Cryptocurrency and its Implications

This is S. Pal Singh, saying a very good evening and thank you all for joining us at this interactive session of this month. As most of you may be aware, we have so far conducted a number of webinars. By now we have conducted about 129 webinars and a number of interactive sessions, and in an interactive session normally there's one speaker and then the section is left open, but we understood and understand that the delegates can ask questions. While I extend warm and hearty welcome to all of you, as you might be knowing, the next speaker today is Shri Karnal Singh, who is an ex Executive Director, ED, of the Enforcement Directorate. I'm sure that all of you who have come to join us will benefit by the deliberation.

A few words about NISSMAT. This institute was established in the year 1990, started with training of private security courses, and subsequently we upgraded ourselves to the fire safety courses also. Now NISSMAT aspires to become the foremost corporate training institute and a think tank organization in the field of security, safety and applied management. We have now got four wings. First is the NISSMAT Forum, to organize webinars, seminars, conferences, interactive sessions, debates, declaration, awards, etc. Then is the NISSMAT Academy, to conduct virtual training programs, assessment, certification, etc. Then it's for the enterprise, to undertake audits and verifications and have global alliances. We have a plan to establish this foundation also, to undertake welfare and social work for the society at large, particularly with reference to the security and safety matters.

A few words about the chairman of NISSMAT. Captain Pawanjit took voluntary retirement from Parachute Regiment of Indian Army at a very young age, and he joined the business, and it was an unknown area for him, but he has made a great success for himself here. A very warm person, he brings out the best in other people who are with him. He almost seems to have an internal sense to find out the silver lining in a situation. Has the courage of conviction, a thoughtful and inspiring leader. He has created a business group under the name of Ahluwalia Holding Company, which has offices at multiple locations in India. With the continuous hard work and attention attitude, he has grown and evolved himself to receive a preservation of prominence in the business world. The first president and former chairman of Council of International Investigations, USA, and is an awardee of Malcolm Thompson Award and Kutely Award by the Council of International Investigation. He shall moderate this session.

I will say a few words and introduce the subjects to the delegates. Cryptocurrency is an outcome of continued scientific efforts to make or to create financial transactions without the intervention of the third party. Third party means banking institutions or financial institutions. It's a direct, without the involvement, without the intervention of third party, a digital currency which uses blockchain technology to record transaction. This makes cryptocurrency secure, more so because blockchain technology means a digital record of transaction which uses cryptography. Since it uses cryptography, the network and the computers which are built in this data, for this data, they're absolutely anonymous, except the person who invests.

In India, cryptocurrency is not presently accepted by the Reserve Bank. A few years back, somewhere I think in 2016, the consideration was given by the RBI, but they imposed a ban on cryptocurrency. In the recent past, a high level committee has been set up for formulation of regulations on cryptocurrency. According to Reserve Bank of India, the flow of cryptocurrency may impose a threat to macroeconomics and financial stability, but probably with the regulatory framework it will be accepted. It is yet under consideration. There are disadvantages, of course, of using cryptocurrency, as well as their advantages also. The cost of excessive use of electricity, other resources, fast decline, etc., are some of the disadvantages.

The Government of India now proposes to pass an enactment with definite rules on the cryptocurrency. There may not be total ban on cryptocurrency, but there are likely to be regulation to create an official digital currency under the overall can of the RBI. Proposal is probably that a separate agency than the RBI may be set up. Thus a middle path may be adopted by the Government of India, and this middle path would mean the importance of cryptocurrency will be realized, accepted, but it will create certain formulations, certain compliances, which have to be complied with by the users of cryptocurrency.

In the recent past you may have seen some papers have also reported about President Biden's initiative. He is going to sign an order on cryptocurrency shortly. This is being done as a matter of concern which has been raised about Russia's using cryptocurrency. Russia is using cryptocurrency to avoid the impact of sanctions imposed by USA, et cetera, on the end of Ukraine. The US is likely to adopt also a middle path, that is, making cryptocurrency legal but with certain regulations to be complied by the users. It is yet to be seen whether in India cryptocurrency is ultimately kept under the control of the new regulatory body, our RBI, or some other tribal compliances are laid down for voluntary adherence. This is yet to be known. Meanwhile, we have a speaker here who was in the Enforcement Directorate, will know very well as to what can be complications, what can be problems of having a total cryptocurrency as an anonymous sort of currency floating about without any regulations. With these words, I'd like to pass on this session to Mr. Pawanjit Ahluwalia, who will moderate the session. Thank you very much, Mr. Ahluwalia, please take over.

Thank you very much. Firstly, I'd like to acknowledge the presence of participants today from India, UAE and Singapore. We are currently streaming live on YouTube and on Zoom. The event today has been sponsored by Premier Consulting and Investigations Private Limited, Premier Shield Private Limited, India Skills, Tax Calls and JMD Cargo. During the course of the discussions today and the webinar, I'd request you all to keep yourself muted, switch off your cell phone so that there's no disturbance, and have those side distractions. And if you let your video remain on, that would be the best. We'd like to see you, and if you have any questions to ask, please send me a message on the chat.

With this, I would like to take the opportunity of introducing our president, Mr. S. Pal Singh. Mr. S. Pal Singh is a masters in English literature, and he has served the Government of India in very senior police assignments almost all over the country. He was the person who raised the Rapid Action Force and was also its first chief. He also raised the Internal Security Academy at Mount Abu in the state of Rajasthan. During his service he has been decorated with the President's Police Medal for Distinguished Service, the Indian Police Medal for Meritorious Service, the Special Duty Medal with bar, a Sena Medal and a number of other commendations and rewards. Post-retirement he has worked as a consultant with Tesco and was assigned the responsibility to streamline the security and vigilance matters in their coal field division. He has been the chairman of the technical committee of Quality Council of India, which formulated the standards of star rating of private security companies. He was involved with the development of curriculum for private security guards training under the Security Sector and Skill Development Council. He was the head of the committee that designed and worked out national occupation standards for the training of private security guards, and the qualification pack and national occupation standards for firefighters. In the year 2009, the President of India awarded him with the Security Personality of the Year Award in a glittering ceremony at the Vigyan Bhawan. He is an advisor to the Asian Professional Security Association and the honorary director general to the Central Association of Private Security Industry and the Association of Private Detectives and Investigators in India. Mr. S. Pal's face is well known in India as a dynamic security professional, and he is frequently called upon to share his views on various subjects connected to homeland security on national news channels.

