Government’s Take

The government is yet to formulate a concrete policy on the issue. There have been two reports that have examined blockchain and cryptocurrency. There is consensus on the use of blockchain and exploring its application in governance. In the 2018 Budget speech, the then Finance Minister Shri Arun Jaitely clarified the stand of the government in Parliament.⁷ He said a distributed ledger system or the blockchain technology allows organization of any chain of records or transactions, without the need of intermediaries. The government will explore use of blockchain technology proactively for ushering in a digital economy.

The contentious point was regarding cryptocurrency. The Government constituted an Inter-Ministerial Committee (IMC)⁸ in November 2017 under the Chairmanship of Secretary, Economic Affairs comprising Secretary, Ministry of Electronics and Information Technology, chairman of Securities Exchange Board of India and other members to study the issues related to virtual currencies and propose specific action to be taken in this matter.

Summary of IMC Report

While some countries have outrightly banned cryptocurrencies and some others have used them for barter transactions and even as a means of payment, no country has yet considered cryptocurrencies as a legal tender.

The Inter-Ministerial Committee (IMC) set up by the Indian Government to study the issues related to virtual currencies and propose specific actions, recently recommended that all private crypto currencies should be banned in India except the ones issued by the Government.

While the Committee suggests that the Government keep an open mind on digital official currency and has highlighted the positive aspects of Distributed Ledger Technology (DLT) and its uses in banks and financial firms, it has proposed banning of all private cryptocurrencies given the risks associated with them.

The disadvantages of virtual cryptocurrencies have been further explained below with sources and rationale.

• • Public blockchain needs decentralized verification such as in the case of bitcoin. People who verify the transaction and get some bitcoins are called miners. A complex mathematical problem is posed to verifiers and solving these problems takes up a lot of energy. Decentralization may help in keeping this process less cumbersome.
• • Low scalability: To be used as a means of payment, the number of transactions that can be processed has to be much higher. At its peak, it would take bitcoin more than a day to verify a transaction.
• • High cost: The cost of verifying transactions through the Proof of Work protocol is very high. The report says that 19 US households could be powered for a day by the electricity it takes to mine one bitcoin. If such currency mining is not prohibited in India, it would be catastrophic. Developed nations such as Canada have had to buy power in the open market. India is already power starved.
• • Irreversibility: All transactions on blockchain are irreversible. While this gives it credibility, it penalizes mistakes. Anyone who has worked at a bank would tell you that mistakes are common even while transferring money.
• • Security: Wallets and even exchanges have been prone to cyber-attacks thereby causing a security concern.
• • Password: If one forgets the Private Key, there is no recourse. Currently, we have the provision of verifying the identity of the person and regenerating a PIN or an OTP. No central authority exists in case of cryptocurrencies.
• • Monetary policy: cannot be enforced by central banks. This can cause unchecked inflation.
• • Cross-border control over currency: cannot be exercised as there is no central clearing house.
• • Anonymity: in transactions is causing cryptocurrencies to be used for criminal activities; from financing narcotics, as in the case of Silk Road, to terrorism.

Given the disadvantages, IMC proposes the enactment of a law to prohibit trading and mining cryptocurrencies and a fine of up to Rs 25 Cr and imprisonment of as much as ten years for anyone dealing in them. However, it does recommend official digital currency with the status of a legal tender and appropriately regulated by the Reserve Bank of India.

Report of the Steering Committee on FinTech Related Issues

The report of the Steering Committee on FinTech Related Issues, also within the Department of Economic Affairs, Ministry of Finance has taken a much softer view on the issue. It has encouraged the use of blockchain and has noted global interest in cryptocurrency. They acknowledge that virtual currencies through Initial Coin Offerings are revolutionizing fintech. it also talks about utility tokens and their potential to enable various industries.

Success Stories

LaVis Wine

Counterfeit is a major problem for the wine industry. People want to be assured of what they are drinking especially when they are paying so much for each bottle. Ernst and Young (EY) has been the blockchain implementation partner for La Vis. La Vis is claimed to be one of the first to sell blockchain-certificate wine using EY Ops Chain⁹. The blockchain contains all details related to the story of the wine starting from the type and quality of the grapes, to the date of bottling and the quality of the sulfates. Each time the bottle changes hands between the producer to the wholesaler to the retailer, the status is updated.

TReDS Bill Discounting

TReDS or Trade Receivables Discounting System which is an RBI¹⁰ approved platform for discounting bills for MSMEs, has started using blockchain". This allows them to broadcast information across a shared network where not only is all information in the public domain, it is also sensitive as it deals with financials.

