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The death knell for India's foray into Cryptocurrency

The death knell for Indias foray into Cryptocurrency

People proclaim the death of bitcoin all the time. At the time of writing, the number of posts on the Bitcoin Obituaries section of 99Bitcoins has reached 293, and this is unlikely to be the last proclamation of the end of the cryptocurrency revolution.

Unlike the observational stance being taken by other members of the G20, the Indian government has been vocal in its disapproval. The latest round of panic is instigated by the RBI's desire to stop banks from dealing with cryptocurrency exchanges, and investors are rightly worried.

The Government currently believes that cryptocurrencies are a risk to the people investing in them, as is the implied message in the official announcement from the RBI. Among the issues raised are the usual suspects of money laundering, market integrity and investor protection. In this article I shall discuss all sides of the narrative being put forward by the government.

The case against cryptocurrency

It is no surprise that those who engage in less-than-acceptable activities have embraced cryptocurrencies. By its very nature, bitcoin is the perfect tool for illicit activities - it is not held by intermediaries, and nobody can stop you from using it as you wish. It provides means for transferring value over large distances in a near instantaneous way, with transaction fees proving to be the cost of this censorship-proof service.

The widespread nature of today's crypto-based economy is only possible because of Dark Web marketplaces and gambling sites, where Bitcoin's use case was borne, out of a market need for anonymity. While all transactions on this blockchain are open for all to see, it is incredibly difficult to deduce who is sending bitcoin to whom due to the nature of the addresses.

The success of Bitcoin in those initial days speaks for itself - the first such marketplace, Silk Road, earned over $1.2 billion in revenue during its short spell of activity. Once the site was shut down a series of copycats spawned to fill the vacuum, offering a host of services usually associated with the darker side of the internet. Among the items available were drugs, pornography, counterfeit government-issued identification, weapons and (what finally got Silk Road founder Ross Ulbricht convicted) assassins.

Cryptocurrency started making its way into the mainstream discourse thanks to Bitcoin's market resilience. Law enforcement wanted to stop it, but physically could not. The only way to take over the network is by controlling the majority of computers that keep it going. The 8th episode of the current season of HBO's Silicon Valley shows how this could work in theory, though the writers eventually chose storytelling over the facts. However, the point still stands, as it would require a near-unattainable amount of devices, electricity and computing power for a single entity to take over the network.

Its effectiveness as censorship-proof means of payment, coupled with the potential for further valuation surges dependent on global adoption created, like Silk Road, a bunch of responses to the original. The source code was available to all with an internet connection. The open-source nature of the code enabled every developer to launch a token based on the proven market impact of Bitcoin.

The 'permission-less' nature of this field, independent of major institutions and governments, encouraged rapid development which manifested in lots of new projects. The nature of these projects were determined by the developers' interpretation of the single thing that started it all - a whitepaper, or statement of intent, by the pseudonymous Satoshi Nakamoto.

Projects were emerging everywhere, and the low barrier to entry, ability to trade anonymously and incentives to mining digital currencies enabled people to accumulate large quantities of crypto assets. A lucky few held onto assets that eventually shot up in valuation, making them the ones who are fawned over by the media and the subjects of envious glances from their peers. Trading is a zero-sum game, and for every winner there are several people who ended up in the receding tide.

Buy low, sell high - it is a mantra that has almost turned into a cliché, but is still ignored by many. Staying emotionally detached from projects is easier said than done, especially during dramatic pullbacks that have seen assets lose up to 70% of their value over extended bearish periods. This leads us on to another oft-repeated phrase - only invest what you can afford to lose. While this market has soaring highs, the lows can be crushing, especially if an individual stretches beyond their means.

Volatility works both ways, and the nature of these market movements are nowhere near being understood. New assets are being listed every day, and this growth has been accelerated by the arrival of Ethereum - a platform where anyone can release their own tokens, under their own rules.

The non-existent barriers to entry enable anyone with an idea to launch funding rounds, and people are pouring their hard-earned money into companies that are, at the time, nothing more than a few co-founders and an idea. This middle ground between venture capital funding and Initial Public Offerings is known as an ICO (for 'coins' that can be 'mined') or 'token sale.' While token sales have the same goal as IPOs concerning the raising of working capital in exchange for equity, they offer none of the investor protections that auditors looking into pre-listed projects can provide.

Investing in cryptocurrency is already risky, and entering projects in those phases of infancy augments both the risk and the reward. There are plenty of high-profile examples of fraud and Ponzi schemes in the digital assets space, among the most visible being BitConnect. Questions have been raised about the backing of US Dollar Tether, a 'stablecoin' whose value is always pegged to $1. Even among blockchain-based solutions that are not scams, hype cycles can drive investors to part with billions, even though a working product is nowhere to be seen.

