Why an Indian Ban on Cryptocurrencies would be a Mistake.
The Corruption Prevention Paradox
During a Union Budget speech, The Indian Minister of Finance, Arun Jaitley, said: The government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate the use of these crypto assets in financing illegitimate activities or as part of the payment system. There has been an ongoing discourse over the interpretation of these words wether this means a ban or not. Especially the following part indicates on extreme regulations towards introduction of cryptocurrencies in the society: “…will take all measures to eliminate the use of these crypto assets… as part of the payment system.” However, the government also claims to embrace blockchains. Once again it becomes apparent we are living in a complex and chaotic world full of contradictions. Whether you interpreted the words of Jaitley as a ‘ban’ or not, it shows a changing discourse in the attitude of the Indian government. Yes, of course ‘binance is still working’ and the government cannot ban the cryptos from existing, but I believe that without cooperation of governments to insert cryptocurrencies in our societies, the full potential can never be reached.
In this article we will follow the perspectives that are presented and explore what an extreme scenario of a complete exclusion of cryptocurrencies in the Indian society would mean, whilst (in the words of the government itself) still having a positive attitude towards blockchains… I know right… Contradictions all over the place.
Back in December already, the Indian government accused bitcoin of ‘being a Ponzi or pyramid scheme’. From a mathematical perspective, however, bitcoin is almost the opposite. Though there is a financial benefit of more demand, because bitcoins are scarce, there is no exponential benefit by introducing new users to use of it. Jeffrey Tucker debunked the myth in this article back in 2013 and even the World Bank concluded bitcoin is not a Ponzi scheme.
In the same statement of the accusation, the government claimed that cryptocurrencies ‘hold no intrinsic value’. Now this is where it gets interesting. A ‘cryptocurrency’ is nothing else than the representation of the perceived value of a particular function of a certain blockchain. If I value the use of smart contracts to increase my operational efficiency, I invest in Ethereum. If I value Machine2Machine transactions in the Internet of Things era, I invest in IOTA. The list goes on.. As much as cryptocurrencies are a human construct, our fiat currencies are nothing else then a human construct as well and are essentially worth nothing more then the paper it is printed on. Ironically, ‘fiat’ originates from Latin, where it is the imperative of the verb facere, meaning “to make or become.” So actually fiat currency is made up money!
Let me disclaim that I am not a particular fan of bitcoin. My respect for it, results from the fact that it was the first blockchain out there and has managed to earn its place in our society. That being said, the destined future of bitcoin appears to be the function of digital gold, with the high transaction costs and the limited supply. Bitcoin’s function and representation of value is therefore in how eager you are to have your wealth stored in the immutable distributed digital ledger.
The intrinsic value of blockchains lies not in it being money. Almost none of the +1400 cryptocurrencies listed on CoinMarketCap aim to be, or function as, a currency. They are rather decentralised trust networks, with applications far beyond the reach of digital currencies. However, the digital currency element is needed to express the public general interest in the societal function of a particular blockchain.
Is the Indian government only interested in private blockchains, opposed to public blockchains?
The Corruption Prevention Paradox
So let’s get back to the point of why the Indian government decided to make these claims, namely to battle fraud and corruption. It is true that many cases are known where bitcoin was used to handle value transaction in the criminal circuit or whitewashing. On the Dark Web, bitcoin was used as the main currency to trade drugs, weapons or worse. The Indian public sector is not unknown for its level of corruption, scoring a 40/100 in the Transparency International Corruption Index, ranking 79th. So the motives behind the negative position on cryptos, from a first impression, seem upright and should certainly be encouraged.
However, let’s look a bit closer at corruption. Vastly simplified, it can be segmented in two levels, low- and high-level corruption. Low-level corruption is the kind where police officials can be bribed not to fine you, or officials are paid to speed up the bureaucracy process for any kind of document. High-level corruption presents itself in government officials on higher positions awarding contracts to companies for bribes or the allocation of public funds to private accounts of the officials. I will try to argue that with the current Indian arguments, the low-level corruption might be prevented, but high level corruption threats remain in place and might even increase. To aid my argument, it is necessary to know the difference between public and private blockchains, which is explained below in short and can be further explored here.
