallets and credit cards, alternate payment options such as bitcoins have also seen new takers. Since the demonetization announcement in early November 2016, the value of one bitcoin has increased by over 30% (on 9 January 2017), with speculation that this could be attributed to aggressive buying by Indians, looking at it as a probable ‘safe haven’ currency.

Understanding bitcoins

A bitcoin is a virtual medium of exchange, a type of cryptocurrency, which is created and tracked online and is secured using cryptography. It is based on blockchain technology, which makes the transactions irreversible, decentralised and publicly verifiable. Blockchain maintains an audit trail, making the transactions quite transparent. A key feature associated with bitcoins is the absence of a centralised authority to issue, exchange, monitor and regulate the currency.

These also offer anonymity, as the currency holder is known by her account ID (wallet ID), and the know-your-customer (KYC) processes may not always be implemented. The transactions done are faster and not bound by geographical limitations, which can help in cost savings on currency conversion charges and other transaction fees. All these aspects create a unique position for bitcoins, possessing both pros and cons, depending on the consumer’s point of view.

Bitcoins versus digital currency

Currently, there is a fair amount of ambiguity around the terms ‘virtual’ and ‘digital’, with many often using them interchangeably. However, the distinction between both these terms can be explained, taking into account some key parameters.

Transparency in transactions: There is more transparency in digital currency as compared to cash, but tracing source of funds and historical transactions can often be cumbersome. Bitcoins offer higher transparency, with the chain of historical transactions available.

Potential fraud risks: Digital currency has higher susceptibility, if key information is compromised.

In case of fraud, banks may sometimes offer protection of assets. Bitcoins are comparatively less prone to fraud loss. The risk lies at the user’s end, unless the wallet is compromised by hackers.

Speed of execution: Digital currency transactions tend to be quick but adding the beneficiaries may take some time. Bitcoin transactions are relatively quicker.

Volatility in value: The value of digital currency is mostly stable and is determined by macroeconomic factors. For bitcoins, it is very volatile as it is not backed by any reserves.

Supply: While it may seem that there are no limits on currencies like bitcoin (as they are not backed by national governments), there is an ultimate cap: the way bitcoins are structured, it is expected that their numbers will not exceed 21 million.

Point of possible failure: Loss in value of a digital currency could be due to geopolitical and country-specific issues. Bitcoins are decentralised, so there is no single point of failure.

Accessibility: Digital currencies are accessible through mobile phones and credit or debit cards. Bitcoins are largely accessible using the internet, credit or debit cards and ATM machines.

Global usage

Many countries—including the US and the UK as well as many companies operating internationally—have already started accepting bitcoins as a medium of exchange. Emerging markets such as China have adopted them more aggressively, with the total trade value estimated to be close to Rs10,000 crore per day. Increased usage can make such currencies relatively more stable over time and offer opportunities for add-on services such as ATMs, credit and debit cards, insurance against fraud, and loyalty programmes.

In India, the initial adoption of bitcoins has been slow but there is an increase in awareness. The value of transactions per year in India is presently pegged at Rs500 crore, which is led by around 50,000 bitcoin wallets and close to 700-800 bitcoins being traded every day.

Today, India is also one of the largest global remittance markets, with a total value of more than $70 billion. In this, a majority of remittances are of around $200 value, for which users typically pay up to 15% in bank charges and conversion fees. Bitcoins could provide an alternate channel for financial inclusion in India, where close to 60% of the population is unbanked and credit and debit card penetration is in single-digit percentages.

These factors can raise the popularity of bitcoins, but could also lead to more risks. As the adoption rate increases over time, consumers can follow certain measures to protect this form of currency, such as by using wallets from reputed providers and storing the wallets in mobile phones that are not jail broken or rooted. Users should also avoid sharing the wallet password or leaving their mobile phones unattended. They should also enable two factor authentication for access.

They can also transfer a smaller amount (a small fraction of a bitcoin) for confirmation, before making a larger transfer.

Consumer vigilance is critical here, as the future of bitcoins could change with innovations in technology.

Amit Jaju is executive director, fraud investigation and dispute services, EY India.

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Published: 18 Jan 2017, 04:16 PM IST
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