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Indian Crypto Market: Blockchain Future in India and Beyond

Digital Propositions and Product Development , Royal Bank of Scotland
Jan 2, 2018 1:31 PM 7 min read
Editorial

2017 was a bizarre year for cryptocurrencies. While it grabbed a lot of headlines, the focus of media was largely on the price of tokens such as Bitcoin, Litecoin, and Ether. More coverage led to increased price volatility and in a vicious circle of hype and frenzy, Bitcoin’s growth mirrored the Tulip Mania of 1637. Such unchecked trading exuberance has completely missed the point of cryptocurrencies, relegating them to just another commodity with cookie cutter technical analyses obsessing over price movements.

 

Bitcoin? That’s so 2017!

 

Some experts are now suggesting Bitcoin is not just a digital asset, but in fact a new digital 'store of value'. A bold claim indeed, and one which needs to be probed further. More importantly, as an informed investor one must figure how to evaluate the intrinsic value of new digital currencies and assets. Unfortunately, a 52-week moving average price chart does not really say much about that. We will have to interrogate a bit deeper.

 

How to determine value?

 

An mp3 file is a digital asset. Its contents determine its value, and consequently its price on a digital marketplace.

 

However, to be a 'store of value’, the asset should be able to retain its purchasing power and be predictably useful when retrieved from storage after a long period of time.

 

This is easy to reflect for physical assets. Gold for example, is predictably useful for its huge ornamental value and for its use as raw material in a range of industries. It is gold's unique conductivity, malleability, low reactivity (what keeps the bling on) and finite availability that has made it a popular store of value in history. Now let’s look at the uses and characteristics of Bitcoin to determine its value.

 

Bitcoin is a decentralized, distributed, digital payment token used on the first, most widely adopted Blockchain, popularly known as the Bitcoin Blockchain. Each Bitcoin token records every transaction it has been a part of, tracing its journey all the way back to when it was first generated, eliminating the need for any intermediaries. Great! So if I convert my fiat currency into Bitcoin, what are the advantages?

 

I am now able to process cheaper transactions!

 

Not really. While that was true initially, the recent surge in trading and volume of Bitcoin transactions has overloaded the network and made it harder to mine new tokens, or more expensive to settle transactions, with per transaction fees hitting $50 in December 2017.

 

I am able to complete transactions more quickly!

 

Try again. Globally, the payments industry is moving towards an era of instant payments. Interestingly, other Blockchain technologies (not Bitcoin) are helping make the transition - Ripple is a crypto asset used by banks to cut down the time for international payments. However, Bitcoin is notorious for unpredictable settlement times, with the average time for transaction confirmation anywhere between 30 mins to 16 hours. 

 

My digital wealth is more secure in Bitcoin!

 

Jury's out on that one. While each Bitcoin token conserves a traceable record of its transactions, recent thefts, frauds and even outright scams in the Bitcoin and the wider cryptocurrency world do not build confidence in the system. Bitcoin runs on a completely public, decentralized Blockchain not controlled by any organization. It provides no protection against theft or fraud due to the absence of any kind of central regulator to efficiently intervene and influence the Blockchain. Contrast this with the presence of regulatory oversight and large investment in IT security within the existing banking system.

 

So, what can I do with Bitcoin that I can't do with ease in the existing system?!

 

How about untraceable, anonymous electronic payments? Yes, now we are on to something. The Bitcoin Blockchain has a strong use case for anonymous transactions, which could include providing cash flow for illegal money transmission and dark market transactions via the Internet. But is that enough to justify the immense premium on its price? As its popularity with crime rises, so does the action from regulatory bodies and governments. Ironically, it is easier to combat nefarious activities with digital currencies, than it is with cash.

 

A country simply outlaws Bitcoin exchanges and illegal money transmission will have to move back to older methods. Such a move would also demolish the Bitcoin 'network effect' - it doesn't matter how wide the network adoption is if it's a closed loop and one can't lawfully exchange Bitcoins for legal currency.

 

Assuming those are the major sources of value for a Bitcoin token (and I encourage readers to suggest any omissions) how confident are we in declaring Bitcoin a 'store of value'?

 

It is already left with little value to offer, especially in the face of competition from technologically advanced Blockchains.

