Blockchain: A Building Block of India's Future Economy?

Blockchain, one of the buzzwords of today’s tech industry, has the potential to make a big impact on the Indian economy and the future of financial transactions. Blockchain is most frequently associated with Bitcoin, the cryptocurrency which runs on blockchain technology. As home to the world’s third largest startup base, with tech and e-commerce a significant contributor to the number of startups, blockchain could spur economic growth in India’s burgeoning digital economy. An analysis of the most in-demand skills in the first quarter of 2018 by the Upwork Skills Indexrevealed that blockchain was the fastest-growing skill. The National Programme on Technology Enhanced Learning (NPTEL) has launched a free 12-week courseteaching blockchain design, architecture and uses. Most recently, the International Blockchain Congresstook place in Hyderabad between August 3-4 and in Goa on August 5th, in partnership with the Modi Administration’s Strategic Planning (NITI Ayog) department, and the IT and Industry departments of the Telangana and Goa state governments. Despite recent efforts, developments in blockchain technology, skill development and adoption across various industries have been limited. 

 

This is partly due to the association between blockchain technology itself and cryptocurrency, with developments in the latter halted by the Reserve Bank of India’s ban on cryptocurrency exchangesin February this year, prohibiting the use of cryptocurrencies during financial transactions and mandating that, under Indian law, coins must “be made of metal or existing in physical form and stamped by the government.”While the Indian government seeks to accelerate adoption of blockchain technology, with Finance Minister Arun Jaitley announcing in his February 2018 budget speech that “the government will explore use of blockchain technology proactively for ushering in the digital economy,” cryptocurrency is another matter. In the same speech, Jaitley stated that the Indian government “does not consider cryptocurrencies as legal tender or coin and will take all measures to eliminate use of these cryptoassets in financing illegitimate activities, or as part of the payment system.” 

 

Therefore, in July, the Supreme Court voted to uphold the RBI’s ban, citing difficulties associated with defining cryptocurrency as a medium for payment and exchange or a commodity itself, or in pricing risk. Recent volatility in the cryptocurrency market has compounded skepticism regarding the use of cryptocurrencies, with the value of Bitcoin falling by 70 percentfrom the almost-$20,000 it reached in late 2017. Meanwhile, a finance ministry panel is still formulating a system of regulations regarding cryptocurrency beyond the RBI’s blanket use, with regulations anticipated for release by the end of 2018. The delay in implementing regulations is due to the ministry’s desire to separate blockchain (a digital public ledger) and cryptocurrency. Stripped of facilitating cryptocurrency exchanges, blockchain is essentially a decentralized book-keeping system in the cloud which cannot be forged or reversed, and which is accessible to anyone. 

 

Blockchain technology has been particularly hailed as holding the potential to enhance the efficiency and reliability of cross-country financial transactions such as remittances. India is the world’s largest recipient of remittances (transfers of money by foreign workers to individuals in their home country), with the World Bank estimating that it received $69 billionin remittances in the 2017 financial year. While remittances to India constitute just 2 percent of national GDP, there is significant variation in the impact of remittance payments to households based on state, with 36.3 percentof Kerala’s net domestic product made up by such payments, according to World Bank estimates. Despite the importance of remittances to household consumption in India, under the current system, inbound remittance payments to South Asia cost 5.2 percentof each transaction, higher than the target of 3 percentunder the Sustainable Development Goals. Remittance payments can also take between three and five days to reach their recipient, leaving them vulnerable to changes in the exchange rate. The use of blockchain could make such transactions faster and cheaper; for this reason, seven private banksin India thus far (Axis Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, RBL Bank, South India Bank and Yes Bank) have adopted blockchain technology to track trade documents digitally, and IndusInd Bankand Yes Bankhave partnered with blockchain enterprises to deliver cross-border payments. 

 

Other applications of blockchain technology have also been adopted in India, with the state government of Andhra Pradesh partnering with ChromaWay, a Swedish startup, to digitize its land registry system. Andhra Pradesh’s neighbor Telangana is also employing the same technology to secure its land records and revenue, as use of blockchain technology can enable more advanced tracking, analysis and automation with data. 

 

It is evident that blockchain technology has uses beyond its function as a ledger for cryptocurrency, although it is unclear whether the Indian government will maintain its ban on the latter’s use, or whether it is a temporarily rigid placeholder for the pending finance ministry’s regulations. In order to develop its digital economy and capitalize on the potential for growth that adoption of blockchain technology would allow, the Indian government must adopt a clear and pragmatic approach, both towards blockchain and cryptocurrency.