Gartner, a leading research and advisory company, had predicted that the banking industry will derive 1 billion dollars of business value from the use of blockchain-based cryptocurrencies by 2020. Moreover, blockchain can be used for launching new cryptocurrencies that will be regulated or influenced by monetary policy.
While 2020 has been topsy-turvy for most industries, blockchain and cryptocurrencies have survived and are making their presence felt.
We have all heard about the Bitcoin resurgence, right? Bitcoin is a type of cryptocurrency. But what is cryptocurrency in reality?
A cryptocurrency is a digital or virtual currency that is secured by cryptography. Cryptography is a scientific methodology of securing the data during storage and also while transmitting. There is no underlying asset or goods or any commodities attached to the cryptocurrency.
Some Facts about Cryptocurrency
- Cryptocurrencies are not issued by any central banks or central authority, thereby making them immune to government interferences or even inflations. As a result, it can also make them almost totally shielded and potential global currency.
- Cryptocurrencies can be bought and sold in the exchanges specifically meant for this purpose. There are a lot of exchanges in the international market and a good number of exchanges that are home-grown within India in the last decade.
- Cryptocurrencies are secured through private and public keys, it is nearly impossible to counterfeit.
- The first cryptocurrency – Bitcoin, came into existence in the year 2009. Since then, more than 5000 cryptocurrencies popularly called ‘altcoins‘ have emerged. Though every altcoin has a unique name in which it is issued and traded.
- The most popular cryptocurrencies worldwide as of 2020 are Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC), Ethereum (ETH), to name a few.
With the burgeoning interest in cryptocurrency trading, the list of cryptocurrencies is steadily increasing and the cryptocurrency exchanges all over the world are also steadily increasing their offerings and listings of the cryptocurrencies.
The Underlying Technology of Cryptocurrency
Cryptocurrencies are stored in a geographically distributed decentralized network of computers called nodes, using blockchain technology.
Blockchain is a type of database but different from a typical relational database. A typical relational database stores the data as tables, whereas blockchain stored the data as blocks. It is nothing but a fixed storage space used to store information. With respect to cryptocurrency, blocks are typically used to store the transaction details and the blockchain serves as a ledger for transactions.
How does it work?
- Once a block is filled with data, it is chained to the previous block, thus making the data chained together in chronological order. Every block will have a unique hash on its own and also store the hash of the previous block it was chained to.
- As soon as a new block is added to a blockchain, the entire blockchain record is updated in all the nodes that are part of the blockchain network, thereby creating a lot of replications of the blockchain so that even if one computer is corrupted or compromised, the entire blockchain data is available in all other nodes.
- Public keys and private keys are tied to a wallet. The public key is used to receive cryptocurrency and the private key is used to post a transaction in the public ledger, vis. transferring a cryptocurrency to somebody else.
Future of Cryptocurrency in India
Post ban of old currency notes in 2018 by the Indian Government, the Indian central bank banned the trading of cryptocurrencies since a string of frauds were reported. But the cryptocurrency exchanges filed a lawsuit in the Supreme Court of India asking to revoke the ban. Finally, after almost two years, the ban was lifted in March 2020, bringing cryptocurrency trading back in India.
As per estimates, there are at least 10 exchanges in India as of 2020 that allow investors to trade cryptocurrency. Experts believe that with proper law and more regulations to maintain the autonomy and making sure the cryptocurrency exchanges follow some basic KYC verifications of the owners, it will give way for widespread adoption of cryptocurrencies for a myriad of applications.
Though cryptocurrencies, when used to their full potential, are expected to disrupt many existing financial systems, there are many technological challenges in creating a complete ecosystem that embraces cryptocurrencies. Financial institutions are taking baby steps in including cryptocurrency in their portfolio of offerings.
Some of India’s bigger technology firms also started showing interest in creating a platform to trade cryptocurrencies. As more and more financial institutions show interest in adopting blockchain technology and cryptocurrencies, with support from the governments and regulators, cryptocurrencies are only expected to become more prominent.
As of now, blockchain technology and cryptocurrencies are still considered niche and the technology cost involved in creating and maintaining is very high. But as more and more players emerge in the market, newer and cost-effective technologies are expected to emerge, paving the way for widespread adoption of cryptocurrencies.
Why is there reluctance in the widespread adoption of cryptocurrency?
Though there is a widespread acknowledgment of the advantages of blockchain technology, financial regulatory authorities and central banks worldwide are not too keen on embracing cryptocurrency so soon for several reasons. Here are some reasons why:
Lack of Mandates
Firstly, cryptocurrencies are not controlled by any central authority or any central bank. Hence, controlling the currency is naturally stripped off from the financial regulators if all the governments and financial institutions embrace cryptocurrency.
Prone to Security Risks
Though all the cryptocurrency blockchain transactions are publicly available for anybody to view, the wallets that store the public and private keys or the addresses are not tied to people making the owner of the cryptocurrency anonymous.
There is a widespread belief that cryptocurrencies are used for illegal activities, including drug trafficking and terrorist financing. Though the advocates of cryptocurrency argue that blockchain technology provides so much transparency that the entire chain and movement of a cryptocurrency can be tracked from the origin to the destination, although with a caveat, that the owner of the cryptocurrency can remain anonymous if he or she chooses to.
Validating a transaction, called mining, is a very complex and heavily technology-oriented operation. This involves a network of specialised machines with high processing capacity. These specialised machines are used to generate unique hashes using complex hashing algorithms and these hashes are tied to every block. With the increasing number of cryptocurrencies, the cost of generating hashes for mining is increasing and the overall phenomenon is still less understood by the majority of the financial institutions and the regulators
Who knows, sometime in the near future, financial institutions may even lend or buy cryptocurrencies from normal investors just like how they do for all other national currencies. When such a time comes, early adopters who are ready with such buying and lending platforms are expected to have a huge advantage over others.
If you own a lending business in the 21st Century, you will need a dynamic Loan Management System (LMS) and Loan Origination System (LOS) to ace the market competition. This is where Finezza’s industry-leading technology can help your business. To know more, get in touch with us today.