Blockchain allows them to operate while protecting privacy.

Travel Insurance

Axa has partnered with Fizzy to provide travel insurance on blockchain. As mentioned above, blockchain is at the back end and the insured have little or no visibility on that. The process of getting flight insurance or to get any insurance for that matter has always been easy. The problem is at the time of claims. Blockchain is solving that component. Insurance pays off in the event of that condition being met. The insured is supposed to file a claim and then that claim is processed internally by the insurer and payment is released. In case of flight insurance, the insured and the insurer check as to whether the flight was delayed by two hours or more, or cancelled altogether. The advantage in this case is that as soon as a flight is delayed by two hours, the information is relayed at the same time to the insured and the insurer. And since it is coded on Ethereum smart contracts, that information triggers payment of the sum insured without any human intervention. Even if the insurer wants, they cannot edit the contract once it is on the system. The contract address is: 0xdc3d8fc2c41781b0259175 bdcl9516f7dal lcba7 which can be accessed on etherscan.io and other such options for Ethereum Blockchain. Anyone can view the contract and the code.

The link to the website is https://fizzy.axa/en-gb/

Other good insurance use cases can be found at https://builtin.com/blockchain/ blockchaininsurance-companies

Sweden Land Records

Since land record titles are susceptible to minor forgeries and clerical errors, the Swedish government has decided to experiment¹² with the use of blockchain. It is called Lantmateriet. Instead of signing papers, people could use digital signatures. Since these can be validated online, a transaction can be concluded. The system operates on a private blockchain and includes land registry and other parties that hold land records such as banks. However, even this system does not act like cryptocurrency where high-value transactions are easy. Nevertheless, just by removing paperwork and preventing forgery, Sweden would save more than $100 million.

Challenges

Digitization

Driving licenses can be put online in a cryptic form only to check validity and if there have been any challans in the past due to traffic violation. This would allow' insurers to decide premium based on the driving history of the person. The problem w'ith this solution is that all the driver’s license data is not available in one online database that is accessible and compatible w'ith other databases.

Firstly all data would have to be digitized with a collaborative architecture. This is an exercise that has been undertaken in many developed economies and efforts for this are under way in India as well.

Property Records Complete

Property records on blockchain would ensure that there is no amendment to land ownership without consent (and in some cases, corresponding payment to the seller). The problem w'ith this approach is that it is only prospective. In order to be retrospective, the land records have to be clean in the first place. In the absence of this, the legacy data cannot be digitized on to blockchain. While this may seem very simple it is not so. Even some of the best States in Government of India’s Ease of Doing Business Ranking do not have even two years’ worth of property records and transactions digitized¹³. Property is fraught with disputes, some in civil courts and others in criminal courts. It is mortgaged, pledged and rented. There are cases subject to Wills, Gift Deeds and Sale Deeds. This leads to too many ownership disputes. If this is not free of errors and disputes, it cannot be put on the blockchain as they would then be immutable.

Need for Scale

The benefits will only arise once the entire platform is on the system. We need everyone to use it. Imagine using emails only to find out that you need to take a print of each communication, respond in w'riting and each response will then be digitized. It w'ould not add any value, right? Similarly blockchain will add value if all processes are present on it. Therefore the need for scale is high to unlock value.

Coders

The main platforms at the moment are

• 1. Hyperledger: by IBM
• 2. Corda R3: industry collaboration initiative with leading organizations as partners
• 3. Solidity: Ethereum blockchain
• 4. Others such as MultiChain, SmartChain and other chains: platforms to create your own blockchain

While Hyperledger and Corda require mostly Java knowledge, Solidity and other platforms require more sophisticated knowledge. There is a dearth of people who understand blockchain architecture and can implement it. Coders are in short supply for the entire industry but more so for blockchain.

Smart Contracts

Oracles: smart contracts require Oracles. These Oracles are assumed to be sources of truth for a contract to get executed. For smart contracts to be a reality, we would need many more Oracles. We would also need more reliable and consistent Oracles. For example, flight.com is a reliable source for flight data. However, it can get hacked. There might be an internal maintenance issue. The server might be down or it could have bugs. Since it is owned privately, one cannot rule out any interference. These issues hamper trust.

Non-repudiability of smart contracts is a welcome feature in many cases. However, in certain cases it can prove to be problematic. If someone were inebriated or under duress while they were writing a smart contract, it could have difficult consequences. The best software from the biggest companies also suffers from bugs. It is inconceivable that no smart contracts would have bugs. Further, both parties may agree to dissolve the contract, or there could be a force majeure. In these cases we would need an escape chute from the non-repudiable smart contract which is not possible currently.