Now it is my distinct privilege to introduce the speaker of the day, Mr. Karnal Singh. The speaker is a graduate in electrical engineering from the Delhi College of Engineering. He's a post graduate in computer sciences from IIT Kanpur. He is an MBA from FMS in Delhi. He is an LLB from the Salgaocar Law College of Goa. He holds a diploma in information technology from the Asian School of Cyber Laws in Pune. During his service in the police, he has been the recipient of the Meritorious Police Medal for Meritorious Service and the President's Police Medal for Distinguished Service. He has been an extraordinary sports person. He was the best athlete in the National Police Academy, and was adjudged the best student of the Delhi College of Engineering and also the best sportsman and the best athlete in the Delhi College of Engineering when he was there. He has written a book titled The Batla House: An Encounter That Shook the Nation.

Some of the major cases that Shri Karnal Singh has supervised: one is the Vijay Mallya case when he was posted in the Enforcement Directorate. Around 96, 97, there were a series of blasts, about 42 in all, that rocked Delhi, Haryana, UP and Punjab. He dedicated the work towards the investigation of these cases, analyzed the evidences and cracked the case. As a result, 22 modules of Lashkar-e-Taiba were arrested from all over India. In 2005, two bomb blasts took place in Liberty and Satyam cinemas in Delhi. The cases were solved within a short span of nine days with the arrest of the militants of the Babbar Khalsa International. During the process, Jagtar Singh Hawara and Paramjit Singh Bheora, who had been involved with the killing of the then Chief Minister of Punjab, Shri Beant Singh, and had escaped from the Burail Jail, were also apprehended. The interrogation revealed the identity of the whole gang, and as a result many Babbar Khalsa terrorists were arrested. In 2005, in Sarojini Nagar, Paharganj and Govindpuri, Delhi, there were three blasts resulting in the death of 67 persons and injuries to more than 200. The cases were cracked within a short span of time with the arrest of LET militants. Serial blasts took place in Delhi in 2008. There were also series of explosions in Gujarat, Rajasthan, UP and Karnataka. The cases were investigated expeditiously, resulting into an encounter with the terrorists of the Indian Mujahideen at Batla House. Subsequently a number of terrorists were arrested, and hence the book that he wrote.

He also handled the investigation of the tragedy, the fire that broke out in the Uphaar Cinema that killed 59 persons. He's handled the investigation of the dropship death cases. He arrested Ramesh Sharma, who was operating in Delhi on behalf of Dawood and Abu Salem. Babloo Srivastava's gang had identified seven businessmen of Delhi for kidnapping. The gang was arrested before it could strike. Sher Singh Rana, the main accused in the Phoolan Devi case, had escaped from Tihar Jail. He escaped to Afghanistan and Bangladesh, but would visit India for short spans to give interviews to media personnel. He was arrested after his painstaking investigations. As the Joint Commissioner of Police in Delhi, he was able to track down the dreaded criminals, resulting in the neutralization of 49 hardcore criminals and arrests of more than 225 gangsters.

His ability on computers led him to computerize the following areas in Delhi Police: the crime criminal system, personal information system, the payrolling system of Delhi Police, the licensing branch and quarter allotment systems. He also computerized the recruitment of constables in Delhi Police. He established cyber labs in Delhi under the Delhi Police. He handled the cyber highway project that connects 241 units of Delhi Police and also provides a video conferencing facility for them. He introduced technology in the Enforcement Directorate with the establishment of six cyber labs across the country. Ladies and gentlemen, I present to you a very, very accomplished person, Mr. Karnal Singh.

Thank you very much. I am really thankful to my senior colleague, Shri S. Pal Singh, the President of NISSMAT. He gave me an opportunity to speak and to interact with my colleagues from different walks of life. The virtual currency, which is the topic of today, creates two narratives in the minds of people and even in the minds of government. The narrative is that it is a new technology, it is a future of the technology to be introduced, and that is all, when we talk of the people who are in favor of bitcoins or virtual currencies. They talk on the contrary, the intelligence and investigating agencies, they talk about that it can be a tool in the hands of criminals and terrorists in hiding money, doing the money laundering and financing. So we have to see what is it, and how it can be regulated, or it can be controlled, or what problems it creates.

If you talk of currency and its timeline, we all know that to begin with it was a barter system, which was replaced by commodity action like gold or salt. Then came the coins currency, the metallic currency. Then came the paper currency, like rupees. Thereafter we have the credit cards, debit cards, plastic currency. We have e-money also. E-money means through the internet we transfer this money. But in all these transactions, the transactions are through the central agencies, except the barter system or commodity system or the cash transactions. In all other cases, when we make transactions, there is a bank there, the financial institutions, which keeps the ledger. So ledger is centralized. Whether we have money or we do not have money, it is with the bank's record. So bank has to check whether, when we are spending the money, even with the plastic money or with the check, they first check whether we have money or not in the bank, and if it has, then they check other things — proper signature is there, other things are there — and then the money is transferred. So there is a centralized control on these transactions. It is not cash. Like, if you have a cash with you, you give to somebody immediately. Even if you issue the check, whether the check will bounce or check will work, it all depends upon the rules and regulations and that central agency.

So in 1980s the scientists started thinking: is it possible to have financial transactions without the central control of the banks? So they were looking for it, and there were various types of currency games. David Chaum's DigiCash, but which failed. Then Wei Dai's B-money, it also failed. Then Adam Back's Hashcash, it also failed. Then on 31st October 2008, one person known as Nakamoto — who is he, nobody knows, it is a pseudonym — he wrote an article, and in that article he bring out how it is possible, and he brought the technology which is known as a blockchain technology. With the help of that, he said it is possible that there is no centralized control; there is a distributed ledger. That means everybody who is on the net for that particular currency transactions, they can look who is transacting money to whom, who is transferring money to whom. And the question will come later: how do we know who is who? That will be the question. But then the people started working on it, Nakamoto also was helping, and the first bitcoin came in 2009. This is the first precursor of the cryptocurrency. Thereafter nobody knows where Nakamoto has gone, who was he, whether he was an organization, or he was some US scientist group or USSR scientist group. Nobody knows about him, and he never claimed, the person never claimed, though he did such a great work.

