Over the past year, interest in cryptocurrency (also known as crypto assets, digital assets, or virtual currency) and blockchain has increased immeasurably, especially institutional interest. Key developments include the announcement of cryptocurrency settlements by Visa, PayPal, which allows users to buy, sell and hold cryptocurrency, the announcement of a $ 1.5 billion investment in Bitcoin by Tesla, and the willingness to use Bitcoin as a means of payment for accepting its cars; and Morgan Stanley, which is Bitcoin exposures, adding 12 of its mutual funds’ investment strategies.
What is it?
Bitcoin was conceived in 2008 and was the first cryptocurrency and the first instance of blockchain technology. To reduce clutter, value transfer was made possible over the Internet without the need for an intermediary. Traditionally, trustworthy intermediaries such as banks or stock exchanges have always had to mediate such transactions, which drives up costs and leads to a single point of failure. Bitcoin aimed to reduce these costs and decentralize the risk of a possible failure. In addition, transactions could be cryptographically verified by anyone as transactions were recorded in a public ledger.
While Bitcoin only focused on transferring value, new blockchains like Ethereum extended the same concept to all types of computing applications – file storage, reconciliation, and decentralized sharing. For example, while most of us use file storage services operated by well-known technology companies, a blockchain-based system would not be dependent on a single entity. It’s another thing that intermediaries are still important in the cryptocurrency and blockchain ecosystem as they help make the technology easy to use. To draw an analogy, while you can theoretically set up your own email server, most of us choose popular email service providers.
Advantages and disadvantages
Cryptocurrencies and blockchains bring many benefits, including cost savings, decentralization and transparency. Various government agencies have recognized this. But blockchains are not a panacea and, like any technology, involve compromises. Government concerns include volatility, money laundering, risks to the monetary system, exchange controls, tax evasion and cybersecurity.
However, cryptocurrencies and blockchains are platform technologies like the Internet. While the Internet enabled the transfer of information across borders almost instantly, cryptocurrencies enable the transfer of value in a similar fashion, leading to the nickname “Internet of Value”. Like information, the transfer of value can also be positive or negative. The internet enables family and friends to connect across borders like never before, but it also enables child pornography and other criminal activities on a large scale. Similarly, cryptocurrency is used by legitimate commercial and not-for-profit companies, including UNICEF, which launched a “CryptoFund” that can be used to receive and withdraw cryptocurrencies to fund projects in emerging markets, and the World Food Program, which uses cryptocurrency networks, Expand the choices for refugees on how to access and spend their financial aid. With new use cases like Non-Fungible Tokens (NFTs) and smart contracts, software developers and creatives around the world, including India, are finding new opportunities for growth and expression. Undoubtedly, cryptocurrencies are also used by bad actors to remotely extract ransom or trade in illegal goods. As explained below, the answer to this must be regulation, not prohibition.
Regulation and Prohibition
When a 2019 report by the Interministerial Committee (IMC) proposed a total ban on cryptocurrencies in India and a 10-year prison sentence for holding cryptocurrencies, participants in this nascent but rapidly growing ecosystem in India were shocked and disappointed.
The IMC’s proposal has not yet been implemented and public statements by government actors have been more measured since then. The finance minister said the government would take a calibrated approach to cryptocurrency and that a proposal would be made to the cabinet shortly. Potentially encouraging signs in this regard are the Department of Corporate Affairs, which recently asked companies to disclose cryptocurrency holdings on their balance sheets, and statements in parliament on how cryptocurrencies are taxed under income tax and GST laws. At the political level, the regulation of cryptocurrencies has the advantage of maintaining control over the system (e.g. through exchange). It avoids the risk that bad actors will merely go underground, while good actors will be denied access to a legitimate technology and good, forcing them to move overseas.
Additionally, a cryptocurrency ban would mean a lot more than investing and trading – it would cut off many types of blockchain applications that use tokens, some of which are used by large Indian and international companies. It would also eliminate a burgeoning ecosystem of thousands of blockchain software developers who have to use tokens to pay the blockchain network to run their applications. Regulators should take a broader perspective and, in addition to regulating trade, also consider enabling regulations on security tokens and first coin offerings, utility tokens, NFTs, etc., all of which will fuel innovation in their respective sectors.
From a constitutional point of view, legitimate trade can only be restricted by appropriate measures. Outright bans have been rejected by the Supreme Court unless there is no less invasive measure. In addition to the fundamental right to trade, the rights to property and privacy, as well as the right to arbitrary or discriminatory government action, are at stake.
The Supreme Court found in March 2020 that the Reserve Bank of India’s circular banning virtual currency transactions through regulated banking channels was disproportionate and violated the fundamental rights of cryptocurrency exchanges. Any outright ban on cryptocurrency is a far more extreme move – the seizure of an estimated Rs. Legitimate fortune of 70 lakh Indians worth 7,000 crore – and an uphill battle for drafting is likely to be ahead.
Alternatives to a ban
On the other hand, there are several alternatives to a ban. Cryptocurrency intermediaries (exchange and wallet providers), like intermediaries in the financial sector, should be licensed and subject to various scrutiny and trade-offs, including KYC norms (self-regulation currently follows). Leading jurisdictions including the US, UK, EU, Canada, Australia, Japan, Singapore and even countries with exchange controls like South Korea have found ways to successfully regulate cryptocurrency without resorting to a ban, despite the same regulatory concerns as India to have .
In addition to its benefits, strong economic phenomena have raised concerns in the past and we are still grappling with the role of cash in laundering money and ensuring investor protection in the stock markets.
Interestingly, a 1948 report by the Government of India found that “[n]Not only has the organization of the stock market been found to be inadequate, but the way it operates has often adversely affected the interests of investors and the economy as a whole. For the most part, there is no security for trading … Perhaps the most objectionable feature is the highly fluctuating nature of prices on the stock exchange. “
Needless to say, the stock market was never banned in India.
(The authors are Leaders, Technology Law, Nishith Desai Associates)