Do it Yourself

HyperLedger

Click and Build platforms such as Hyperledger by IBM are available free of cost for enthusiasts. The online program is free for all and leads to a decent working knowledge of the platform. The course helps you develop a small blockchain for trading cars. It does not require any coding experience. In order to build something useful for an organization, it has a Java component that needs to be understood and coded. However, this is a good place to start if you want to understand and see it in action.

Coursera and a number of other learning platforms provide free learning content hosted at www.coursera.org/lecture/blockchain-platforms/hyperledgerpart-l-87Qz4.

Bitcoin

Although Bitcoin and trading in any form of crypto is not recommended in India, it is possible to look at the blocks. Since it is open, you can look at all the blocks ever created. The hash of each block is available. If you click on one of these, you will see the number of transactions in each block which contains the amount of bitcoins transferred, the sender’s address and the receiver’s address¹⁴. For each address, you can also view the history of all transactions made by that address along with dates.

Each block also identifies the username of the miner (the one who successfully solved the mathematical problem before everyone else) as well. This miner would have received a reward for doing this as well. This keeps miners motivated and therefore the system has an in-built reward within it. Each block is about 1.2 Mb. The block height or the number of the block is in the 6,00,000 series. All these transactions would roughly add up to 72 Gb of data. Since all the transactions on each block are hashed, the entire chain, without the record of the transactions would occupy less than 1 Mb of space. This allows the system to be scalable.

Everything about bitcoin transactions is public. The identities of the sender and the receiver are encrypted. Each wallet (of sender and receiver) has multiple unique hashed identities. This ensures that no one can trace previous transactions to one person.

The same is true for all crypto currencies. The famous ones with higher volumes have their ledger accessible from multiple websites.

Ethereum Blockchain

Ethereum has been a successful blockchain in terms of diversifying beyond a currency. At time of writing it is considered to be the default platform for coding DAPPS (stands for Distributed Applications). Solidity is the platform where smart contracts can be coded on to the Ethereum blockchain. Learning Solidity has been made easy by CrytoZombies.io. This platform offers a gamified system of learning how to code for Ethereum. The course is free and has levels that one progresses through in the journey of dealing with zombies.

Generate a Hash

There are a number of hashing algorithms. They have varied complexity. Some have a private key that can be changed for each transaction.

If you are familiar with the statistics software called R, then you can try out digest package to generate hashes. You can use the following code to generate the hash for any content hmac (“PrivateKey", “Content”, algo = “sha256”).

You can change the Private Key to anything you want. The content can be whatever you want. The algorithm can be specified to any out of shal, sha256, sha512, crc32, mda5. These would all generate a different hash of the same content but would be internally consistent.

Alternatively, you can visitwww.shal-online.com/ to hash anything you type.

You can hash images as well. Right click any image file and click on Open With... and click Notepad or any text editor. You will see the textual representation of the image. It is this text that would be hashed. Try editing this image in Paint or any other picture editing software. You could add a small dot, that might even be imperceptible to the naked eye. If you compare the text representation of this edited picture to that of the unedited it, you would be able to see the difference. Since the source text is different, the hash would also be different.

Notes

• 1 DOA: October 10. 2019 https://dea.gov.in/sites/default/files/Report%20of%20the%20Steering%20 Committee%20on%20Fintech.pdf
• 2 https://en.wikipedia.org/wiki/Punjab National Bank Scam
• 3 India Meteorological Department (IMD)
• 4 www.forbes.corn/sites/mariyayao/2017/04/14/your-electronic-medical-recordscan-be-worth-1000-to- hackers/#5eOe 1 b7250cf
• 5 Usually above INR 20k in most cases
• 6 Source www.cbinsights.com/research/what-is-blockchain-technology/
• 7 www.livemint.corn/Money/o4bSQ6CiUfjCIWDFDyZjnJ/Cryptocurrency-notlegal-tender-in-India- but-blockchain-get.html
• 8 https://dea.gov.in/sites/default/files/Approved%20Press%20Release%20on%20the%20Report%20 and%20Bill%20
• 9 www.ey.com/en gl/global-review/2018/restoring-trust-in-the-wine-industry
• 10 Reserve Bank of India
• 11 www.thehindubusinessline.com/money-and-banking/indias-first-blockchainimplementation-goes- live/article23422835 .ece
• 12 https://qz.com/947064/sweden-is-turning-a-blockchain-powered-land-registry-into-areality/
• 13 Rajasthan as accessed at eodb.dipp.in
• 14 These are encrypted.