Now what is cryptocurrency? And they say that cryptocurrency is backed by the blockchain technology. To understand that, I'll take you to a website. I'll just put it. Are you able to see it? Yes. See, first we have to understand how to calculate the hash. When we say this SHA-256 hash — on the top of it it is written — it is secure hash algorithm. 256 means whatever is the input, that will be converted into 256 bits. So we have 256 bits whatever is the input available. So for example, let's take, we can put any input, and you see the hash is below. If we write one, for example, you can see, changing it, the hash below, now it is starting from a665a. For example, if we put a dot, it becomes 581380. So basic idea is, if we have a letter, for example, maybe of thousands of words, and we take a hash, hash will be of the same length. But even if you change a comma or full stop, this hash will change. So the concept is, we send whatever is our letter, whatever is our text, along with the hash, and if somebody changes anything — let's take, if we say "what are you doing," so we have 3f9a3c, and somebody put a dot, hash has changed totally. It is only when dot is not there, hash will come back to the same. So if in a big file somebody changes comma or full stop, this digest or hash value will change. So that is first we have to understand: there are mechanism to create hash value of anything, and this is very, very useful tool.

Now, when we say it is a blockchain technology, so we have to understand what is a block. Now block is like, we can put a data here in the center of this. We can put in a data. Data could be the transactions, like for example A transferred money to B. These are the transactions. Which transactions will be? When a person is making transactions, they will all be recorded in the data. Generally what happens is, when we are making transactions, transactions of 10 minutes are clubbed together. So all over the world there are various nodes connected to the internet which are using the protocol of bitcoin, for example. Now when the transactions are there, these are visible to everybody, and on these nodes they can club these transactions. After clubbing these transactions, what they have to do: here we record the previous digest. We will calculate the digest, previous digest or hash value. We record the previous block — we will see how they are connected. Then we will calculate the hash of this particular whole block, in such a fashion that for each particular cryptocurrency they will say that we require four zeros in the hash value, initial four zeros in the hash value, or initial five zeros in the hash value. Let's for example, this particular example is for initial four zeros. So what they have to do is, all these computers will start guessing this number, changing this number, so that the hash value which comes of the whole block, it starts with the four zeros, and that process is called mining. So we say the cryptocurrency is mined. Basically the process is getting the value — getting this value which is called nonce here — so that the hash value comes with four zeros. So if you put mine here, so it will start giving different values. Now on eleven thousand five hundred, this value, there are four zeros of the hash.

Now if somebody changes, for example, A transferred money to D, now this hash value has changed. It is not four zeros. That means if somebody changes in between, the hash value will change, or immediately people will recognize somebody has done something wrong with it. Again the people have to mine it to find out four zeros, and this value will change, nonce. So this is the basic mining process which takes place, and this mining process becomes more and more complicated as new and new bitcoins are found. Once somebody is able to find out — suppose thousands of people are trying to mine this value for a particular block — whosoever does first wins, and he is given an incentive in the form of bitcoin, and that process is called mining the bitcoin. Basically what you are doing is, your various computers are competing to guess this number, and whosoever gets the number first is become successful, and as an incentive he gets a bitcoin, a new bitcoin which was not existing previously. That means bitcoins are increasing with the passage of time.

Now when we talk about bitcoin, the maximum limit to bitcoin is 21 million. Today we have already mined 19 million. In 2140, that means next century, all bitcoins will be mined. There are other types of the cryptocurrencies, for example altcoin, there's another type of cryptocurrency. Now we have more than 10,000 types of cryptocurrencies. Ethereum, they can mine around 85 million. So different types of currencies have different mechanism. Here incentive is, you work your computer well to find the number, so it is called proof of work. Proof of work is that you want — that means you have worked, and when you have worked, you will be given incentive. So in the terminology of cryptocurrency, this work of mining is called proof of work. There could be different other mechanism also. The proof of stake means whoever has more stake will be given the mined currency. So different types of mechanisms are there, but in bitcoin it's a proof of work process, and proof of work means you mine, you find out the number which gives the hash value four zeros. So that is how the blocks are created.

Then we talk about what is a blockchain. Now in the blockchain, suppose this is the first block. First block, it's a number which makes it 0 0 0, and here may be some transactions, here all transactions, and this is the first block. So previous hash value is null, all zeros, and this hash value is the hash of this particular block. Now if you change any value in this, for example 2 3 4 if you put, for example, we have to mine it, because four zeros will be changed. So if anybody comes and make changes in this block, what will happen is, subsequent block will show changes. So any change anywhere in the previous block will cause all subsequent blocks giving the hash which is not four zeros. Now the hash of this particular block, first block, is put into the hash of previous here in the next block. So these blocks gets connected. First block gets connected to the second block. If you make any changes in the first block, its hash changes, and therefore the previous block hash will also change here, and if this block has changes, then automatically its hash will change. This hash will go to the next block. The hash of this particular block, the second block, will go as the hash of previous block. So how they are connected together, and that's why it is called blockchain. So it becomes a blockchain — one block connected with the second block with the help of the hash of the previous block. Now if anybody wants to make any changes in the previous block, it will disrupt everything subsequently. So that is one concept.

Now where is this blockchain kept? You have blockchain of many transactions, but where they are kept? Now these blockchains are kept in the computers of all the nodes connected to the bitcoin. Whosoever are dealing in bitcoins, it is connected to all of them. So that is why it is called distributed ledger. So suppose Person A, in his computer there will be total blockchain of all the transactions. Person B will also have the same blockchain. Person C will also have a same blockchain. All the people, thousands of the people connected to the network, they will have the same blockchain available with them, and that is why it is called distributed blockchain. So everybody will have this record. It is not that I have this record or you have this record or central bank — everybody has this record. And suppose, for example, now what this person does is, Person A changes some record. It changes some record: K transfers to B. Suppose he changes the first record. Now this pink is showing that hash of this is not giving four zeros, it is not giving four zeros, it is not giving four zeros. Everything is disturbed from that to last. But it will be disturbed only in his ledger. The other ledger will remain intact. So if anybody wants to verify which is the correct transactions, it can check in the distributed ledger with the other computers. So they can find out this Person A is doing something else, and it can be reported to everybody that this fear is not correct. So that is the advantage of distributed ledger, that no single person can make any changes.

