There is a problem with making declarations without giving them due thought. This discounts nuances and disregards vital facts. Lately there have been many voices that have repeated the popular stance that the blockchain is ‘good’ but cryptocurrencies are ‘bad’. There is a reason why cryptocurrencies get their bad reputation; it is largely an unregulated space where anything goes. Pump and dump, fake crypto, vanishing promoters. You name it, crypto has had a scam related to it.
In an excellent article on Bitcoin.com Kai Sedgwick pointed out that US$ 1.36 bln has already been stolen by cryptocurrency scammers in the first 59 days of 2018. He took into account the first two months of 2018 and estimated that cryptocurrency scams cost approximately USD 9.1 mln a day.
On the other hand blockchain has evolved an angelic reputation. It is being adopted by governments, private companies, charities, musicians, etc. The potential use cases of blockchains are so numerous that it has become the seasoning of the business world. Just add a dash of blockchain and you are future ready.
The Siamese Twins
Is it really all that simple? Would there have been a blockchain without cryptocurrency? “Public blockchain cannot live without cryptocurrency and mining,” Oleg Khovayko, CTO at Emercoin, argues. “Otherwise - how to make incentives to pools of witness (miners) to participate in a mining competition and vote for blocks in chain?”
Blockchain and crypto are joined at the hip. While blockchain is the technology that is crucial for many cryptocurrencies, the tokens or units of currencies play an important role as they enable the realisation of the transfer of value in the blockchain. In essence, crypto tokens, coins or currencies are the doorways into the blockchain. Without cryptocurrencies we cannot have a decentralised blockchain system, and without a blockchain, we can’t really have many of the cryptocurrencies that we use today. In the simplest possible terms, a currency is an entry in a ledger that cannot be changed unless certain conditions are met.
The blockchain just happens to be a decentralised ledger on which these currencies rest. Essentially, cryptocurrencies are a tool, and it is what you do with them and how you use them or misuse them that makes all the difference. “Saying that crypto is bad and blockchain is good is completely subjective,” agrees Kumar Gaurav, Founder of Cashaa. “Proper regulations might advantage the cryptocurrency enterprise and the blockchain community.”
He adds, “Blockchain and cryptocurrencies are incomparable. Blockchain is the basis of cryptocurrencies; if the blockchain protocol is valuable, then the tokens based on it will be valuable. Blockchain is a technology that has formed the basis of smart contracts, insurance claims processing, cross-border remittances and by providing robustness and incredible security it has earned respect.”
Cryptocurrencies Have a Purpose
Money is essentially a medium of exchange which is facilitated by banknotes or coins or both. Cryptocurrencies can act like the money that we are familiar with but they can also be used for other purposes. If we look at some currencies like Bitcoin or Litecoin, they are of a transactional nature. They act as an alternative to circulating government money, or at least they were envisioned as such.
Then we have cryptocurrencies that are a platform in themselves. These currencies facilitate the launch of other tokens and can be used to implement smart contracts. Ethereum is a good example of such a cryptocurrency. There are several tokens that have already been launched on Ethereum. Finally, we have utility-based cryptocurrencies, and these are useful for a particular purpose. As an example, take Ripple which can be used to transfer money between banks.
Cryptocurrencies have a definite role and purpose, and they are still evolving. One of the primary uses of tokens has been fundraising. Balaji S. Srinivasan, CEO of Earn.com, has written an exhaustive note on the uses of tokens, and here is an excerpt from that note, “Because tokens have a price, they can be issued and sold en masse at the inception of a new protocol to fund its development, similar to the way startups have used Kickstarter to fund product development. The money is typically received in digital currency form and goes to the organisation issuing the tokens, which can be a traditional company or an open-source project funded entirely through a blockchain.”
He elaborates further, “In the same way that boosting sales is an alternative to raising money, token launches can be an alternative to traditional equity-based financings and can provide a way to fund previously unfundable shared infrastructure, like open-source.”
Governments Get the Jitters
Recent debates on cryptocurrencies vs. blockchains seem to be the source of much news media speculation. The Indian finance minister Arun Jaitley, while delivering his 2018 Union Budget Speech, said, “The Government will take all measures to eliminate the use of crypto-assets in financing illegitimate activities. The Government will also explore the use of blockchain technology for ushering in digital economy.” South Korea, too, has taken measures that would bring in some control over crypto assets. CNBC reported that the government would now allow cryptocurrency trade from ‘real name’ bank accounts.
Meanwhile, France and Germany have also taken a strict stance on cryptocurrencies. The heads of Banque De France, Villeroy de Galhau, and Bundesbank, Jens Weidmann, have collectively called for a ‘crackdown’ on Bitcoin and other cryptocurrencies, according to the Telegraph. In a letter penned by them, which the newspaper reported, they say, “Tokens and their potential for financial innovation should not be left to those who make the worst use of them. France and Germany have already taken concrete regulatory measures regarding 'virtual currencies' in the field of anti-money laundering and counter-terrorism financing and the European Union is working in the same direction”.
They added, “However, an efficient pushback against the use of “tokens” and “virtual currencies” for the purpose of criminal activities will require a coordinated international effort.” The fact that global governments are jittery about cryptocurrencies is hardly surprising. The volatility of some of these currencies and the fact that these tokens could be used for less than legitimate purposes are valid concerns.
We Need to Be Reasonable
All technologies and tools have the potential to do good. The crypto economy is in a state of flux at the moment and we are in the initial days of it. There are some that favour no regulation and letting the industry take an organic route to its evolution. There are others that favour the idea of some control to protect investor interests.
It will pay to find reasonable middle ground where governments do not shut down innovation that is needed to realise the full potential of blockchain technology and we also need some laws that protect vulnerable investors who are just discovering cryptocurrencies, especially after the rise in valuations of many coins. The only question is whether people will bow down to reason.
Everyone has a soft spot for the bad boy, the rebel. We find them so attractive, in part, because they bend and break the rules, while seemingly always getting the girl. But what happens when one Siamese twin is a rebel and the other a saint?
Eight countries around the world have banned the use of cryptocurrencies completely. This is entirely understandable given that many are keen to enforce tight controls on any exchange of value, with money laundering widespread and government coffers under severe strain.
But without the bad boy allure of cryptocurrencies, how are their citizens supposed to enter the world of blockchain research and development, to spur on economic growth?
For all their bad reputation, cryptocurrencies are inextricably linked to blockchain technologies. If governments want to embrace the blockchain revolution, they must allow these twins to work together- which is the only true way they can work at all.
llustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]