Indian IMC report on Cryptocurrencies — Rebuttal and Recommendations
The recently released IMC report recommending a blanket ban on all Cryptocurrencies, including stiff fines and jail time for participants, has set the Crypto community in India ablaze. While the recommendations of this report are shocking, it’s important to realize a couple of key points
- This is a recommendation, and has not become law yet. There are many stages it needs to go through in order to become the law of the land.
- This is the time for the Indian Crypto Community to mobilize. Whether it be through education, petitions or contacting your lawmakers, anyone interested in seeing a bright future for Crypto in India can play a role.
I read the entire IMC report and as a first step, I thought it made sense to extract portions of the report that I found interesting or flawed and comment on them (My comments are inline after >>>s). I then conclude this piece with a set of bold and some not-so-bold recommendations for the Indian government.
On pg 8: “virtual currency in and of itself does not have any of the benefits associated with a fiat currency.”
>>> A bit of an apples to oranges comparison. Fiat currency just means currency by decree, while Virtual currency refers to it’s form e.g. Physical cash vs Digital money. One can have Fiat Virtual currency. Additionally, Virtual currency is not a single monolith. Types of virtual currency range from Non-sovereign stores of value like Bitcoin and decentralized platforms like Ethereum and EOS, to utility tokens such as Filecoin that provide storage and security tokens that may offer a dividend or interest from an underlying business.
>>> Virtual currencies are also programmable money, meaning legal constructs such as escrows and arbitration can be set in stone (in code) in an unalterable way. The programmability also makes them suitable for micropayments and similar metered exchange of value. To say Virtual currency has none of the benefits of Fiat currency is an incorrect comparison and severely shortsighted, especially in view of India’s “Smart City” plans.
On pg 8: “Further, the Committee notes that non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors”
>>> Completely true, and this is why it is important for the Government to take a proactive regulatory stance that involves first the classification of Cryptocurrencies into Currencies, Utility tokens, Security tokens and others. The government should establish clear rules to a. explain how this classification can be determined by a consumer or business to ensure they are in compliance and b. what are the regulations that need to be complied with once a classification has been established.
>>> There is a serious potential for India and her citizens to participate in a safe regulated way in the massive wealth creation that is sure to occur over the next few years. Blanket banning all from access to this opportunity due to a fear of fraud will just drive all activity underground into Black markets, where there is no scope for consumer protection.
On pg 8: “Another concern from use of non-official digital currencies is to the economy and the financial system with implications for monetary supply, particularly given their volatility”
>>> The government can address this concern while allowing the Crypto economy to thrive by regulating Fiat on and off ramps (Crypto exchanges) and establishing KYC / AML requirements that I’m sure every Cryptocurrency exchange will be happy to comply with. This allows the Government to maintain complete control of its monetary policy as well as protect against money laundering and terrorist financing.
On pg 8: “The Financial Action Task Force has observed that on account of the anonymity associated with Virtual Currencies / Cryptocurrencies, they are vulnerable to money laundering and use in terrorist financing activities while also making law enforcement difficult”
>>> The previous point about regulating the Fiat on and off ramps + working with the G20 Financial action task force (FATF) will ensure the ability of Governments around the world to curb money laundering and terrorist financing. It is not necessary to ban Crypto to achieve this goal.
On pg 9: “However,keeping all of the fore-said in mind,the Committee recommends that all private Cryptocurrencies, except any Cryptocurrency which may be issued by the government, be banned in India.”
>>> Many of the world’s advanced economies have either kept an open mind to Crypto (United States) or have pro-actively embraced it (Japan, Switzerland). The ones that have taken a strong stance against Crypto are China and Venezuela among others. A quick look at these countries should inform India on which side of this argument she should strive to be on.
On pg 11: “The Government will explore the use of block CHAIN technology PROACTIVELY for ushering in DIGITAL economy.”
>>> There is no blockchain technology without Cryptocurrencies. They cannot be separated. Anyone stating this has been severely misinformed. It would behoove the government to invite an international panel of experts and regulators from around the world to discuss and understand the technology before banning it outright.