On the Ethereum Blockchain for instance, tokens called Ether can store historic transactions (like Bitcoin) as well as business logic in the form of programming code (way beyond Bitcoin). The token can trigger ‘smart contracts’ based on a set of predefined rules, without the need for human intervention. Using this enhancement, clever programmers are building DApps or distributed apps. DApps are not hosted on central servers but distributed on the servers of its users. This decentralization prompts use cases beyond simple money transmission. For example, there could be a Voting DApp, which registers each vote, stores it on the Blockchain and reports election results directly without the need of a central authority (which might be susceptible to foul play). From secure data sharing, to combating against single points of failure, and coordinating interactions between millions of Internet-of-Things devices, a programmable Blockchain can be the foundation for a host of digital solutions.

 

Initial Coin Offerings : A New Class of Capital for Digital Businesses

 

The true value of a Blockchain and its corresponding cryptocurrency is derived from what its token enables the user to do. Consequently, these tokens are now instruments, giving rise to exciting new funding models for digital businesses.

 

Initial Coin Offerings or ICOs emerged in 2017 as a new way to raise funds for crypto projects. To be perfectly clear, an ICO is vastly different from an IPO. To illustrate, say you want to raise funds for a new app that connects anyone with a smartphone to a qualified doctor at the tap of a button. To raise money for the app development, you launch an ICO. In that ICO (and this is a heavily simplified explanation) you offer 100 ‘DoctorCoins’ in return for every $10 to your investors. What are ‘DoctorCoins’? These are the crypto tokens in your Doctor app. Behaving like an in-app currency, users will need to exchange ‘DoctorCoins’ to connect with doctors, say 1 ‘DoctorCoin’ in exchange for answering a health query via text or 5 ‘DoctorCoins’ for a 15 minute video call session. These ‘DoctorCoins’ can be purchased separately and are priced accordingly at cryptocurrency exchanges. In an ICO, investors do not receive equity in the company for their initial investment. Instead, they receive a chunk of the in-app economy. So, as an ICO investor in your Doctor app, I have a choice when the app launches – use my ‘DoctorCoins’ as intended in the app or wait for your app to gain popularity and then resell my initial allocation of ‘DoctorCoins’ at a price higher than $10.

This presents an interesting evolution in the area of capital markets. Debt providers are coldly focused on recovering their capital and a pre-determined interest. Equity holders are largely only concerned with the profit and loss statement of a business, often celebrating ‘one-off’ gains that have little relevance to ongoing business strategy. ICO investors however, are actually early adopters of a product they invested in. By being the first, often evangelical users of a new product, ICO investors have a built-in incentive to increase the adoption of a new product, as that will raise the value of the in-app economy. To do that, they champion the usage of the product, give feedback to the development team for improvements and actively promote the new product through their social networks to help increase usage and adoption in an organic way. This way, an ICO investor can prove to be a more useful class of capital for digital businesses, than debt or equity. However, it also means that an ICO investor must be sophisticated enough to understand the risks and viability of crypto projects.

 

There is a need for regulatory oversight to stabilize the ICO market and its participants. Given the speed with which things are moving in this space, I strongly believe that we will see ICOs as a dominant form of fundraising for digital products and startups by 2020.

 

2018: Speculative trading gives way to meaningful adoption

 

Bitcoin has spawned out of the first iteration of Blockchain technology. Like all first iterations, it started from a place of pure creativity, innocence and wonder. A decade since inception, the concept of the Blockchain has been widely welcomed, adopted and adapted. Efforts are on to optimize it for practical, real world applications that provide a great user experience.

 

While 2017 was the year of the Bitcoin, 2018 will be the year in which the spotlight will firmly shift to the broader world of Blockchains. This has happened before in the digital world. MySpace and Orkut were early implementations that brought the phenomena of Social Networking to limelight. Eventually, both were surpassed with newer and better implementations – Facebook, LinkedIn and Twitter. More broadly, social networking went on to firmly establish itself as one of the key pillars of the Internet – no app or website worth your time comes without a social integration.

 

Blockchains have the potential to go beyond that, because they are more than simple websites or apps. Like the Internet itself, blockchains are the foundation layer on which fascinating and useful complexity can be built. In many ways, blockchains are like mini-internets, and the successful ones will be those which imbibe the original ethos of the internet - open source, decentralized and distributed operations, that easily allow people and ideas across continents to come together and create something special.

 

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