Projects that have been mainstays of the cryptocurrency environment for years are valued at a fraction of savvy marketers like EOS, a company nearing the end of its year-long ICO.

A company with a high valuation has a lot ot live up to, and anything short of flawless execution could prove problematic. Consider the low barriers to entry alongside inexperienced investors constantly glued to social media, spurred by the promises of crypto millions. The volatile nature of this market becomes apparent.

So in order to further understand the government's perspective, one must consider the services on which these digital assets are traded. Cryptocurrency exchanges are responsible for storing users' information, and are currently the sole actors involved with tracking who is transacting on their site. In the case of India-based exchanges, providing Aadhar and PAN numbers as well as an active phone number and email address are a minimum requirement for using the services. With all this information on hand, tracking the source of financing is an elementary task.

Problems arise when individuals buy Bitcoin using cash, however carrying large quantities of fiat currency on one's self in order to purchase a digital asset presents its own set of challenges.

Of the criticisms levelled at Bitcoin and its kin, the the legal and taxation frameworks bring about the most confusion. Firstly, the asset class of cryptocurrencies have not yet been defined, and this needs to happen before any further discussion concerning its place alongside a regulated economy can commence.

The founders of projects in the space even shy away from currency-based terms, instead choosing to position their assets, in the case of Neo and Ethereum, as fuel for the operation of a decentralised network. Irrespective, people are making money through investing, and all realised profits could potentially come under scrutiny.

The fact of the matter is that these are uniquely identifiable digital goods that can be transferred across borders without the consent of gatekeepers such as financial institutions. Their value is derived by their scarcity, rather than from the voice of a respected, centralised, government authority. This existence outside the traditional realms of surveillance and control brings cryptocurrencies under a spotlight from those combating money laundering and terrorism-related activities. While an EU report declared these perspectives are based on anecdotal evidence, there always remains the possibility of malicious actors in society adopting these means of value transfer.

A case for cryptocurrency

By starting this article with a focus on the dark past of Bitcoin, it was by no means an attack on the community, nor support for the early use cases of the technology. It was an acknowledgement of Bitcoin's hostile proving ground, a platform where security and anonymity were potentially matters of life and death. This embracing of technology by those operating outside the law is not a new phenomenon.

The Bonnot Gang were the first to use the automobile as a getaway vehicle for bank robberies, in a time when the public discourse revolved around whether cars would ever be desirable in society. 'Why do we need cars? Faster horses are what we should be aiming for.' In the following decades, the rhetoric resurfaced, albeit with a new foe in every instance - the pager, the mobile phone, and the Internet.

In the words of Bitcoin educator Andreas Antonopoulos, "criminals adopt technology early because they face high friction in the marketplace. They are on the cutting edge, by necessity." Having risen to public prominence under these conditions, separating Bitcoin from its association with dark web dealings would be a colossal challenge.

As with the examples mentioned earlier, embracing something that fundamentally challenges our perception of the world takes time. That's not to say that we have reached the zenith of cryptocurrency development. That is akin to saying the Ford Model T was the epitome of the automobile. Bitcoin is the 'version 1' of a system that has proven results.

Just like in early automobiles, innovation will increase at an accelerating rate as we learn how to best develop this idea. The benefits and drawbacks of Bitcoin are nuanced, require context, and lie in the eye of the beholder. Power consumption due to mining and maintaining the Bitcoin network is one such topic. This has lead to programmers releasing their own versions, adapting the open-source code to parameters which they believe will provide value to the community. The combination of supply, demand and government regulation will shape our cryptocurrency future.

If one truly wants to understand the role that is envisioned for cryptocurrency, one needs knowledge of the problems that those in the community want to address. Among the most discussed topics is the elimination of middlemen, a rethink of the financial system, and the restoration of privacy surrendered due to our Internet habits. Since the latter point affects every single individual who will be reading this, it shall be the first that I cover.

The first step to fixing the state of online privacy is acknowledging that the problem is real, and affects every individual who participates in the network. Our current paradigm of the internet is known as Web 2.0. In contrast to its predecessor, participants provide the information and use it as a basis for interaction, rather than a central gatekeeper or authority disseminating information in a top-down manner.

We use Facebook to keep in touch with friends, consume news, and participate in our chosen interest-based communities. Facebook maintains and governs the platform using its terms & conditions as a guide. They can also choose what they want us to see, using their algorithm to rank items based on what we will interact with most.

