With the proliferation of blockchain tech, banks’ role will gradually go down, say XinFin co-founders

Sainul Abudheen
ICOs need some regulation as there are lots of ponzy scheme, say XinFin co-founders

But in the long term, banks will still be required for investors to encash their cryptocurrencies back to their native currencies

(L-R) XinFin Co-founders Sameer Dharap (VP — Blockchain Applications) and Atul Khekade (Head — Ecosystem Development)

Singapore-registered hybrid blockchain firm XinFin launched its marketplace platform TradeFinex at the 2nd Global Summit on P2P Digital Asset System Summit in Delhi last week. TradeFinex is basically a platform that enables peer-to-peer contracting between financiers, suppliers and beneficiaries, thereby minimising the role played by intermediaries.

The launch came barely days after India’s Finance Ministry termed cryptocurrency a financial scam and cautioned people against investing in it. While XinFin co-founders Sameer Dharap and Atul Khekade are not very hopeful of an immediate recognition of virtual currencies by India, the duo believe that the government will eventually have to jump the bandwagon to catch up with the rest of the world.

e27 sat with Dharap and Khekade on the sidelines of the event to know about the blockchain and cryptocurrency industry.

Edited excerpts:

Do you think India will eventually recognise cryptocurrency and ICOs, maybe, two-three years down the line?

Dharap: I don’t see that happening immediately for certain reasons. There are two different bodies — market regulator SEBI and central bank RBI. At this point in time, the definition of cryptocurrency — whether it is a token, whether it’s a currency, whether it’s an asset or whether it’s a commodity — has not been clearly defined, and hence the associated tax and applicable laws have not been defined.

Also Read: TradeFinex aims to minimise global infra investment deficit using its blockchain-powered P2P financing platform

There is still a decision or a power battle that is going to happen between the RBI and the SEBI, in terms of deciding who is going to govern this. To that extent, we are expecting a little delay. We’ll be happy to be proved wrong, but that’s what we are seeing right now.

The government is looking at cryptocurrencies in a very different angle. They are treating crptocurrencies in a pure speculative means, and until now the government hasn’t come out of this mindset. Secondly, by the demonstration of certain applications where tokens have been used to improve business process efficiency, the government is not going to make it very easy for the companies or the ecosystem to accept cryptocurrencies.

One of the beauties of blockchain is that it removes the need for an intermediary for transactions between two entities. Do you think banks will become redundant with the proliferation of this distributed ledger technology?

Dharap: What we have seen traditionally is that if I take a remittance from the Middle East or the Philippines, there is 100 per cent dominance by banks, but with the advent of various fintech products, this dominance has now fallen below 60 per cent. This has happened predominantly because there are other cheaper alternatives. What this means is that a bank’s share of business is going to go down if they don’t have a competing product or technology to support this.

That said, banking as an industry will still remain core for commerce and finance activities. Banks as an entity have been dominating this space for all these years. However, with peer-to-peer platforms getting implemented and the government recognising this mechanism to do trade and finance, the role of banks may go down gradually.

Khekade: In long term, they will still be required because even if we look at crypto as an economy, people at the end of the day would like to encash back to USD or their native currency. So, to that extent, banks will still be required. There will be another participant called cryptocurrency exchanges. These exchanges will gain prominence because at some point in time, people would like to encash back into their account to pay for their utility bills or various trade and commerce activities. To that extent, these guys will gain momentum.

Given that exchanges will get lot of attention, all the regulatory bodies will have tighter norms on regulations or on exchanges because that’s the first point where our fiat currency gets into the crypto world and the last point where crypto money gets encashed.

As per some report, world’s top central bankers are realising the futility of trying to control cryptocurrencies, and are preparing to join the bandwagon by issuing their own Central Bank Digital Currency. How this is going to affect the existing  cryptocurrencies?

Khekade: Firstly, the reason why bitcoin, Ethereum and all the cryptocurrencies have seen so much traction is that there is no one to control it. It is fairly decentralised and that is the most important point that the central bankers miss out on. Unless they come together and do something independently, it may not get so much traction because every country has its own digital banking/transactions.

You know India has Paytm, the Philippines has something else, and Africa has mPesa. So, all these digital transactions or mechanisms are already there. So, enabling them on blockchain is only effective when all of them come together.

But that’s unlikely as it will be very difficult for all of them to come on a single platform and launch something. This is where cryptocurrencies come into play. They bring all the trustless parties together and still do the transactions.

I think the only way out for the central bank is to regulate the activities. Eventually, these are all systems that are backed by communities and by people who drive them and build applications for them. I think regulation is going to be far better strategy for central bankers than to really jump the bandwagon.