Public or permissionless blockchains, like Bitcoin and Ethereum, have a public distributed ledger and the cryptocurrency accompanying it is the means to participate in the blockchain protocol, whatever function it may have. Being public and distributed allows for the tracking of every transaction that has ever happened, while anyone can inspect the transactions, potentially finding patterns. While fraudulent transactions are not automatically labeled as such, they are out in the open visible to anyone. This is the reason why Dark Web users have recently been unmasked by tracking bitcoin payments. Executors of high-level corruption should be terrified of public blockchains, because with some investigation, all their transactions are out in the open. It must be noted that there are also public ledgers that specifically focus on privacy, such as Monero and Zcash, with which it is easier to hide your fraudulent transactions, but more on that later.
So, remembering the current arguments l, it seems that the Indian government is going against cryptocurrencies, that are an inseparable result from public blockchains, but at the same time embraces blockchains. Is the Indian government only interested in private blockchains, opposed to public blockchains? Private blockchains are owned by an institution, which controls the users of the blockchain and determines the form of auditing whether transactions are valid, which could be an advantage for internal auditing of the ecosystem operating on the blockchain and will result in less low-level corruption. This application can come in handy for complex supply chain management of products and goods, for example. However, full transparency is not desirable, making citizen-auditing impossible. It would also allow the high level corruptors on the level of the blockchain design to continue their business as usual and potentially even increase their activities, since now they rule over the rules of the system.
So if the government favours private blockchains, what would that mean? Shortly said, it is only interested in decentralisation whenever there is still centralised control by a single entity. It will not allow the public to decide whichever function of blockchain they value most, because then such cryptocurrency needs to be openly traded and used as a form of payment in society, which is exactly what the government aims to eliminate.
Change the culture, not the tools.
‘Banning cryptocurrencies because there is fraud’ follows the same logic as ‘banning the internet because there are hackers’, which not surprisingly, is being tried in India as well (and yes I know the internet still works). The quick fix to ban something that is new and difficult to handle can almost be called an Indian tradition. However, humanity has always found ways to break or bend the rules, regardless of laws and regulations. It is true that privacy blockchains like Zcash and Monero are now on the radar of criminals, for easy and private transactions of money. However, in this ever growing world of privacy data breaches, isn’t the function of privacy something worth to our societies too? What the Indian government should rather focus on is changing the culture of corruption, rather than limiting tools that could be used for it.
Not only would this make sense, if the tools were only used for bad purposes, but it becomes even more true now those same tools are also promising to pose solutions to some of the biggest world problems, many of which are completely in line with the Indian government’s agenda and targets.
At Energy Bazaar, of course, we are looking into the possibilities of using blockchain to increase the access to energy for the Indian population. However, we are not alone in our good intentions. Stellar Lumens is aiming to bank the unbanked, the World Food Programme has been using blockchain-based solutions to battle hunger with refugees and Tykn is trying to provide people in conflicts zones with a blockchain verifiable identity which might help them in the event of fleeing there country. Such projects are impacted by the words of mister Jaitley and it is difficult to accept that such discourse which is not based on facts allows the cryptoworld to tremble as it has done this week. Still, as cryptocurrency experts in India explain:“When a platform as significant as the Union Budget speech mentions cryptocurrencies, it is clear that the sector is coming of age. We welcome this positive development, and see it as an important milestone in the journey to policy- clarity and consumer-education”.
Concluding, it appears that, with an Indian ban on cryptocurrencies, the high-level governmental corruption in the country is not prevented and perhaps even strengthened, paradoxically to the motive of wanting to prevent corruption and fraud. This paradox in itself should already be enough reason to strive for smooth inclusion of cryptocurrencies in the Indian society. With the observation that at the same time many projects with good intentions are severely negatively impacted by the ban, the choice of words are even more debatable. The Indian government could really take its responsibility in banishing corruption by using public blockchains and cryptocurrencies, rather then just private ones, and change its culture of corruption once and for all. New institutions for our societies are being built and we all need to accept that they are going across borders.