Think of 100 computer professionals sitting in separate cubicles in a hall. They are solving a Sudoku puzzle with 50 rows and 50 columns. The one who solves the puzzle first shouts that he has solved it and shares his solution with all the participants. The others check his solution and, if found correct, confirm his ‘win’ and gave him a bitcoin as a prize. Then all the 100 participants give their suggestions for the next stage of the Sudoku, which would now be made with, say, 70 rows and 70 columns. A master computer mixes up these suggestions and makes a new Sudoku puzzle, The same 100 participants again try to solve this puzzle.
Once again, whoever solves the new puzzle is given a bitcoin by all the participants. These 100 participants use this bitcoin to trade amongst themselves. One participant can sell and another can buy, say, 10 apples for one bitcoin. This trade is possible because both participants recognise the bitcoin as their own currency. It is like children trading with marbles as a currency. One can sell and another can buy a postage stamp for two marbles, for example.
Why the 'crypto'
This cryptocurrency bitcoin is only a number generated by the master computer. Whoever has the number is the owner of the bitcoin. This number is encrypted, hence the name cryptocurrency.
It would be obvious that the acceptability of such a cryptocurrency, say bitcoin, would be only among the 100 participants in the competition. Let us say, 200 computer professionals were sitting in another hall nearby and are also solving their own Sudoku puzzles; and they give away their own cryptocurrency as a prize, by the name, say, Twocoin.
The 200 professionals sitting in the second hall may not recognise the solution of the Sudoku by the 100 professionals in the first hall, but may only recognise the solution made by the 200 participants sitting with them in the second hall. In this way, more the numbers of halls, more the numbers of cryptocurrencies. if you want, you too can assemble 100 or 1,000 participants in a hall or a computer network and start your own cryptocurrency. No wonder around 1,500 types of cryptocurrencies are in existence in the world today. The acceptability of these currencies depends entirely on the number of participants who recognise that currency.
Now, if a currency is accepted by sufficiently large numbers of players, then any individual owner is assured of being able to sell his Bitcoins and buy, say, a car. In such a situation, the banks also recognise these currencies. Bitcoin is the most prominent, and perhaps, the most widely accepted cryptocurrency toady. Many banks across the world accept these currencies though, thankfully, the Reserve Bank of India has not allowed Indian banks to accept them as valid means of payment.
Decentralised digital currency
The original idea behind starting cryptocurrencies was that the value of the currencies issued by the governments was controlled by their central banks. You may have worked hard to earn the Rs one lakh deposited in a bank. But the government could have increased the inflation and real value of your deposit could be reduced to, say, Rs 90,000. Cryptocurrency was made to keep the value of one’s money outside the control of the government.
Indeed, it is true that the value of cryptocurrency is not in the hands of the central banks. However, the computers in which the cryptocurrencies are made and stored are located in some country and are under the control of that government. Most cryptocurrency enthusiasts are located in China. Thus, the Chinese government can therefore, seize the computers and the value of the currency will evaporate in a few minutes.
The intricacy of the Sudoku puzzles increases with every puzzle that is solved. We may now have a Sudoku puzzle of 2,000 lines and 2,000 rows. It would not be possible to solve such puzzles manually. Therefore, Bitcoin enthusiasts have established ‘factories’ to solve these puzzles. Large computers are installed in these factories that try to solve the most complicated Sudoku puzzles set by the master computer. They consume huge amounts of electricity in the process.
These ‘businesspersons’ invest in computers and electricity and get returns in the bitcoins that they win. The manufacture of bitcoins uses electricity, just as the Reserve Bank of India uses paper and ink to print notes. The first problem in cryptocurrencies, therefore, is the huge use of electricity—which is a burden on our environment. We are using electricity to solve puzzles that have no tangible use.
The cryptocurrency is only a number, though a very complicated one. Incidents, like when an owner’s computer crashed and the cryptocurrency number stored in it was lost forever, have occurred. The bitcoin was extinguished and the owner suffered a loss akin to losing a diamond on the street. Hackers have also entered the owner’s computer and stolen the number and become the owner of the bitcoin.
Most importantly, today, criminals are seeking payments in cryptocurrencies. Recently, the computers of the United States’ Colonial Oil Company were hacked. The hackers introduced a malware in the computer that only they could remove. The company had to pay $5 million dollars or about Rs 40 crore in ransom to keep its pipelines running. Reportedly, the US Government has recovered one-half of the ransom. It is not clear how the recovery was made. Be that as it may, in the main, the ransom paid in cryptocurrency does not leave a visible trail of bank transactions or even the numbers printed on the currency notes that could be tracked by the police. It is believed that crime is increasing across the world because it is become easier to receive the ransom anonymously in cryptocurrencies.
These currencies are harmful for the environment because they consume resources like computers and electricity and do not produce tangible goods that could lead to social welfare. They are harmful for the society because they are leading to increase in crime. Lastly, their value is uncertain and can disappear anytime. Therefore, governments across the world should ban the trade in cryptocurrencies. If banks do not recognise the currencies, then the owners would not be able to use that money for any useful purpose in the economy and this harmful game will die a natural death.
The writer is former Professor of Economics, IIM Bengaluru