Dharap: If you look at some of these governments, probably India has INR 250,000 crore (US$391.25 billion) of bad debt. So, India is already in fiscal deficit. How then will the launch of a new currency by the government make sense? The there are some write-offs already happening. Are you going to use this currency as another way to raise money? If yes, this is what is happening traditionally. What if it fails? Then we are going to be in even greater debt.

So, till the time existing banks don’t fix their books, this may not be a real utility. Also, if you look countries like Estonia which are very advanced in terms of cryptocurrency technology. They have embraced digital journey way back in 2000. They are still part of European Union and now they want to launch their digital currency and their own tokens. They are part of a consortium which will not allow them. So, collectively, people need to take decisions and move forward.

Some Experts say that cryptocurrencies are inflation-proof as there is only a limited supply. For example, there is a maximum of 21 million bitcoins in the market. Do you really think cryptos are inflation-proof?

Khekade: It was actually designed to be that way. However, what has happened is that it has grown far because it’s run across thousands of nodes. Any kind of upgrade to the network for improving performance has become a big event. Because of all the minors, they have to agree to run the same node. This has kind of exploited a loophole in the reflationary supply of bitcoins.

That said, it’s not really an inflation-proof medium as it was designed to be. There have been several forks on bitcoin network and every fork has added about five to six billion of alternatives. However, if there is a strong consensus between the participants that no more forks or side scenes are going to run on it without adding an additional supply, then that would become a far compelling inflation proof mechanism.

Dharap: If you are looking at token’s value getting appreciating, it means there is going to be inequality in the income distribution. Some of those who do kind of 9 am to 5 pm job and earn bare minimum wages, so that guys are going to lose out in the entire supply chain, while those who are in early investors or in the cryptocurrency are going to make millions out of their investments.

Also Read: Police detain man accused of stealing US$1.3M-worth of bitcoins in China

Now, this will only increase the divide the between the rich and poor. To me, this will be another reason while the cryptocurrency supply may not be inflationary proof. But the underlying ecosystem which still transacts in the local currency that today will still remain inflation-prone.

How is cryptocurrency going to transform the banking industry in India?

Dharap: We at XinFin are already working on a proof of concept with one of the leading private sector banks in India. We are helping them to improve internal business process efficiency using the underlying blockchain technology.

So, now you look at any organisation, there is lot of free reconciliation happening between employee, various functions and outside parties. This means a lot of them communicate with each other in different formats, it could be paper based format, or it could be internet based format where the data is being recited.

This is non-standard communication and information sharing formats causing lots of inefficiencies in the system. It means somebody has to sit down and reconcile and validate the data and then there is a maker checker of a system which adds to inefficiencies, delays and overheads. We have developed a leisure blockchain ledger solution wherein multiple parties can access the same ledger thereby eliminating need of reconciliation.

Khekade: So, traditionally all the banking technology was driven by large IT companies which are not open source but are purely working on a licensing agreement. It becomes the only option for banks to take these cases into account and charge on top of it. That is where blockchain has totally disrupted the game.

Now, you have an entire foolproof transaction system in an open source environment on the blockchain that the banks can use. That’s where the transaction cost go down as well.

What are the factors impacting the value of cryptocurrencies. Does the volatality of bitcoin affect other currencies like Ethereum and Litecoin?

Dharap: There are five factors that can impact value of a cryptocurrency. First itself is that the association and the participation alliance, and the number of exchanges on which your token is listed.

Also Read: This Singapore blockchain startup wants to replace banks; has raised over US$15M in ICO to do so

Recently there was a news that McAfee has tied up with one of the coins and their market cap which was about 2 billion jumped to 4 billion in matter of few hours. So, who is on board and in what capacity they are going to adopt blockchain or the underlying coin matters a lot.

The second factor is the government regulations. The third is the ecosystem participation and the fourth the underlying utility that your token has a problem that gets us solving. And the fifth factor is the pump and dump schemes that are run by traders who are purely speculative in nature. These are the five areas that will determine.

Many companies in Asia are now going the ICO way to raise money? What are your views on this new trend? Do you think ICOs are suspicious?

Dharap: I look at ICO as a very innovative way of raising money. If you look at it rationally, says, from the Indian startups ecosystem perspective, there are people who want to start their own business. They got for angel/VC funding and that’s how they traditionally raised money.

But, for them the avenues has been limited. Now, I look at ICO as a parallel where you are not restricted to raise money from some of the limited angel groups, but it offers a wide opportunity to reach out to global industries and get money to put into their idea. Now, there have been failures in both the areas, even in their e-commerce phase as well as traditional crypto space. It all depends on various due diligence that someone is going to do before investing into a project so over the price of the ICO in the e-commerce or real world ecosystem. The same principle is applied to cryptocurrency.

ICOs need some regulation given the life that there are lot of ponzy schemes. Some companies raise lot of funds and then vanish overnight, so from that point of view, there needs some regulation.

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