Now here we were just talking about till now about data. What is this data, how is it created? Now let's come to that. There is a concept of token. When person one transfer money to somebody else, he has his wallet. What is wallet? Basically wallet is protected by the private key of person. And what is private key and what is public key, let me explain you that. When, suppose, you have a lock at your home and you go out, you put a lock, you put lock with the key. When you come back, you open with the same key. It is called symmetric key. That means you close the lock with the same key and you open the lock with the same key. Now what happens is, suppose you have a message and you encrypt it with the key, and then you send to your friend. How the friend will decrypt it? He will require the key. Without key he cannot decrypt it. So on the way, suppose what somebody does is — man in the middle does it — he changes your message, encrypted it, and also change the key. So the concept is asymmetric key combination: private key and public key. If you encrypt something with private key, you can only decrypt with public key. I keep a private key with me. I write a message, I encrypt it with my private key, and then I put public key and send it to other person. Now nobody on the way can change it, because it cannot be encrypted with the public key. In the same fashion, if somebody encrypted with public key, it can be decrypted with the private key, which is with me, which is not with other people. So that is advantage of private key and public key combination, which is called PKI, public key private key combination. And so this wallet is encrypted with the private key, so nobody can open my wallet.

Now from that I'll send a message: transfer this amount of money, I am transferring this amount of money to somebody, Y. When I am transferring the money to Y, that message is called transaction. So a transaction is: 200 euro from Ali to Ali, 10 euro from Ali to Robin. And then it will be, a previous example — in this case previous is there, which is null because it is a first block, and hash will be created. That is how transactions are good. Now the problem with the wallet with me is, it is encrypted with my private key. If I lose my private key, what happens? I lose my wallet. I lose all my cryptocurrency, and there is no mechanism to find it out, because nobody else can have my private key. And if somebody is able to steal my private key, then again there is a problem: he transfers this and everything goes. So that is the tokens we create. This is called token. Transactions are called token, which we put in the previous slides — we were only showing the data, but instead of that data, now we put the transactions, and all those transactions which have taken place in last 10 minutes are clubbed at one place. Whether it is one transaction or five transactions or ten transactions, they will be clubbed at one place, and after clubbing of that, then we'll mine this number so that hash is found in which first four digit is zero, and that is the basic work. And then whatever hash is found, when second block is made, then previous hash is put here, and then new hash is found. That is a process.

But question is, who makes this ultimately? Who is authorized, out of so many people who are mining, who is authorized to make a block? The person who mines first is authorized to make a block, and after he completes the block, he send it to everybody, and then other people verify it, whether the transactions which have been made — for example if Oli said send ten euro to Robin, whether Oli had 10 euro or not. So what these people will do is, they will check the previous transactions to check whether Oli actually had ten euro or not, and then they confirm that this particular block has been made, it has been made correctly. So there are people who are working on it, and there is no possibility somebody is trying to play against, and if somebody does it, it will be difficult for him, because all other blocks will change, and anybody can find out this block has been corrupted, this block has been changed. Now I'll show you one more, because here we have not used till now how to encrypt the transaction. So I'll show you one presentation. It's a video presentation to make that clear. Yes, now is it visible? Yes, yes. So I am just — it will not be my voice, it will be voice of the person who is presenting it. I am just starting the video.

Welcome back. Last time we looked at a blockchain and how it works, particularly in the financial context, and we have these transactions that we were creating that move money from one person to another. But there's a big problem with this, and that is, what's to stop somebody from just adding a transaction that spends all of someone else's money? There seems to be no protection here for that. So what we're going to do is, we're going to look at ways to add transactions to a blockchain that keep it so not just anyone can create these transactions. In order to do this, we need to look at another cryptographic primitive, and that is public private key pairs, and then we'll use that for signatures. So let's take a look at that right now.

So here's a public private key pair. The private key here, it's just, you know, it's a really, really long number, and any number is a private key, right? You could make this be one. One is a private key. It's not a very good one — lots of people have thought of the number one before — but you could, you know, you could pick some really, really long number, and it's sort of a random number, and we can use that as a private key. Now you see, every time I'm adding digits here, it's recomputing the public key that relates to that private key, and that's why the stuff down here starts changing. So as the name would imply, this private key is to be kept private. Only you have this private key, and you never tell it to anyone else, okay? And just as the name implies, public key — the public key here, you just tell everyone. This is something that you want everybody to know. This is something that there's no harm in letting everyone know. There is not a way to derive from this public key what the private key is, okay? So it's just a kind of a public version of this private key that does not reveal what the private key is. Okay, so I'm gonna hit my little random number generator so I get a nice really long private key, and it's not something, you know, where the numbers are close together where I type on the keyboard — it's something a little bit more random looking — and then the system has derived a public key from this. So this is going to be my private key, and I'm going to use this to do signatures.

So let's do that right now. So here's a message signature. So here's a message. I'm going to type, you know, "hello anders" — that's me — and I have my private key here, 656 whatever it is, is my private key. Only I have that, and here's the message that only I have, and I can hit sign and come up with a message signature here. Now this message signature I can pass to someone else. I'm going to hit my little verify button. I'm going to pass this message signature to someone else, to anybody else, okay? Now of course they don't have my private key, because I keep that private. Nobody else can see that, but I publicize my public key, and they know, everybody knows that this is my public key. So given this message, and everybody knows my public key, and given the signature that I just made, you should be able to verify this. Now of course, if I hit verify, sure enough the screen goes green. This is a valid message, and I have verified that whoever signed this message and came up with a signature had access to the private key behind this public key, okay? And if I have kept that private key secret, that must be me, okay? So that's a message signature and how you can sign something and verify it.

