The word “contract” usually brings with it visions of lawyers, reams of convoluted technical text, and the mandatory enforcement of the provisions outlined in all that text. A smart contract, comes with only the third part – the mandatory enforcement. Smart contracts are simply computer codes that facilitate any sort of exchange, whether it is of money, content, property, shares, or anything else of value.
When placed on a blockchain, smart contracts become self-operating computer programs that can automatically execute actions when specific conditions are met. Because they are on the blockchain and can be coded in any way that the programmer wants, these smart contracts are extremely flexible and can implement any sort of a command that is agreed upon, without any possibility of it being hampered or interfered with.
The applications of such a system are virtually (pardon the pun!) limitless. In countries such as India, especially, where tax legislation has become such that tax benefits of companies depend on the compliance of the company’s suppliers, the benefits of smart contracts become absolutely clear.
Under the Goods and Services Tax (GST) system, companies can receive credits from the tax they pay on inputs only if the suppliers of those inputs upload the invoices of supply. That is, the companies are sort of held hostage by their suppliers. What is currently happening is that companies are weeding out the suppliers who are unreliable in filing their invoices. But there’s still a significant delay between the time when the supplier uploads the invoice and the government releases the input tax credit to the company.
Now, apply smart contracts to this process. Suppose the entire process of invoice uploading, applying for input tax credit, and disbursing that credit is put on a smart contract blockchain. The contract can be set to automatically execute the transfer of credits as soon as the invoices are uploaded. That is, the companies will no longer have to apply for credit. As soon as the suppliers upload the invoices for a particular transaction, the smart contract executes and transfers the specific credit amount to the relevant company, without any delay or government intervention coming into play.
Not only can this reduce the compliance burden for the companies in terms of the number of forms they have to fill each time, but it also frees up a lot of their working capital that would otherwise have been locked away due to the delays in disbursals. That’s just one example. The possibilities are limited only by our imagination.
One big reason for the volatility seen in the prices of cryptocurrencies is that they are not yet accepted in most parts of the world as a substitute for currency and so there is no regulation of the market. Greater adoption of cryptocurrencies can fix this by making it a prime focus of governments worldwide to begin regulating them before it’s too late – that is, before a large number of people lose their hard-earned savings. This wider adoption is now starting to take off.
In August 2018, Starbucks, the global coffee chain, announced that it will accept cryptocurrencies as a means of payment. The payments would be made in cryptocurrencies, converted to US dollars, and then used to pay for whatever coffee or snack Starbucks has for sale. As of late 2019, a total of fifty-three global companies accept cryptocurrencies as payment. These include behemoths such as McDonald’s, Subway, Microsoft, PayPal, Wikipedia, and Bloomberg.com. This list is growing by the day.
In early 2019, social media giant Facebook announced that it would soon be issuing its own cryptocurrency, called Libra. Libra’s setup is supposed to be quite different from other cryptocurrencies in that it will run on a “permissioned” network. Transactions will be put on the blockchain only if they are approved by a core group. The implications of this are vast and will be discussed in greater detail later in this book.
These are simply the bigger chains and companies that are getting on the cryptocurrency bandwagon. A large number of smaller companies have already blazed that trail and are doing business using cryptocurrencies either for their transactions or for smart contracts.
According to some reports, there are over 260,000 stores accepting cryptocurrency in Japan, and over 80,000 stores in Europe had already adopted cryptocurrencies in one way or the other by mid-2019.
In 2018, rap star and singer Akon, now known for his immense philanthropic efforts in Africa, announced his ambitious plans to establish a city in Senegal where the economy would run entirely on his own cryptocurrency, dubbed AKoin. As these things usually go, the city has already been nicknamed the “real-life Wakanda” as homage to the fictional and fabulously wealthy African country from the Marvel comics and movies. The implications of this, if the city actually comes to be, are enormous.
Cryptocurrencies and blockchain have already had such an impact on the world that prestigious schools such as the London School of Economics began courses as early as 2018 on the subject. One such course is titled “Cryptocurrency and Disruption”. The website for the course says:
The volatility of cryptocurrencies and the distributed ledger technology underpinning them has led to a global interest in cryptoassets, ICOs and the distribution of digital wealth. Private organisations, individual investors, financial service firms, governments and regulatory bodies worldwide are taking note of this highly disruptive trend. And in such a fast-paced and rapidly-changing environment, it can be difficult to make sense of, and accurately evaluate, cryptocurrencies and their uses.
You’ll also explore how cryptocurrencies and blockchain will shape the future of money, society and industries with your international cohort of professionals. Set against theoretical frameworks from LSE, the knowledge you gain in this course will enable you to critically engage with and assess the causes of things in the cryptoasset world – not only in today’s volatile cryptocurrency market, but for years to come.
In other words, one of the best places in the world to learn economics has launched a course that seeks to do what this book you’re reading is trying to do, and much more!
Excerpted with permission from Cowrie To Crypto: Blockchain and the Future of Money, TCA Sharad Raghavan, Westland.
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