Cryptocurrencies by their very nature cannot be regulated. The Supreme Court should resist the urge to get involved
Abraham C Mathews
In the last decade or so that they have existed, cryptocurrencies, and their most popular ambassador, Bitcoins, have come a long way — from being a convenient medium of exchange to pay for drugs or crime to finding their rates quoted in financial newspapers daily. Monetarily, Bitcoin scaled dizzying heights over this period (the famous 20 times run to around $20,000/Btc in 2017), before settling at more reasonable levels of around $3000/Btc over the last year — still a spectacular return if you had bought it during the early frenzy.
As a medium of exchange, the report card is perhaps humbler. There is simply no denying the fact that cryptocurrencies have not gained the widespread usage their early proponents predicted, with usage as currency still restricted to a few pockets of enthusiasts. It’s a different matter that blockchain, the technology on which cryptocurrencies are built, has in fact taken off, and many enterprises use blockchain effectively. But that’s not under debate. However, the revolution called cryptocurrency has all but failed.
As for its economic argument — that the value of the coin cannot be diluted, and therefore prices will only rise as acceptance grows (in fact, in its earliest days, this was touted as its biggest selling point) — failed the day that the folks running the show decided to permit interoperability between different currencies. For example, other cryptocurrencies can be pegged with the value of Bitcoin meaning the total number of possible Bitcoins effectively expanded beyond the originally fixed 21 million, thereby giving it the same effect as of a central bank printing fresh currency.
Finally, its technological argument — that it works under complete anonymity and that transactions were irreversible proved to be its undoing, as well as a nightmare for law-enforcement. Since crypto wallets (like bank accounts, for simplicity) are just a long string of characters and there is no way to connect such a wallet with its owner, retrieving stolen Bitcoins is nigh impossible. One cannot begin to count the number of instances where Bitcoins were stolen, never to be traced again, leaving entire exchanges broke. Just imagine if all the investors in the Bombay Stock Exchange were to receive an email one lazy Tuesday afternoon informing them that unfortunately, it turns out that their money has been rendered untraceable and irretrievable. That has happened to investors in Mt. Gox, once the largest crypto-exchange in the world, and routinely happens with others.
In the Indian context, cryptocurrencies carry an additional dimension. Gaining prominence just when the regulators ramped up crackdowns on pyramid as well as ponzi schemes (in the aftermath of the Sahara judgments, and the Sharadha and PACL cases), cryptocurrencies offered a new mode of attracting investments from the public — without attracting regulatory censure in the post-Sahara framework where all deposit-taking institutions had to be mandatorily registered. Crypto-exchanges escaped such scrutiny, since investors were technically buying Bitcoins in their own names, but behind the scenes, stupendous returns were being promised by dubious promoters who had custody of these coins. These coins would then mysteriously disappear in way too many instances — allegedly due to a hack, but since the transaction is not traceable, one simply does not know who the real perpetrator was.
This is the paradigm that the government must address as it sets out to formulate a regulatory structure for cryptocurrencies. It must at least take a stance on whether such a structure is warranted. Indeed, the Supreme Court, while hearing a clutch of writ petitions praying for regulatory oversight over cryptocurrencies, has orally directed the government to do so by the date of the next hearing, say news reports .
The Reserve Bank of India (RBI) has so far taken the position that cryptocurrencies do not have sovereign backing (merely a truism), and last year, barred banks from transacting with entities that deal with cryptocurrencies.
This is, unfortunately as far as the central bank can go. You cannot regulate (remember, regulation also works as assurance to citizens who deal with regulated entities) something that you do not have some semblance of control over. Suppose a Bitcoin exchange is registered with the government, or the RBI, and let’s say, it gets hacked, the probably of the coins being recovered or the perpetrators being discovered is alarmingly low. Nothing that the government introduces or requires can change this fact.
This is not to say that cryptocurrencies must be declared illegal. It must be treated for what it is: a shiny new toy. Let them play with it. However, giving it statutory or regulatory legitimacy is not just imprudent, it is foolhardy.Abraham C Mathews is a Supreme Court advocate, and a chartered accountant. He tweets at @ebbruz. Views are personal.The Great Diwali Discount!
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