Crypto ban: It's not the solution

The Reserve Bank of India (RBI) governor Shaktikanta Das has major concerns about cryptocurrencies and their effect on financial stability. While he has not gone into details about what kind of cryptocurrencies he is concerned about, one can assume that it includes the entire gamut — the original Bitcoin, the Altcoins such as Ethereum, which number about 9,000 and are growing too fast for anyone to keep track of, and finally even the Initial Coin Offerings (ICOs), which are being used by most technology businesses to raise money while issuing tokens. The concern  extends to even the class of cryptos called “Stablecoins” that try to minimise volatility by tethering their value to an underlying asset or basket of assets.

Like many other central banks around the world, the RBI favours bringing out its own digital currency. China already has one out, while the US Fed will come out with its own digital dollar. These are nothing more than digital representations of the country’s currency, and hence are likely to be nothing more than official currency in digital form.

The Indian government is as worried as the RBI about cryptos. It plans to bring in a law that, if reports are accurate, will end up prohibiting all private cryptocurrencies while allowing the RBI to create an official digital coin.

But a law prohibiting all forms of private cryptocurrency — whether tethered or untethered to any underlying asset — would be akin to throwing out the baby with the bathwater and also the bathtub itself. It comes from a failure to understand the technology, the underlying philosophy behind the cryptocurrencies and most importantly, the unfortunate tagging of the term “currency”, which is completely misleading.

The first cryptocurrency — Bitcoin — was an elegant peer-to-peer transaction solution that bypassed the need for a central institution and instead used cryptographic proof in a shared public ledger. It was created by Satoshi Nakamoto, which is a pseudonym. It is still not clear whether this was one person or a group of programmers working together. The exact identity of Satoshi Nakamoto remains a mystery.

At first, Bitcoin was merely a curiosity for nerds. In 2010, Laszlo Hanyecz paid for two pizzas using 10,000 bitcoins. To put that in perspective, that is over half a billion US dollars for two pizzas at current rates of bitcoin to dollar. As bitcoins gained in popularity, its value has bounced up and down — mostly up. Its value shot up when Elon Musk of Tesla bought over a billion dollars worth of bitcoin.

Economists Joseph Stiglitz, Kenneth Rogoff and Nouriel Roubini, among others, have warned against them as has Bill Gates. Meanwhile, those interested in saving the planet worry about the enormous amount of electricity consumed in cryptocurrency mining — or verifying transactions. Cambridge researchers recently tried to calculate the electricity usage and came up with the estimate that bitcoin mining currently consumes more electricity than Argentina. Central bankers and governments worry that, because of their nature, they can lead to anonymous transactions that can be used by criminals to transfer money.

All those worries are valid to an extent. The world’s financial structure is chaotic enough even without completely unregulated cryptocurrency enthusiasts unleashing havoc. Also, cryptos can be used by criminals — though so can any currency or gold or silver as we know.

Prohibiting cryptos completely and trying to replace them with digital currencies issued by the central bank is not a solution either because these are not similar beasts.

The central bank’s digital currency will rise and fall in value exactly as paper currency. Pure cryptocurrencies not linked to anything should be treated more as an asset class where the value is largely determined by what the buyer is willing to pay and its availability. In that sense, it is no different from, say splash of paint on a public wall— which can be treated either as an artwork because a famous graffiti artist created it or just a daub of colour of no value. What one pays for it is entirely dictated by the value the buyer is willing to pay.

Stablecoins are very different. They may share some characteristics with pure cryptocurrencies and they might not have a central bank behind them but they are linked to the value of a physical asset. Suppose a stablecoin is linked to gold — it is no different from a gold bond except in the way it has been issued and monitored.  

The correct way to regulate pure cryptocurrencies would be to create a mechanism and a regulatory structure that is suitable for commodities or an alternative investment class. And allow authorised brokers and official exchanges to buy, sell, and borrow based on their current value. Only well-established cryptocurrencies such as Bitcoins and Ethereum can be allowed to be transacted within the country and only using registered brokers and exchanges. And limits of transactions and settlements should be made and monitored.

Stablecoins would require a separate exchange — perhaps more closer to a commodity exchange. In both cases, the regulatory mechanism needs checks and balances and methods of settlement.  

The government needs to realise that cryptocurrencies today are what stocks were in the 17th century. They cannot be ignored and the door cannot be shut on them in the long run.

The writer is former editor of Business Today and Businessworld and founder and editor of Prosaicview, an editorial consultancy