NORTHAMPTON: Financial innovation in payment systems has led to the development of innovative payment systems and digital currencies. Easypaisa launched in 2009 has become Pakistan’s largest mobile banking service with a vast network of 70,000 merchants located across the country. Worldwide digital currencies have gathered a lot of attention, especially since the birth of Bitcoin.
The amount of importance attached to virtual currencies can be judged from the fact that in a recent conference organised at the Bank of England, IMF Chief Christine Lagarde shared a rosy vision of the future of crypto currencies.
“It may not be wise to dismiss virtual currencies,” she said, adding, “instead; citizens may one day prefer digital currencies.” Bitcoin has followed an exponential growth since 2017 and has recently touched highs with its value climbing above $7,000, up 600% this year. This came after news that a major exchange operator, CME, will launch Bitcoin futures, which has buttressed the notion that Wall Street is taking the crypto currency seriously.
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However, there have been concerns raised over time by eminent investment bankers issuing caveats to investors that the accelerated rise in its value is nothing more than a bubble. An important question is, what is Bitcoin and how does it work?
Bitcoins are digital currencies that are not printed, are increasingly being used by businesses and people, and are decentralised, which means that no institution controls it.
It was created by a software developer Satoshi Nakamoto who developed an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any authority, transferable electronically and with very low transaction fees. The fact that it can be transferred in no time is a hugely important facet of Bitcoins. So how do Bitcoins actually work?
An example would be illustrative at this point. Suppose that Ali sends Bitcoins to Harris, the transaction will have three pieces of information. The input which records the address which was used to send Bitcoins to Ali in the first place, an amount (amount of Bitcoins sent by Ali to Harris) and lastly, an output which is Harris’s address. All these transactions which take place are stored in a vast public ledger called the blockchain.
Blockchain is a continuously growing list of records, called blocks which are linked and secured using cryptography. Each block is linked to the previous block, has a timestamp and a transaction data. It can be viewed as a set of code that delivers data in blocks (defined quantities) that are then stored in a sequence called the blockchain on a distributed set of global computers.
Emerging markets and blockchain
Financial inclusion is a key agenda for many developing countries and emerging markets alike. With an estimated two billion adults remaining unbanked, blockchain and digital currencies have an important role to play. In the case of Pakistan, a meagre 13% of the adults aged 15 years or over have a bank account. Policymakers, academics and investment bankers are of the view that the growing use of the internet by people residing in emerging markets would enable people to use a cheaper system with a transparent means of recording transactions.
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Unlike banks, no physical branch presence is needed for a blockchain to work and no complex infrastructure is required for the system to run. This saves on costs that banks and telecom companies pass on to users including other charges when using bank accounts or performing mobile transactions.
Blockchain technology and Bitcoin can play a crucial role in Pakistan in bringing millions of people into a formal financial structure. Pakistan’s National Financial Inclusion Strategy should pay increased focus on this.
The writer is a doctoral candidate at The Bartlett, UCL
Published in The Express Tribune, November 20th, 2017.
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