Now instead of just using this free form text box, let's put some structure around this. I'm going to make a transaction here instead, right? This is similar to what we saw before. The message I'm going to say is, I'm going to send 20 from — this happens to be my public key — to somebody else's public key, whoever this is that I'm sending money to, okay? I, of course, because I signed this message, I have my private key — I never tell anybody the private key — but I can use this private key to sign this message, which consists of these three things up here, and if I hit sign, I get a message signature. Great. All right, now I send this whole thing out. I send out my message and my signature to somebody else, and they know that I'm trying to send twenty dollars from my public key to this somebody else's public key. You'll notice this little blue box around the from public key. That suggests that you can check this signature against this public key to see whether or not the private key behind this public key actually signed this message. So let's hit verify. Sure enough, it verifies. So I know that the person in possession with the private key behind this public key, which must only be Anders, is sending 20 to some other public key, okay?

Now let's use this in the blockchain. Let's go back to the blockchain case that we're looking at before. Now you'll notice a couple of different things here, all right? First of all, there's not names here anymore, right? They're just public keys in the from and the to, and you'll also notice that I added a signature section here, okay? So in this case, this is this public key sending two dollars to this public key, and here's a message signature that says that it is. Well, what happens if I change this to, you know, 25? Okay, of course it broke the block, but it also broke the signature. The signature is not verified, and that's why the signature is turning red. So while we could press the little mine button — you know, a miner could take this altered block and re-mine this block — they're going to end up with something where the block is signed, which should eventually happen, and there we go. And the signature, though, is still invalid, because the miner has no — they don't have my private key, they only have my public keys — so they can't come up with the right signature, okay? So that's the way we can make sure that this transaction here was posed by the person that had the money, and only that person, not just anyone else on the internet. So that's how public private key pair message signing is used to protect transactions and make sure that they are from the people that they propose that they're from.

Now, if you think about it, it actually works really well, because in order to create a new address, a new public key, the only thing you have to do is go back and come up with a new private key, a new random number. You didn't have to go to a centralized authority to come up with a public private key pair. You know, you just make up a private key and you use it. You derive the public key from it, and you put that out there, and that's how people can pay you. So that's a blockchain, and again, it's a financial context. All successful production blockchains that are distributed use a token of some sort, so they'll all have a financial context. So that's, you know, how a blockchain will work. I mean, I have glossed over a couple of the details, but for the most part, the overall idea here that you're looking at is very similar to the way that bitcoin works, and many other cryptocurrencies as well. So that's a blockchain. I hope it's helpful to you. Please leave me some notes down below and let me know what you think of this, and I hope to see you next time in the next video.

Well, I have tried to explain. One more thing it comes out: when we say A transferred money to B in the blockchain, although this distributed blockchain is available to everybody, but who is this A who transferred money to B? It is his public address, and I can create three pair of public private keys with me. So I have three different wallets. Each wallet will have different public private key, so nobody will know who am I, and that's the problem area. Unless I go to the exchange and ask this cryptocurrency to be changed to the fiat currency, or the currency of a country, my identity will not be known to anybody, and this is the area of concern for the investigating agencies.

Now, when we talk of this cryptocurrencies, whether it's a money, it is a currency, or it is not a currency, that is a question raised. Now if we talk about the fundamental properties of the currency, one is it has a store of value. People can store it, save it. Yes, cryptocurrency can be stored in your wallet, can be there for years together, so it can be stored and it can be used later. So the first property of any currency, it satisfies. It is also unit of account — you can compare the price. It is a medium of exchange — you can purchase things from it. The attributes of money: one is durable, it doesn't perish, it is durable. It is portable, can be taken anywhere. It is divisible — cryptocurrency can be divided into 10 raised to the power minus eight, so one bitcoin can be divided into 10 raised to power 8 parts of the bitcoins. One unit is interchangeable with another unit — fungible.

But problem is, who is responsible for this cryptocurrency creation? Suppose, who will pay for it? Like, for example, we have 10 rupees note, 100 rupees note, or one rupee note — except one rupee note, in all cases Governor of the Reserve Bank of India takes the guarantee of the currency. In cryptocurrency, who takes the guarantee? Nobody can take the guarantee. Suppose the crypto exchange is started, and a new cryptocurrency is started, and then this crypto exchange is closed. What happens to the people who are using that particular cryptocurrency? It has happened. So the question is, the issues have been raised, what are the areas of concerns. That is why it is not backed by any country, so it is not a legal tender, and unless it is a legal tender, it cannot be termed as currency. So none of the country in the world has decided it to be legal tender. So what is it? If it is not legal, then whether it's assets, whether it is a commodity? United States of America treats it as a commodity. So it is a crypto asset, which can be sold, which can be purchased. It is a non-tangible asset.

The next question comes is, should it be regulated or should it not be regulated? Before that, let's find out issues. See, suppose you have a wallet. Where is the wallet located? It is a software. I have my laptop with me. I am sitting in India and I am transferring my money to somebody sitting in Europe. Nobody will know it. It is like hawala. RBI will never come to know that I have transferred money across the border. So it can lead to the violations of Foreign Exchange Management Act in India. USA does not have foreign exchange laws — only their condition is you report to the country — but we have foreign exchange laws, so there could be violation, and many countries have foreign exchange laws. So that is the one issue which is raised by Reserve Bank of India.

Then, who are the owners of these assets? As we have seen it, it is a digital signature. Owner is a digital, and one person can have many digital signatures, as he can have many wallets. So we do not know whose digital signature is it. So how to find out whose money is it? The question of verification of the user — know your client, KYC — how to get those KYC norms? That's the second issue. Of course, the exchanges — exchanges which are assuming in our country now — they say that any client who is connected with us will be verifiable, and that is absolutely right, that is verifiable. But when he sends the money, he need not send the money through the exchange, because he comes to the exchange only in case he has to exchange that particular cryptocurrency with the fiat currency. Otherwise he can transfer directly from one wallet to another wallet. So the owner could be a kidnapper, owner could be a hawala operator, owner could be a terrorist. We do not know who could be the owner. They can be only controlled at the point of exchange of money, when it is converted, exchanged with the real money. Only there the people will come to know who is this person. So money laundering and terror financing is the second issue, which is the issue with the law enforcing agency.