On pg 14: “1.3. Growth and adoption of DLTs (categories where dlt can be applied)”
>>> With all due respect, it is unrealistic for a government committee of a few individuals to match the creativity and entrepreneurial spirit of a billion people. If the government establishes clear regulations and allowed Cryptocurrency products in the Fintech regulatory sandbox (from which Crypto was excluded for inexplicable reasons), we will witness the thriving of a new sector that will generate employment for millions of youth in this country.
On pg 15: “As an example, Ripple is a DLT-based solution for cross-border payments, settlement and remittance system for banks and payment networks. Ripple provides direct, real-time transfer of assets that settles in almost real time. Ripple system uses XRP tokens to facilitate the transfer of money between different currencies.”
>>> This is one of the most troubling sections of the report. Ripple is essentially within the control of a private Silicon Valley organization. Allowing or considering the use of Ripple for cross-border payments, remittances or central bank settlements will essentially cede the keys to untold power to a set of private individuals. I would strongly urge the government to study Bitcoin as a non-sovereign TRULY decentralized money under the control of no one.
On pg 15: “Traditional systems use US dollar as a common currency for converting between other currencies. This incurs exchange fee and takes time. By first converting the value of the transfer into XRP, rather than US dollar, exchange fees are eliminated and banks need to allocate less liquidity. Moreover, the underlying digital ledger allows for real-time message transmission between participants and verification of transactions, which reduces processing of payments to seconds.
>>> While the use of the US dollar as a common currency and as a reserve is undesirable and bestows upon the United States an exorbitant privilege (https://en.wikipedia.org/wiki/Exorbitant_privilege), the solution is not to consider using a currency like XRP which will make things worse.
>>> This is why it is very important for the Government to classify the different forms of Cryptocurrency and form a strategy to move India’s monetary system to the forefront, using a combination of traditional hard money (Gold / Silver), digital hard money (Bitcoin) and others. More on this in the recommendations section below.
On pg 17: “Scalability and transaction speed: Current versions of permissionless DLTs presently have challenges with respect to scalability of blockchain i.e both in terms of speed of validation and transaction volume. Existing permissionless blockchains have limited transaction speed. In a permissionless setup, this much time is needed for nodes to validate transactions and propagate across the network. On the other hand, permissioned blockchains have greater capacity and can process larger transaction volumes, due to fewer nodes having to validate the transaction. As an example, in a permissionless transaction involving bitcoins, it takes roughly ten minutes for a block to be created and added to the blockchain.”
>>> While this is true, it is important to understand why it’s desirable to have a permissionless decentralized blockchain that might be slower than a fast permissioned one. The former allows 2 operators that do not know or trust each other to nevertheless interact with one another confidently, while the latter requires greater trust in the nodes or gatekeepers operating the permissioned blockchain. The former is a solid basis for transacting between 2 nation states or central banks for instance (this does not require scalability or speed!) while the latter requires trust and empowers the gatekeepers to censor, rollback or otherwise sanction transactions, much like the recent use of the SWIFT system by the United States as a weapon of financial terrorism against non-compliant nations like Iran.
>>> India is not immune from these types of sanctions or threats of sanctions. Using a Cryptocurrency like Bitcoin as one of the pillars of Financial sovereignty is something India should consider very strongly and is well within the historical norms of India’s quest for non alignment, self reliance and self determination.
On pg 18: “Moreover, there is the possibility of the network being compromised if 51% of nodes on the network are taken over by a malicious agent. The Decentralised Autonomous Organisation‟s attack on the Ethereum blockchain has demonstrated that any VULNERABILITY in SMART CONTRACTS can be exploited to create harm.”
>>> Bitcoin is by far the most secure network amongst Cryptocurrencies backed by 92,000+ petahashes of compute power (and growing every day). Bitcoin and Ethereum are not the same thing. Unlike Ethereum which features a turing-complete language,Bitcoin has intentionally limited the scope of it’s scripting language to make it’s attack surface miniscule.
>>> A look at https://www.crypto51.app/ tells us the cost of a 51% attack on Bitcoin for 1 hour is almost $800,000. Additionally, depending on the goals set forth by the Indian government should it take a positive stance towards incorporating Cryptocurrency, it may become necessary for the government to acquire both Bitcoin nodes and Mining capacity in order to secure the network and protect the nation’s interests. More on that below.