Due to their respective effectiveness in curating content and ranking results, Facebook and Google make up over 80% of referral web traffic. While this does not seem like a problem at first, one must consider the value proposition of these "free" services. As people who were alive before the days of ubiquitous internet penetration can attest, social networks help you keep in touch at next to no cost. How can companies like Facebook and Google not charge their users anything, but still be considered among the largest companies in the world? Where is their money coming from?

One must realise that if the service that you are using is free, you are the product. Companies pay these platforms for access, targeting users with advertising in the hope of a purchase. In addition to easy audience segmentation thanks to demographics, location and interests, a person's actions on social media platforms can be tracked down to the click.

However, the true value of this information lies in the connecting of individual data points, finding patterns that are common over sections within the 2 billion-strong Facebook user base. It is this capability that has made companies like Facebook and Google two of the largest advertising companies in history. A 2014 study in Indonesia showed that people use Facebook without even knowing that they are using the Internet. Some are not concerned by the use of their personal data by Facebook and other companies.

If all this data is used to curate a better online experience, with more relevant information being presented, is that not a good thing? Combine that sentiment with Facebook's inherent design - the platform is designed to keep people on the site for as long as possible, and encourage activity. In addition to studies (1, 2, 3, 4, 5) showing that time spent on social media can affect mental well being, individuals often do not consider the permanence of data trails they're leaving behind.

The flip-side of this unfettered access only entered the mainstream discourse during the Cambridge Analytica debacle. Data points that were once used to discern whether you would buy Pepsi or Coke can now segregate who would be susceptible to fake news and provide confirmation bias to win political favour.

People may not provide honest answers in exit polls, but the detachment from the 'real world' provided by online platforms can enable them to truly speak their minds. While the crux of the Cambridge Analytica issue relied on the manner in which this information was gathered, the firm's success lay in their ability to capitalise on the polarisation of our society.

The world-changing potential of manipulative feeds combined with predictable political echo chambers created the perfect storm for a Trump victory in the 2016 Presidential elections. This intimate access to human habits has lead some to proclaim that data is the new oil. Think outside of Facebook - Google is homepage of the Internet for many, a place where people don't fear judgement and ask even the most personal questions. The ecosystem of Gmail, search, YouTube and the Android operating system can provide details of your entire online, and sometimes offline, life.

In 2012, Big Data analysis at Target accurately predicted when a teenage shopper was pregnant. Factor in 6 years of advancement in the fields of artificial intelligence and web infrastructure alongside a series of mergers, acquisitions and rapid global expansion, Amazon's scale & predictive powers have revolutionised the worlds of shipping and logistics. While the oil analogy is disputed, it has merits if one considers superficial similarities - high levels of investment and expertise are required to accumulate, refine and present data in a usable form.

By clicking 'agree' on the Facebook terms and conditions, you are essentially giving up ownership of images and videos that you share on the site, allowing the social network to do with it as they please. When these issues were brought to Mark Zuckerberg by an EU panel, the Facebook founder actively avoided addressing some of the most pressing concerns, including data collection of people not on Facebook's platform, the elimination of fake accounts, and Facebook's lack of competition.

The privacy violations stretch beyond actions of these social media gatekeepers. While political campaigning involving audience segmentation is, while suspicious, an expected use of the tools, the situation gets significantly more complex when government surveillance comes into the picture. 'I'm not doing anything wrong, I have got nothing to hide, right?' It turns out that the answer is a lot more complicated than you think. In the words of Edward Snowden, your rights matter because you never know when you're going to need them. When proof of government surveillance was revealed by Snowden's leaks, the depth of data collection was the most shocking aspect. Even Mark Zuckerberg covers his webcam.

All this data surveillance is only possible because of the centralised nature of these services. At the most basic business level, Facebook & Google accept money in exchange for packaged data that will grant businesses exposure to potential consumers.

If one assumes that an increase in communication channels between individuals is the key to understanding differing political and social views, the sensationalist, unverified content that litters Facebook's news feed encourages the opposite. Reddit is not much better, with the simpler upvote/downvote system still falling prey to community tribalism. While having less content restrictions that Facebook, including the permission to post content deemed "Not Safe For Work" (NSFW), its server time heavily relies on donations from users in the form of Reddit Gold. The current state of advertising and social media is far from perfect, but it has achieved the objectives of making sales more efficient. The costs, however, we are yet to fully realise.

The next step, Web 3.0, may be about the returning of data to its owners. The cornerstone of this new paradigm could well be the blockchain.