And third issue is how to identify, how to trace. All transactions are available — that is one good point — but whose transactions, that is not known. So that identity one has to find out, and that identity, this public address, has to be linked to the person. It can be done at the exchange level, but then the person has to register, and that could be one solution: that everybody who is allowed to use cryptocurrency, they are registered to one exchange or the another exchange in the world. But then there is another problem. Suppose some address is registered with the USA exchange. How to get that information from USA? You have to send letter rogatory to that country, and that is again a time consuming process. So when you talk of the crypto experts, they would say that the ledger is available, so it is very easy to trace people. It is not very easy to trace people. It becomes difficult, because the ledger contains the public digital address of the person and not the identity of the person.

So with these two issues, RBI issued a circular first in December 2013, and it says no consumer redressal mechanism is available. Suppose you lose your private key. How do you retrieve your money? There is no mechanism to retrieve your money. You cannot make complaint to anybody. It is gone forever. Somebody hacks into your wallet, then again there is no mechanism to make complaints to anybody. So there is no customer redressal mechanism available, as is available in the banks. Now this virtual currency, high volatility is there, the scope of illegal activities, as we have talked of money laundering, terror financing, FEMA violations is there. RBI again repeated its circular on first February 2017 and fifth December 2017. 6th April 2018, RBI came with the prohibition of dealing in virtual currency, and RBI directed the regulated financial institutions that they are debarred in dealing with VC, the virtual currencies. However, Internet and Mobile Association of India, they went to courts against it, and Supreme Court quashed it on the reason of proportionality. Basically, RBI is a regulator and not the framer of law. Laws can be framed by the legislature.

A committee was made prior to this in the Department of Economic Affairs, headed by the Secretary of that department, inter ministerial group, and they gave the recommendations that the cryptocurrency should be banned in the country. Government is still debating it, and initially government wanted to bring a bill, but that was not brought. Again in 2021 government said that Cryptocurrency and Regulation of Official Digital Currency Bill will be introduced. That has not been introduced. There is still debate going on whether it should be regulated or it should not be regulated. Meanwhile, there has been amendment in the Companies Act, where the government has said that anybody who is having cryptocurrency with it, he should reflect in its financial statement. So that is how to first getting the stockholder, that who are having the cryptocurrency with it. This year in the budget they came out with the transaction tax, or if you gain in the cryptocurrency, 30 percent tax has been imposed. However, the Finance Minister said that it does not mean it will be regulated. So we do not know what will be the outcome, whether it will be regulated, whether it will be banned. It appears that it might be regulated, because you are bringing certain changes in the systems to know that the cryptocurrency transactions are taking place. On 25th February, recently, in a case — of course it was a case related to bail — but Supreme Court asked the central government to clarify legal status of cryptocurrency in the minds of the government. So if the case will come in the March, let's see what government replies.

Now there have been various cases which have taken place through cryptocurrency. In India there was a GainBitcoin scam in Pune. Now what was this scam is: this person says, you purchase bitcoins, then in each month I'll give you ten percent. I have a big system installed in China which mines cryptocurrency, and I'll be able to give 10 percent whatever you purchase every month. That means your money will double just in 10 months. And then this man vanished with the money of everybody. He was arrested, he died, his associates are now in jail. In America also, recently they were able to unearth — there was a big finance exchange from where one hacker took out 4.4 billion dollar of money, not million but billion dollar of money. It happened in 2016. They were able to lay hand after six years, when somebody tried to exchange money and converting into fiat currency. Otherwise the FBI was not able to detect the case. Recently somebody was trying to encash that amount through the banking channels. As they were doing it, FBI got hold of them and seized 3.6 billion. Recently it has happened, in this year only, in the month of February only. So when we talk of the crypto exchanges and the experts, they say it is easily traceable. It is not easily traceable. There are difficulties, because people are not aware of these difficulties. Only because of the ledger, which is distributed, they say it is easier to detect. It is not.

But one more thing we have to understand about cryptocurrencies. Cryptocurrency is based on the blockchain technology. Blockchain technology is actually independent of cryptocurrency. Cryptocurrency depends on the blockchain technology, and this is a blockchain technology which makes the transactions visible to everybody, which makes the transactions immutable. It means that, suppose I have a property, and I sell property to A, then I sell property to B. There are court cases — we see these court cases — but if we have all property transactions recorded by using the blockchain technology, then double sale is not possible. You can go back and see everything in this. So the concept is that the blockchain technology can be used in various spheres of life. It can also be used in the supply chain management. For example, you go to the market and you purchase the medicines. Whether that medicine is genuine or not — if that medicine has moved from the company which has made it, to the shopkeeper, to the chemist, and there is a transactions details available which can be verified through blockchain technology, then it is not possible to sell the spurious drugs. So there are various use of the blockchain technology, and we have to understand, when we talk of this cryptocurrency, people say blockchain technology is only for cryptocurrency. No, it is not. Blockchain technology is a technology which can be deployed in any field where we want the transactions cannot be manipulated, transactions are immutable, the double transactions are not possible, and the various use of this technology are going to come in future. I'll stop at that, sir. Any question?

Yes, there is one question: what is the cost of cryptocurrency as opposed to the national currency of any country? So cost of cryptocurrency depends upon the cost of mining — that is one, if you talk of the cost — and the cost of mining keeps increasing. With every bitcoin mined, the calculations are made more complicated, so one has to invest more computer energy in it, more power in it. As far as the market is available, it depends upon the supply and demands, and because whenever people feel that the cryptocurrency is of the future, and some country approves it or starts regulating it, more and more number of people start purchasing it, and because then demand increases, its rates increases. But the cost depends upon the mining cost, and that is increasing day by day.

What would be a typical cost of mining one bitcoin? See, it is coming huge now, I mean huge now. Reason being, you have to put large number of computers. Previously you would be able to do with one computer. Now you have to put a large number of computers together so that you can mine it. I will not be able to tell you exactly how much is the cost today, but we can find it out.

And let's say, in your example, you transferred 10 euros or 20 euros to somebody. Where is your money kept, and how do you know as to how much money do you have in your account? All money which is in my account is available in ledger only, and my wallet will know it, that how much money I have. It is like cash. What is in my pocket, what is with me, is available in my wallet. When I transfer it to somebody, then the whole blockchain is checked to see whether I actually had that money or not. And I can buy more money and put it in my wallet. You cannot, because even if you say my wallet has money and you try to transfer the money, it is not possible, because the blockchain will tell you this person has no money.