On pg 18: “Another major area of concern is with respect to the ABSENCE of A CENTRALISED INFRASTRUCTURE and a CENTRAL entity to ensure effective governance of the overall distributed ledger infrastructure. Historically, financial sector regulators depended on effective governance arrangements on central infrastructure and other regulated entities.”
>>> This is a double edged sword. It is far more preferable for nation states interested in dealing in equal terms to transact with each other using a decentralized infrastructure than it is with a centralized entity. If they were to choose the “security” of the latter, this centralized entity will likely be located in New York, London or Washington DC and be subject to the whims of the Powers-that-be: Sanctions and Censorship against anyone who does not fall in line.
>>> Decentralized structures level the playing field between countries. India can opt for the dual approach of using decentralized structures like Bitcoin for her central bank policy and international trade, while still internally maintaining a Fiat currency in a Centralized infrastructure.
On pg 18: “Consensus protocol provides immutable seals to the blockchain ledger. Changing the records of one transaction would require the entire history of transactions on the chain to be changed. However,the keys associated with recording or changing a transaction are susceptible to theft or loss. In such cases, the digital assets could become irretrievable.”
>>> This is a problem today and is being solved. Certainly not a reason to completely ban the entire thing. There will be a combination of custodial arrangements, where people have their keys held by trusted intermediaries, if they so choose, to situations where people prefer to hold their own keys. With the latter comes the personal responsibility for the safekeeping of keys. Nation states operating with Bitcoin should of course maintain the level of security arrangements and technology that dealing with such large sums of money should necessitate.
On pg 18: “DLT is still at an EARLY STAGE of development. There are still serious concerns about the robustness and resilience of DLT.”
>>> Absolutely. The Jury is still out. However there are millions of engineers and others around the world working to make this system better. It is better for India to have a seat at the table and take a proactive approach to exploiting this opportunity than to take a wait-and-see approach. This revolution will benefit early adopters and movers in an extremely disproportionate way should it come to pass. India should opt to be an early adopter of the technology and show the world how it’s done while creating millions of jobs and companies in the process.
On pg 18: “Although the transactions in a permissioned or permissionless network are hashed, with only the hash strings available on public domain, these hashes and the metadata is still visible to all the participants. Monitoring of metadata through various cluster analysis techniques can reveal the information on the type of activity and the volume associated with the activity of any address on the blockchain to any participant node.”
>>> This is actually a great point that explains why the government has little to fear from Cryptocurrency. Every transaction is tracked. Firms like Chainalysis have been able to build robust solutions to analyze blockchain data and help with AML efforts.
On pg 20: “Recourse mechanisms: One of the main features of the distributed ledger technology is it’s IMMUTABILITY. Due to this feature, there are concerns regarding how transaction disputes or erroneous transactions can be resolved.”
>>> It is a design feature of Cryptocurrencies like Bitcoin that censorship resistance and immutability is the greater good to strive for at the expense of sometimes having erroneous transactions go through. It can easily be argued that this is exactly the right choice to make. Transaction disputes can be resolved in a regulated way with funds being sent back to the originating address depending on how an arbitration goes.
On pg 29: “The Bank for International Settlements‟ Cryptocurrencies: Looking Beyond The Hype report states that to scale to a national level retail payments system, a virtual currency would require crippling levels of storage and processing power. Adding more users also makes virtual currencies more cumbersome to use. “
>>> This is patently false information. The energy consumed is directly tied to how secure the network is. There is almost no relationship between energy consumption and number of users or transaction capacity.
On pg 30: “Central Government may notify categories of personal data that should only be stored or processed in India. Reading that with another provision, which already provides for at least one copy of personal data to be stored in India, Cryptocurrencies could potentially take up an enormous amount of energy in an already power-starved India.”
>>> This is possible to enforce at the Crypto exchange level or with other Crypto-related service providers, but not at the Cryptocurrency protocol level. Enforcement or compliance with Personal data storage certainly completely unrelated to the amount of energy used by Cryptocurrency mining. However, on the point of energy consumption, the philosophical point to be made is what is the “right” amount of energy should be used to create the world’s first non-sovereign trust-less censorship resistant hard money for international border-less commerce? How does one quantify the value of expending energy on what is arguably the greatest invention the world has seen since the Internet.
