Blockchain, Cryptocurrency, and Legal Tender; The Three Sides to a Coin
Bitcoin prices are the lowest in two months. Other cryptocurrencies are following the downward trend. Since the beginning of the year, cryptocurrency markets have been hit by a string of negative news. Fears of tighter regulation in China and South Korea rocked the cryptocurrency freight train in January. Largest cryptocurrency hack in history at the Japanese exchange Coincheck raised concerns about security and added to the negativity. Facebook statement banning advertisement puts a few things into perspective; a ban on advertising that “promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings, and cryptocurrency.”
Yesterday’s statement by the Finance Minister of India, “the Government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system” precipitated the cryptocurrencies slide. The Finance Minister went on to state “The Government will explore the use of blockchain technology proactively for ushering in the digital economy.” Within his statements are four key words – blockchain technology, cryptocurrencies, crypto-assets and legal tender. Let’s demystify these terms.
Blockchain Technology:
Blockchain technology is the basic foundation on which almost all cryptocurrencies are based. The main advantage of blockchain is a decentralized ledger. Decentralization ensures that there is no one central agency that store the information. This ensures that there is no one central authority and it also means better safeguard against cyberattacks. Decentralized ledger means that there is no middleman acting as a ‘common’ trusted party. This enables the transacting parties to perform a transaction without the need for a third trusted party; In Blockchain we Trust!
The financial transaction is one use case of blockchain technology. There are over 20 blockchain platforms, and some of them are offered open source.
Cryptocurrencies:
For over three decades peer to peer electronic payment approaches have been considered. Use of Blockchain technology to enable electronic peer to peer payments is about a decade old and gained traction over the past couple of years thanks to Bitcoin.
Cryptocurrency is a virtual currency, a product, which has been created on a Blockchain platform using encryption techniques. There is nothing physical that a person holds so in that way it is more like having positions on a commodity exchange as opposed holding onto a commodity. Like any commodity, it may or may not hold its value and, its price fluctuates depending on the number of buyers or sellers. Recent fluctuations in the value of cryptocurrencies is a testament to the commodity nature of the crypto-asset.
At the time of writing this post, there are 1506 cryptocurrencies being offered for sale at coinmarketcap and new currencies through Initial Coin Offerings (ICO) are coming daily.
Crypto-asset:
It is the economic nature of the crypto-coin. Currency exchanges enable trading, buy-sell transactions, to take place between different crypto-currencies. When one buys a coin, they purchase a crypto-asset using government-issued currency. A sell side transaction enables one to offload the asset and get back the government-backed currency.
Legal Tender:
It’s a medium of payment recognized by a legal system to be valid for meeting a financial obligation to extinguish a public or private debt and must be accepted for that payment. Coins and bank notes are defined as legal tender. When a government says that a cryptocurrency is not legal tender, it means that you cannot use the crypto-asset as a legally recognized form of payment. This means that the recipient of payment can refuse to accept crypto-assets and the legal system will recognize their act as lawful.
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The use of Blockchain as a foundational technology holds immense possibilities. Blockchain decentralized ledger can be used as a public chain for digitizing and managing Personal Identifiable Information (PII) like national ID, medical records, marriage records, passport, driver’s license, education qualifications and has the framework to empower the citizens with information without the need for a central authority.
Blockchain could be used by an enterprise as a private chain for supply chain management, invoice financing, loan management, contract management, treasury management; just to name a few.