How do I add more money into my wallet? You can purchase it, and the purchase is also on the net. I advertise that I want money, and somebody else — when you go to the crypto exchange, give them the fiat currency, the cash or check, and ask them to give you the cryptocurrency. That is one. Second is, there are websites, like stock exchange websites. Bitcoin also has its own exchange. You can go online and you can purchase, against one currency against another currency, it is tradable. You are purchasing something in Indian currency, for example. How do you pay? You pay it through either the cash system or the banking system, and that is the area where the people are recognized, that this person has purchased so much cryptocurrency using this particular check or this particular transaction. So that's the only area where one can be caught.

And do you think the Indian government would recognize cryptocurrency? It's very difficult to get the mind of the government, because on the one side RBI and Intelligence Bureau and other agencies, the investigating agencies of the government, are saying that it is difficult to trace them, it can lead to the FEMA violations, it can lead to the money laundering or terror financing. On the other side, the people are saying that it is a new technology which is coming — how will you be able to stop it? So the Financial Action Task Force is getting the studies done on it. They are coming out with papers. They have come out with some papers. You can go to the FATF website; there are two or three papers available in that about what are the guidelines which can be available to various governments. So one is to see whether those guidelines — it is possible to regulate it properly, to find out the know your customers, to find out the beneficial owners. That is the area of concern, and therefore what is required is, suppose we have, all over the world, everybody who is using bitcoin or cryptocurrency registered on those exchanges, then know your customer is satisfied. Only thing is that some law has to come, international law, which says that each exchange should be able to give information to the other exchange, and that would be required. If that is possible, then regulation is possible.

So now that the Russian oligarchs' money has been blocked, if they had money in cryptocurrency, they would still be able to use it? It will not — nobody will be able to block that money. Which means that if they did not have money in bank but they had it in cryptocurrency? Yes, then they would still be able to do whatever they wanted. They will still be able to do things. You can bypass the government, basically. One more point to what Pawan has brought out: now, because of the sanctions which have been imposed on Russia by the western nations, now there is some talk that the Russians and the Chinese are making a separate financial institution of bitcoin or something else sort. What happens to the ones which are presently held by these countries? Can they transfer that into the new system, or the new system has to start afresh? See, what the China is doing: besides the cryptocurrency, they are trying to have the Chinese currency to be used internationally, and they are making a system for it. That is one. However, you are talking about the cryptocurrency which is already available with them. They can transact those cryptocurrencies in the underworld. See, we already have underworld on this. You can go to the deep net, dark web, and the transactions are possible there. So they can do transactions there, they can purchase things using that. That's a possibility.

That's a very major issue, because of this bitcoin can be trained. The Chinese have been trying very desperately to make yuan as the international currency. Now they can sidestep this cryptocurrency into yuan and use it. See, they can do it. The cryptocurrencies, whatever cryptocurrencies they have, or they can make their own cryptocurrency, like India is going to make their own digital currency. But that digital currency, then there will be central bank which will be monitoring it, of India. Thank you, sir. Thank you very much. When we talk of the China, their central bank will be monitoring only those, their cryptocurrencies, the Chinese digital currencies. Thank you, thank you very much. Your next, ask a question please.

Are you telling me, sir? Yeah, yeah, you yourself. Sir, pardon my ignorance. What I could make out from your talk was that every crime that can be done through cryptocurrency can also be done through normal currency. Absolutely right. Please correct me if I'm wrong. Absolutely right, but it is a question of traceability. See, for example — in fact, sir, my submission is, the computer which generated the key can be traced. We have the technology for it, through the registry and the IP. No. The cash you cannot trace it anyway, so I think cryptocurrencies are lesser evil than the hard currency.

See, the cryptocurrency, you are saying the computer can be traced. No, it cannot be traced, the reason being it is only the digital signature which is known. See, you work in the Tor, the onion routing system, for cryptocurrency. What is that? You have to understand. See, for example, how do you trace a person? You trace a person using the IP address, internet protocol address. Correct. So I send a message to you, so you read my IP address, you trace me. But suppose this IP address goes to some other anonymizer, which we call anonymizer. They peel off my this IP address, they put another IP address on it. So the IP address is of that anonymizer, not of me. Only when you go to that anonymizer, he will tell, yes, this IP address corresponding is this IP address. Then from here it goes to third anonymizer. The second anonymizer, they peel off the first anonymizer and put the another IP address. Tracing becomes difficult in the onion routing, and that's why it is called onion routing. You peel one, you get another IP address. You peel this, you get another IP address. Yes, please.

So through the IP address you not only identify the source, but you also identify the instrument which is used, whether it's a computer or a mobile. Am I right, sir? So this is what the type of engine is. That is what I am telling. The IP address doesn't remain sacrosanct, the reason being the IP address which is reaching to you is IP address of some anonymizer, not mine. Now to find out IP address, you have to go to that anonymizer. That may be, suppose, in Germany. You go for the letter rogatory, you may take two years, three years to find that out. Then from there the second stage will come, the other anonymizer in Russia. Third may be in USA, and there may be 50, 60 anonymizers before the IP address goes to you. So it will be very difficult to trace when you are working in the onion routing system. And that is a reason I told you, the transactions which took place where 4.4 billion were taken away in cryptocurrency, the FBI was not able to trace it unless the person made actual transaction with the fiat currency. After six years they were able to trace it.

So imagine the same crime was done through hard cash. It would be impossible to trace it. Here at least you have a chance of tracing it. See, when it is given in hard cash, free cash, you can't trace it. No, it can be traced, because the person who has given in hard cash, he will know to whom he has given, and that is how we catch the kidnappers. When they say give money to us here, we catch them subsequently, because the person who has given them, he sees the faces, their evidences, their mobile locations of that person. So there's a possibility, when you are giving hard cash, you are leaving the evidences of the person who is taking the money. Here you don't know who is the person, and that is the problem. No evidences are left. Am I clear? Yes, the last point is clear. Okay, thank you. The first point — wasn't that audible? Now, yes, please.

