Digital currency, distributed ledger and democracy

The context is our Union budget this year, and a lot of deliberations afterwards. In the one hundred and eleventh paragraph of this year’s budget speech, the numerical rupee is mentioned. The understanding is clear. It will be based on blockchain technology as implemented in several other cryptocurrencies like bitcoin.

However, there will be government control. First, we believe this is a logical and positive development in terms of available technological developments related to secure communication. While the main discussion of internet-based ideas always tends to get into deeper scientific technical details, here we like to dig deeper into socio-political issues.

Science changes the world as evident in the story, but its implications for humanity as a whole should also be placed in a related thread.

An immediate question that will be asked is what are the differences between our normal currency used in the digital realm and the new digital currency or cryptocurrency? Existing currency is usually controlled by governments or designated banks, such as the Reserve Bank of India.

Currency was already in place, but with new technologies, as well as physical coins or paper notes, the transfer of money is possible through digital technologies. This is equivalent to replacing normal stamped envelopes with emails. The existing currency remains, but the modes of transactions are modified in some places using electronic technologies. Here, cryptology is involved in providing relevant security in transactions.

However, it is not a cryptocurrency. The use of cryptological techniques on existing currency, such as internet banking or internet credit/debit card transactions, is not generally referred to as cryptocurrency.

The Wiki says: “A cryptocurrency, cryptocurrency, or crypto is a digital currency designed to function as a medium of exchange through a computer network that is independent of any central authority, such as a government or bank , to maintain or maintain this.” With this we like to add that in general there should be no physical currency behind it.

Generating money is also quite complicated, because in the case of bitcoin, it is related to computing power based on solving certain algorithmic puzzles related to the “Hash Function” cryptological primitive. It is also understood that the most important database containing information on all transactions, i.e. the ledger, will be stored and updated in a distributed environment through a democratic process.

It can never be altered by any authority. The main point here is that a small power group should not be able to control this inherently democratic system. Unfortunately, such a beautiful blockchain technology is most popular and associated with bitcoin, which is currently being mined for the wrong reasons.

In a country like India, more than seven out of ten people belong to a low income group. They swing the election and so, either motivationally or professionally, each political party as a decision-maker (when governing) shows the intention to distribute the wealth among a greater number of citizens. This is related to socialism writ large, but the idea of ​​socialism has changed significantly over the past 50 years. The communist paradigm might still be relevant in a world based on theoretical principles.

On the contrary, we all know how the so-called communist leaders acted autocratically in their respective countries. China is doing well in different parameters, but the concept of democracy is repeatedly undermined. On the other hand, we Indians are enjoying democracy to a reasonable extent even with the current downward trend in some indices.

It should also be noted that the increase in inequalities hinders democratic values ​​for a large part of our fellow citizens. Here, the concept of decentralized finance (DeFi) could provide a logical direction towards getting better clues in achievable socialism as well as political democracy alongside.

In this context, let’s briefly describe DeFi since we talked about cryptocurrencies a while ago. DeFi is based on blockchain technology and initially powered by cryptocurrencies. It creates a parallel financial system that can compete with centralized financial institutions through advanced processes, greater transparency, and robust security.

It can provide an immediate opportunity for approximately 1.4 billion people (unbanked or underbanked in our country) to be included in a formal financial system that is not otherwise accessible to them. By using DeFi, people who are normally forced to use informal intermediaries for financial transactions could avoid high and unreasonable fees – this would lead to less exploitation of the underprivileged class.

That is to say, blockchain has the potential to become “the gold standard of the supply chain”. On the one hand, it would eliminate middlemen, on the other hand, it would allow for greater control, tracking and standardization for the end-to-end transfer of goods and services. Anyone with a smartphone and an internet connection would be able to take advantage of supply chains, reach potential customers to supply products and services, and improve their profit margins while maintaining prices. competitive. Thus, blockchain technology can appear as a great leveler when it comes to giving market opportunities to small businesses or cooperatives.

Not only the tech jargons, the numbers indicate that wealth is also available. In November 2021, Bloomberg reported that the market capitalization of cryptocurrencies has exceeded $3 trillion. Apparently, the value of the crypto universe has quadrupled in 2021. A deeper understanding will reveal that the source of this wealth is not transparent.

Like the stock market, sometimes the root of this wealth may not be tied to tangible production. So, with a new proposal for a digital currency controlled by the central government, there is a possibility of resource generation almost from nowhere. Once such wealth is generated, the intention of the government to distribute it among the low income group could be a direction of social development. According to a German study, it would take about $330 billion to alleviate world hunger by 2030.

When we compare this with the market capitalization of cryptocurrencies, it becomes clear that this new paradigm is going to be a force to be reckoned with. With smart exploitation of resources, this has the potential to reduce extreme wealth polarization and inequality around the world.

As already mentioned, it is now well understood that modern concepts of socialism and democracy cannot be based on communist dictatorship. On the other hand, there is a tendency to undermine the democratic process by democratically elected governments themselves, which is currently referred to as ‘electoral autocracy’ or ‘demo-cracy’.

In such a situation, elected governments should be more careful in terms of maintaining democracy and DeFi, also called “open finance”, could be an important element in this social direction. The very basic idea of ​​the distributed ledger in the secure and public management of all transactions forms the basis of a democratic infrastructure. This has the potential to open an ecosystem of financial products like loans, insurance, exchanges, lending platforms, marketplaces to those who are otherwise deprived of these formal platforms.

In this direction, the current government shows its intention to speed up the process by designing a peer-to-peer payment infrastructure based on the central bank digital currency (CBDC). This is highlighted in this year’s budget. As it is now understood, there will be government control, unlike bitcoin. The security infrastructure, where it will not be possible to manipulate ledger transactions, can be guaranteed by the underlying blockchain technology. Thus, fraudulent transactions should be mitigated with increased confidence.

Finally, it should be noted that the application of blockchain is not only related to digital currency. It can be leveraged to handle large amounts of distributed data in any application. For example, today more than a billion people in the world do not have nationally issued identification.

Blockchain-based technology with minimal biometric information (available through simple biometric apps) can also bridge this kind of gap. In summary, the intent of our central government, in the Nelson paragraph, provides direction toward our national development. The concepts are good modulo the effective implementation and the good intention. We need to consider around the next budget whether this idea remains only in the budget speech or can be implemented on the ground.

Sylvia B. Polson