Decrypting India’s Crypto Report
By Ishan Sharma on ALTCOIN MAGAZINE
An inter-ministerial committee set up by the Indian government to study the Virtual Currencies (VCs), has recommended a ban on all ‘non-official virtual currencies’. It also came up with a draft bill which proposes maximum imprisonment of up to 10 years for anyone found dealing in VCs. The report also advocates the promotion of Blockchain Technology without a cryptocurrency (which is technically possible but isn’t widely popular, e.g. Smart Dubai Initiative).
Since the use of the term “virtual currency” has created a lot of confusion, I first try to declutter what is being proposed. Next, I delve into various concerns listed in the report and conclude that many of these are misplaced. I also discuss the likely impact of banning cryptocurrencies and propose what India should do instead.
Virtual Currency (VC)
Electronic money or the money stored in your Paytm wallet is not a virtual currency (thankfully!). Digital coins, which are used for monetary exchange or as a payment method for services on the blockchain, like Bitcoin (BTC) or Ethereum’s Ether (ETH), are a VC. Tokens, which store complex levels of value (such as property, income, and utility) like the DAO tokens which operates on Ethereum platform, will come under VC. Tokens are generally issued through Initial Coin Offerings — ICOs (cryptocurrency equivalent of crowdfunding), the committee proposes a ban on ICOs as well.
Concerns
Crime and Crypto
Cryptocurrencies offer pseudonymity which makes the job of establishing the real-life identities of the transacting parties difficult. The case of Silk Road, an online black market involved in illegal drug trade highlighted the enormity of this problem. The company had a turnover of $1.2 billion and most of its transactions were through Bitcoin.
Bitcoins have also become a favorite of ransomware hackers, not only do they offer anonymity, but being electronic cash, they also make it easy to write software that can automatically demand payment. Ransomware CryptoWall, the most successful attack till date, was able to extort over $2.2 million through Bitcoin payments. But the ban on cryptocurrencies by the Indian government will not stop these attacks. This is a game of cat and mouse between cybersecurity experts and the hackers
No Intrinsic Value
According to the report “private cryptocurrencies” are inconsistent with the essential functions of money.
.. private cryptocurrencies lack all the attributes of a currency. There is no fixed nominal value of these private cryptocurrencies i.e. neither act as any store of value nor they are a medium of exchange.
Committee emphasized on the fact that the cryptocurrencies have not been declared a “legal tender” anywhere in the world (How can a private currency even be?). But for something to have an intrinsic value, it is not necessary for it to be a legal tender. The intrinsic value would depend on the importance that people attach to it and on its relative abundance. How do we decide the intrinsic value of Gold, which is after all just a piece of rock? Like Gold, mining of bitcoins or any cryptocurrency is an energy-intensive process (one bitcoin transaction takes the same amount of electricity as 19 US households consume in a day) but there is a marketplace where people can spend it. This ecosystem reinforces the value of a cryptocurrency.
Also, the committee shouldn’t define the term “value” so narrowly. Tokens are much more than merely a store of ‘value’. The DAO tokens, for example, can facilitate democratic decision making among the “shareholders” by ensuring that their functional relationship reflects the ownership.
Central Bank’s Autonomy
The committee believes that cryptocurrencies could affect the ability of central banks to carry out their mandates.
..cross-border transactions with non-official virtual currencies can violate limits on the inflow and outflow of money, particularly as such transactions happen irreversibly. This compromises an- other important lever of monetary policy.
The total market capitalization of all (2000+) cryptocurrencies put together is just about $119 billion. Therefore it is hard to imagine how cross-border transactions can in the near term, create a problem for a country whose current account is anyway fully convertible. Also, this is a concern which can be addressed by regulating the cryptocurrency exchanges.
Former RBI governor Urjit Patel was asked about this in a discussion held at Brookings Institution. In his reply, he rightly pointed out that at this stage, scalability is a big challenge for any cryptocurrency. Transaction time is prohibitively large (a Bitcoin transaction takes minimum 10 minutes) thus limiting the wider use.
Algorithms cannot be a substitute for all that a central bank does to make a currency trustworthy, so only those who understand the technology and its risks are taking the plunge.
Other Issues
- Price Volatility: Cryptocurrencies are still new as an asset class, therefore it is not easy to predict the factors which cause fluctuations. But, one must realize that their volume resembles a small-cap stock as they have not yet hit the mass market adoption rates.
- Environmental Concerns: It is estimated that mining activities are responsible for over 10 million tonnes of carbon dioxide emissions. Research has also shown that crypto mining consumes more energy than mineral mining, to produce an equivalent market value. But, Cryptocurrencies are likely to become increasingly efficient as they continue to evolve and develop. For example, the proposal to replace “proof of work” in Ethereum with a “proof of stake”, could cut energy consumption by 99%.
- Financial Frauds: Phishing and Ponzi Schemes like GainBitcoin. Digital Literacy Initiative can go a long way in tackling these problems which even exist with conventional internet space.
But, Can We Really Ban it?
China is the only country where cryptocurrency ban of the kind being proposed in this report has been imposed. They were also very successful in implementing the ban. RMB made up 90% of the Bitcoin trade worldwide before the ban. In under a year, the trade between RMB and Bitcoin fell to under 1% of the world total.
China, with its formidable firewall “the Golden Shield” could ban all cryptocurrency exchanges. It could also censor all the discussions around crypto on Baidu and WeChat by using “keyword filter”. India doesn’t have these capabilities and even if India’s privacy-conscious citizenry allows the state to acquire these tools, people can always use a VPN. Criminalization will only push this sector underground, regulations will raise its standards.
Fear of Missing Out.
Applications which utilize Blockchain are called DAPPs. More than 60% of all DAPPs are hosted on Ethereum Blockchain. Banning “virtual currencies” is therefore like banning Android. It will only lead to denial of access for Indian developers.
Since 2017, ICOs have delivered 3.5 times more capital to the startups than the venture capitalists. The ban on tokens will hurt the nascent startup ecosystem as they have become the easiest way for DAPP developers to secure funding.
A large part of the Blockchain ecosystem (consisting of researchers, investors, miners, end users, entrepreneurs, developers, and traders) deal with crypto, banning it would only cause job and opportunity losses. After China banned mining, the rigs moved to other jurisdiction. The globalized world does not disappear when one country closes its doors to technology.
The Way Forward
Geoeconomic considerations should be kept in mind before taking any decision. The crypto-sphere is dividing into two mutually exclusive camps, one led by China (where this report will take us) and the other which has all liberal democracies.
Also, the technological trend is towards such organizations which wouldn’t be affiliated to any particular nation-state. So, instead of banning them all, the Government of India should join the International Community to set up effective regulatory standards.
On the domestic front, we must create regulatory sandboxes for all emerging technologies and a standing committee must be constituted in the parliament for much wider consultation.
Lastly, the government and the regulators must understand the uniqueness of the technology and the opportunities it offers. Reckless decisions taken without fully understanding its potential will cost us.
