What are the qualities of a good regulatory framework? First, it has to be as unambiguous as possible. In other words, there should be clarity on what activities are permitted, and what are prohibited, as well as the penalties for violations. Second, the regulator — usually a State body — should have the powers to proactively detect violations, and when detected, the ability to effectively bring violators to book.
In the ongoing melee of analyses over the imminent law to regulate cryptocurrencies, too much attention is being given to the first, and hardly any over the second. Assuming the law bars cryptocurrency transactions, and somebody holding a few Bitcoins sells them in a private transaction, the fact is, it is highly unlikely the government will come to know. Even if transactions are permitted within a regulatory framework, is there any way to detect a private transaction between two traders using their personal wallets? Good luck with taxing such a transaction.
Suppose a crime involving cryptocurrencies has been discovered, and the accused nabbed along with the spoils (stolen coins). As we saw recently, the police often does not even have the necessary expertise to ensure that the seized coins be appropriated, and kept in custody.
Or suppose the IT system of an electricity company, or a hospital, is hacked into and taken hostage by cybercriminals demanding ransom in cryptocurrency. The fact that Bitcoins are banned in India will hardly work as an excuse. The victim will be forced to ‘make arrangements’, likely at an exorbitant cost.
In short, a regulatory framework that merely addresses what activities are permitted does not serve any purpose. Why, even a complete ban (which would meet the test of clarity) would mean nothing, if the State does not have the means, or expertise, to enforce the ban.
It is often said that cryptocurrencies today are what the Internet was back in the ’90s — championed by a few geeks, while the rest of us shrug in part-amusement, part-disquiet. It could well be that the technologies which cryptocurrencies are based will define our lives in the decades (or years) to come.
What the government ought to focus is on permitting the development of this technology, while protecting both the economy and the individual citizen from lasting harm. Meanwhile, defenders of cryptocurrencies could probably help by acknowledging its real potential to cause lasting harm, if they are to be taken more credibly.
The harms are primarily of three kinds: One, the anonymity that crypto-transactions operate under mean that they are going to be used for illegal activities – almost all cyber-crime nowadays involve demands for ransom in the form of cryptocurrencies. Banning won’t make this problem go away, as India’s share in the global trade involving cryptocurrencies is small.
Just as importantly, the anonymity coupled with irreversibility of transactions mean that it is almost impossible to identify whether lost Bitcoins were in fact stolen by an insider, or lost to a hack by an outsider, or even to a forgotten password. After all, even the most secure system is vulnerable to hacks.
An extreme response to this would be to prohibit holding of cryptocurrencies in trust on behalf of others (which would wipe out exchanges), making each person responsible for their coins’ safety. A more moderate approach would be to make exchanges absolutely liable for loss of coins — irrespective of whether it was stolen or lost. Needless to say, customers would bear the brunt of losses due to fluctuations in price.
The second harm, already seen in India aplenty, is that the wild price increases would be used to attract ‘investors’ looking to make a quick buck. However, this harm can be addressed through criminal (and securities) law, since it almost entirely transpires in the physical world (advertising fraudulent schemes, collecting money, etc.). Unapproved schemes for collecting money from investors are prohibited by law. The government’s role would be to create greater awareness.
Finally, and this is not talked about enough, mainstreaming of cryptocurrencies will increase wealth inequality. People who own large tranches of crypto-assets acquired them at throwaway prices long ago, or even received it as a joke. Today, as prices have soared (100x, compared to just seven years ago) many who have hoarded them would be richer than the world’s wealthiest people. Remember, this is money that has no underlying value — or sovereign guarantee. It will necessarily inflate prices in the economy, pulling off the ultimate con — self-printed money.
The government could address by prohibiting the use of cryptocurrencies for purchases (such as for pizza or cars) — that is, prohibit their use as currency, and permitting their use only as assets to be held or traded. A blanket ban, on the other hand, would be both futile, and unnecessary.
Abraham C Mathews is an advocate based in Delhi. Twitter: @ebbruz.Views are personal and do not represent the stand of this publication.