A blockchain is, at its heart, an open ledger of token transactions that is maintained by a distributed network of computers, or nodes. Every one of the tokens being transacted is uniquely identifiable, and the wallets in which they are held have a publicly-viewable history. Each node serves as a reference point, maintaining a copy of the ledger while working with other nodes to validate new transactions. Validations are required to ensure that the same token is only spent by the wallet in which it is held, and happens without a central authority saying it is true. Instead, the consensus is reached through the cooperation of nodes, and this can even be achieved if there are malicious actors among the nodes. The network identifies and isolates the malicious players, and moves on.

The only way to compromise the system is to take control of over 50% of the computing power that is verifying transactions. As the network gets more dispersed, the more challenging it becomes for an attacker to achieve a majority. As a result, this distributed network is immutable, and has no "off" switch. This realisation of a robust, trustless system is the reason why you will often hear an iteration of the phrase, 'hate Bitcoin, love blockchain.' The same lack of a trust requirement that enables strangers to transact cash over large distances can also be used to maintain a variety of communication channels that can never be shut down. Implications for system security and permanence are undeniable. Tokenized supply chains could eliminate the need for middlemen and brokers.

The challenge lies in using these means to eliminate the problems of Web 2.0, while maintaining the value propositions and effectiveness of the original services. A solution has been provided, and now a problem must be assigned to it. Global recognition of its potential, alongside the drive to explore its limitations, is what has driven blockchain development forward.

The permissionless development enabled by the low barriers to entry on the Ethereum platform has given us a deluge of ICOs. Our newfound ability to tokenize items and create scarce digital goods has resulted in a bloated and lucrative ICO market. While some have given their investors fantastic returns, not all of these project will survive in the long term. This is normal. It is a well-accepted fact among venture capitalists that 75% of their projects will fail.

A comparable fever pitch surrounded technology startups at the turn of the millennium, with multi-million dollar valuations becoming widespread. We also know that it all came crashing down, but failed to signal the end of our desire to understand the capabilities internet. The bubble was a shakeout, where almost $1 trillion was lost between March and April 2000. Behemoths like Cisco lost over 86% of their market value. Companies unable to adapt and weather this storm crumbled. As time went on, services once adored like Myspace, Napster and MSN Messenger were either shut down, or slowly faded into indifference.

Like the true potential of those early services, uniquely identifiable and easily-transferable digital goods have use cases that we are yet to fully understand. Facebook, Snapchat, Whatsapp and Soundcloud used the fundamental parts of what was proposed by those early offerings, made them more accessible, and exploited the advancements in communication technology to their benefit. Finally, there was the minority among these tech companies who recovered quickly, and used the wreckage of the burst bubble to move from strength to strength. The innovations that Google and Amazon brought to the world enabled them to form two of the history's most powerful entities, and the backbone of the internet.

In the same way, not all cryptocurrency investors will strike gold. Some projects will not be viable, and simply won't ever get widespread traction. Others may be Ponzi schemes, and collapse when the founders take flight with the money. With the amount of new projects being announced every day, old projects will become obsolete because the nature of this space makes it ripe for innovation. People may just lose interest in projects. This is also expected, and among the risks that people consider before investing.

But, there will be significant returns on investment too. Highly intelligent, experienced and qualified individuals have been assembling teams that aim to tackle global problems. This article describes how the current state of the blockchain is not unlike the Internet in the mid-1990s, where there was a new, exciting technology that we were only beginning to explore. That technological gold rush brought an enormous capital injection into the market, global development was on steroids. It is likely that entrepreneurs will translate services that we are familiar with from their centralised state onto blockchains. We saw this with the moving of businesses from physical stores to websites, eventually culminating in online retail juggernauts like Amazon.

As we learned more about the tools, and developed the infrastructure supporting it, the value provided far outstripped our initial predictions. The disruptive applications of new technology only happen when we learn how to think in relation to these new parameters, i.e. the language of this new system. While we are still several years away from adoption of cryptocurrencies within mainstream circles, the ideas being explored today, or some future version of them, are more than likely here to stay. Organisations, institutional investors and governments are lining up to test these waters. The global cryptocurrency journey is still yet to truly commence.

This is the first in a series of articles where I will explain, in depth, problems that we face, and how a cryptocurrency-based solution is asking questions to solve them. The list of projects in this space gets longer every day, and the volume of information available can seem overwhelming to even the most active participants in the community. My hope is that these articles will help you discern which projects you feel like studying in further detail, and really get to know the nooks and crannies of every idea. Most importantly, participation in this new, unregulated cryptocurrency economy requires unrivaled confidence in one's decision making and a willingness to embrace the unknown.

If you think you have what it takes, welcome aboard.

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