>>> On the more practical front, India should take a positive approach to growing the energy sector especially in renewable and green energy like Solar rather than approach it from a scarcity mindset. Additionally, if the government decides to take the recommendations set forth in this article with regards to mining (more on that below), it is quite possible for the government to acquire and setup captive mining facilities in Energy-rich countries that we have a good relationship with, without affecting India’s own energy balance.
On pg 30: “Post the RBI’s announcement in April barring regulated lenders from facilitating Cryptocurrency transactions, prices of Cryptocurrencies declined steeply to Rs. 350,001, and so did the volume traded “
>>> Yes, governments or central banks threatening to ban or outright banning Cryptocurrencies will impact prices and affect consumers who have invested in their hard earned savings into this new asset class. It is therefore much more prudent to take a careful thoughtful stance on this. People are demanding this alternative. In a free society, it behooves the government to accommodate this need, albeit with necessary legal and regulatory safeguards.
On pg 30: “For example, in 2014 the illegal website Silk Road was found to have been using Bitcoin to finance hacking, drug trafficking, and illegal weapons sales. The FBI alleged that Silk Road facilitated more than USD 1 billion worth of transactions in over two years.”
>>> This is a great example of how law enforcement can in fact track down criminals using Cryptocurrency due to the public nature of the blockchain transactions and trace-ability.
On pg 33: “In 2017,the government of China banned trading between RMB and Cryptocurrencies, and also banned Initial Coin Offerings.”
>>> This is a massive opportunity for India to serve as the Asian Crypto hub and take away opportunities that have been lost by the Chinese government. If India were to enact the right regulatory climate, there are thousands of Entrepreneurs and businesses that are sure to spring up and in turn provide millions of well paying jobs, tax revenue and wealth creation for the country. The alternative is serious loss of Talent and Capital as people look to leave the country and set up shop elsewhere.
Recommendations for the Indian Government
I strongly believe in the Indian Government’s ability to do the right thing for its citizens, especially in the light of the audacious economic goals set forth by the Modi Government. The boldness of my recommendations is only a testament to that fact. The faith I have in India to move us forward in previously unimagined ways.
Recommendation 1: Allow the operation of Cryptocurrency services in the Fintech regulatory sandbox, governed by a loose set of rules and regulations that encourages innovation. Watch it in action. Formulate regulations and shepherd these into the real world.
Recommendation 2: Fully regulate on and off ramps for Fiat currency into the Crypto world with needed KYC / AML procedures. Crypto exchanges and other service providers that offer any bridge between fiat and Crypto would fall under this purview.
Recommendation 3: US-based companies especially in Silicon Valley operate as Monopolies (Google, Facebook, Netflix, Amazon among others) and have unparalleled power to control the message and censor what they deem to be undesirable. India deserves much better. A new crop of decentralized companies will disrupt these monopolies. Designate an under developed region of India as ‘Crypto Valley’, much like Bangalore is Silicon Valley. Develop Crypto Valley as a set of smart cities and designate them similar to free trade or export zones. Ensure that at least some of the new disruptors are born in India.
Recommendation 4: Add Bitcoin to Central bank reserves. The RBI should strongly consider allocating a small proportion of their reserves to Bitcoin as a hedge against the end of the current world monetary order. The world is in an unsustainable debt bubble with >$17 trillion in negative interest yielding debt and fiscal imprudence and deficit spending as far as the eye can see. Change is coming. Ensure that India has the insurance to emerge on the other side of this intact and ready to thrive. Allow and even Encourage citizens to hold a portion of their savings in Bitcoin in additional to the more traditional Gold and Silver. Please do not deny them their life rafts.
Recommendation 5: Mine bitcoin. This goes with the previous recommendation. Acquire enough of the hash power on the Bitcoin network to protect the central bank’s holdings and to secure and validate the network.
Recommendation 6: Invite leading subject matter experts from around the world and have an open dialogue. This is a fast changing landscape. Assemble the best advisers and well-wishers you can to help navigate the nation forward.
CEO / Founder, Indra Crypto Capital
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