So sir, again pardon my ignorance. I only put this message of IP address on the chat. Is there a possibility of masking the IP address so that it cannot be turned into a onion peel kind of thing you're talking about? I mean, could there be something? Second was, if I register myself for a cryptocurrency trading, is there a possibility that my identity, which is at the time of registration — I mean, I'm talking very basic — is there a possibility of having that identity sacrosanct throughout my transactions, in form of encrypted keys or whatever you want to call it? Just food for thought which came.

See, number one is, you are supposed to only download an app in a computer. Now you can download from various places. At that time your IP address is not recorded anywhere when you are downloading. Now, all other transactions are through your public address system — what is your public address — and it is going through the onion routing. See, that you have to understand. You are going through the onion routing, and therefore your IP address, even if it is recorded there, it is no meaning, because that is not your IP address which is recorded there. Okay, so that's a problem. There's a problem. Traceability comes because of that, because if it would have been, along with each transaction there's an IP address attached, then there's no problem in tracing the person. Obviously. But that is not the case. But I am sure, as we grow in this trading, as the world across grows in this trading, I'm sure there will be steps which will be incorporated. I'm sure, absolutely. All these crypto exchanges are trying to do that. They are trying to find the solution, because the governments will not permit. Some governments have started regulating it, it is true, but they are very — like USA started regulating it. Let's see whether we should start regulating or not. This call will be taken by the legislature ultimately. Absolutely.

In any case, in the UAE, blockchain usage to record property and other transactions has already been initiated. So eventually I think they will move over to cryptocurrency also, once the transactions are all — people are using blockchain for them. Certainly, right. Blockchain will be used in large number of things. Even the smart agreements would be coming. In banks also, I think they'll start having distributed ledgers on blockchains, and banking will also become slightly easier. See, that's a question, because see, there's a problem. The distributed ledger is antithesis to the centralized control. So how they will get together — it is possible, like, I don't say that it is not possible. It depends upon the further development in future. That is true. Let's see. So thank you very much for a very illuminating talk. I think everyone must be taking away nuggets of gold from your talk, and now it's time for me to hand the proceedings back to the President.

Time is already shorter. I like cryptocurrency for some time shelf, perhaps, remain limited only to very technically savvy persons. It is not possible for any non-technical or semi-technical person to get into cryptocurrency. First point is that, because irrespective of the fact, I'm sorry, that you have explained — and there are explanation of blockchain, there's explanation of wallet, the explanation of mining method — you know, sir, that when wars were fought, there used to be cipher messages. Cipher messages were that if you put X, it will translate into XY or ZY, and that cipher language was available with our wireless operator. If some cipher message has to come to you, a secret message, he will give a message taking the cue from that cipher language. So it is something like that language. I mean, although it is much more complicated, because the hash becomes previous, the previous of that next chain become hash, the hash become previous, and it is a continuous process. So it is difficult, but once the language is made clear, then probably people will understand — that sense is my fear.

Now the question is that — how, this is very important — what is the problems likely to face, keeping in view the Indian law, that we said, I can say, by the enforcement agencies. It's very, very difficult to reach ultimate. Money laundering and many, many more things can happen. It go to the hands of terrorists, it can go to the hands of drug addicts, it can go to — a lot of records can come out of that, unless we have absolutely streamlined the method of investigation in terms of cryptocurrency. The third is that there is a risk also of significant decline on the cryptocurrency for the person who is putting the money in it. All of a sudden and rule, you have lost all the money. Irrespective of the fact whether you are trying to gain, but all of a sudden you may lose the money. So there are many risks involved, and I am of the view that, as the Government of India has now started thinking to have a middle path — that is, it may not be directly controlled by RBI, or it will not pass through all the financial institutions like bank etc., but some middle course where they may have put some regulation, some compliance is to be undertaken by person who is going into cryptocurrency — it may give. I also, in the opening, I said that even now in recent past the President of America, Biden, has again said, okay, we will have some regulation, as Russia was having no idea what is sanctioned, because Russia was getting cryptocurrency and the sanctions were of no value to him. So there's a lot of problems. I am of the view that with the passage of time, probably, as far as Indian context is concerned, we may be able to evolve something, but in initial stages there's going to be a lot of difficulties, particularly for those people who are not open, who do not want their money to be taxed. If they have absolute taxation, that is all right, but those who don't want their money to be taxed, it will be very difficult for the enforcement agency to catch them.

It was very illuminating talk. I'm sure the committee, considered by Government of India about the regulation — I'm sure the committee must be having very competent persons in it, but I am of the view, the enforcement angle, the problem is, you explain, I hope somebody brings it to the notice of the committee which is formed for cryptocurrency in India. With these words, I want to thank you, sir, Karnal Singh, again for a very, very illuminating talk, very elaborate talk, and you have made everything clear to many people. At least I am not technical savvy, so I have become clear what is blockchain, what is one to one, and how hash is coming previous, and previous the hash, and how the wallet is maintained, our signing. It is very illuminating and very, very knowledgeable talk for all of us, and from my side and from the side of NISSMAT and all this NISSMAT team, I thank you very much for accepting our invitation to come here, sir. Thank you very much. All the delegates, I hope you have learned certain things, and we will have to unlearn certain thing, because at least I say, unless you're a technical savvy, I'll forget about investing in bitcoin or anything else. It's very, very difficult to understand. With these words, I thank you all for having graced our session, interactive session. Thank you very much. Thank you indeed.

Would you put on the next banner, please, give me the next. Yes, banner. Now this is our next interactive session. It is going to be very important one, again from the current topical discussions which are going on all over the country and everywhere: China's border laws and impact on India. This, you must know that China's border laws have got great impact for India in terms of certain areas and Arunachal Pradesh. So this subject will be discussed by a reputed general, and registration is complimentary. It is due on 25th March, 6 to 7 pm. Please block your slots and do join this, because it's going to be very interesting subject, and we must know what is the impact likely to be on India of the China's border laws which they have passed recently. With these words, I want to conclude the session. Thank you very much. Thank you, thank you very much. Thank you so much. Thank you, sir. Thank you, S. Pal sir. Thank you, everyone. Thank you, thank you, thank you very much. Thank you, right, thank you. Thank you, sir. Thank you, so kind of you. Thank you, thank you, thank you, thank you, thank you.