Historically, barter systems were the only way you could transact. In the barter system, transactions happened face-to-face, and mostly since it was the exchange of physical goods (or gold for goods), and the respective physical assets/items that were exchanged could be instantly checked and verified.
In recent times, the growth of the Internet and the proliferation of digital transactions have exposed many limitations these exchange systems in the borderless, electronic world. The limitations mainly included high expenses, time delays and therefore high expenses, and security risks because you had to depend on the intermediary to do it the right way for you.
The ideals of being able to securely transfer money or buy something over a digital network led to the concept of a digital currency, enabling the concept of cash or cash equivalent to be used over an ‘online network’ called Internet. And then there were born payment systems, credit card service providers, and mobile/digital wallets; and these stood guarantee for transactions in some way because of the algorithms they implemented to encode and decode the data travelling over the online network. For example, in today’s world credit card issuers are examples of a third-party standing in for a buyer, guaranteeing to the seller that the buyer’s funds are good.
The latest entrant into the digital currency bandwagon is the Bitcoin. Bitcoin is virtual decentralized currency. Bitcoin was published in a research paper in October 2008 and later implemented as open source in Jan 2009. Decentralized means that the currency trades directly from person-to-person compared to current electronic transfers where a bank or a clearinghouse acts as a middleman.
Without going into the technical details of how Bitcoin works, we want to explore and detail out whether Bitcoin transactions are suitable for Peer-to-Peer (P2P) lending transactions on a P2P platform based in India. But before that, let us explore a little more about Bitcoin, and what blockchain means; a term used almost always when Bitcoin is referred.
History of Bitcoin
According to legend, Satoshi Nakamoto began working on the Bitcoin concept in 2007. While he is on record as living in Japan, it is speculated that Nakamoto may be a collective pseudonym for more than one person. Get more details here – http://historyofbitcoin.org/
Bitcoin is a digital asset and a payment system. The system is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account.
Bitcoins are transacted using “wallet” – the name for the public digital files where the respective parties, or wallet owners, keep private encryption keys to prove ownership of the wallet. Yes, Bitcoin is highly technical in its nature. It does not expect you to be software pro, but you need to be very tech savvy to use Bitcoin. Each computer verifying the transaction adds its own sequence of numbers to the block chain. As transactions increase, the computing power necessary to complete each transaction also increases due to the longer block chain and the greater complexity of the algorithms required completing each operation.
Where do Bitcoins exist?
Bitcoins do not exist anywhere. That means you cannot point them to a physical object or even a digital file on your hard drive. Instead there are records of transactions between different addresses. Every transaction that ever took place is stored in a vast public ledger, which is called as blockchain. Ownership of bitcoins implies that a user can spend bitcoins associated with a specific address. To do so, a payer must digitally sign the transaction using the corresponding private key. The network verifies the signature using public key. The loss of private key means the corresponding bitcoins are unusable and lost.
Just because Bitcoin is a peer-to-peer system and the transactions take place between users directly without an intermediary doesn’t mean it can be used for peer-to-peer lending. Here are some reasons –
Lack of Awareness and Understanding – Many people are still unaware of digital currencies and Bitcoin. Networking is a must to spread the word on Bitcoin. There is no safety net or perfect way to protect your bitcoins from human error (passwords), technical glitches (hard drive failures, malware), or fiduciary fraud.
Risk and Volatility – Bitcoin has volatility mainly due to the fact that there is a limited amount of coins and the demand for them increases by each passing day. However, it is expected that the volatility will decrease as more time goes on. Bitcoin pricing can be unpredictable. So, placing personal or business accounts such as savings, investment, or retirement fund is not recommended for use with the bitcoin network. Based on a report, bitcoins have been 7.5 times as volatile as gold, and more than eight times as volatile as the S&P 500 over the last three years.
Regulation – While basic guidelines are currently in place, law enforcement agencies could decide that bitcoins are a “giant money laundering scheme,” and enact more stringent regulations that would diminish the currency’s value. Or these reasons could just make it a non-starter. Bitcoin payments are irreversible for any transaction. Refunds can only be issued by the person receiving the funds. Make sure you use this network with trustworthy businesses or individuals.
Limited Scaling – The design of the bitcoin and blockchain limits the speed and number of transactions processed, making it unlikely that bitcoins will replace conventional credit card transactions or other digital/wallet transactions. Unconfirmed transactions are not secure within the initial 10-minute window of the transaction process. In fact, during this timeframe, transactions may be considered authentic, but are still reversible.
Tech savvy – To use Bitcoin payments you must be fairly technology savvy. You don’t have to be a tech pro, but some technology know-how will help you immensely if using this payment method. It’s not as simple as using traditional payment methods or the current digital/wallet payment systems (which are still ‘difficult to use’ for silvers), and you will have to use online services to help you take care and manage this digital currency.
Security issues –Bitcoin transactions help keep your customers/clients personal details safe, so there is no chance of stolen credit card numbers. But, there is currently no way to completely stop online criminals from hacking into your Bitcoin wallet and stealing your funds.
Someone likened investments into Bitcoin as purchasing a lottery ticket, which is “It’s either zero or it’s worth a truly outstanding amount of money.” Someone else said, “The truth is, bitcoiners aren’t just a bunch of nerds wanting to buy drugs online – out there is a vibrant international community of consumers who have realized the advantages of this new kind of money, and it’s growing day by day.”
Bitcoin in a sense is the perfect form of money for the Internet because it is fast, secure, and borderless. Whereas people take P2P loans for their immediate needs and mostly need cash for various expenses/payments, or to make some payments through their bank accounts or do a debt consolidation.
While it is difficult to come to a hard conclusion about the future of Bitcoin, it is very clear from above facts that Bitcoin cannot be used for Peer-to-Peer lending in India. Bitcoin remains unpredictable. Bitcoin is still an experimental digital currency that is in real-time development and carries a high asset risk to the user. The reason that it is highly volatile is good enough to say it is not suitable for P2P lending. Plus, the fact that the users have to necessarily use online services to take care and manage this digital currency makes it really unviable, at least in India where most online e-commerce transactions are still ‘Cash-on-Delivery’.
To make the digital currency more secure and accessible, new features, tools, and services are currently being developed. This is because Bitcoin is just starting out, and it needs to work out its problems just like how any currency in its beginning stage would need to.