The bitcoin puzzle

India needs a pragmatic approach towards cryptocurrencies

Just a month before the deadline imposed by the Reserve Bank of India (RBI) to banks to cut off all transactions and services to cryptocurrency exchanges comes into effect, reports of a series of scams involving bitcoin have surfaced from Gujarat. The Central Bureau of Investigation is investigating one case where high-ranking policemen were allegedly involved in extorting bitcoin from kidnappers, who had demanded a ransom to be paid in the cryptocurrency. In another case, a fly-by-night operator is believed to have persuaded many individuals to invest in bitcoin, offering them returns of 365 per cent per annum, and to have fled with over 1,300 bitcoins. Ironically, demonetisation may have been a watershed in boosting the popularity of cryptocurrencies. While exchanges for these existed prior to demonetisation, many Indian traders discovered the utility of these exotic instruments during the cash-crunch period. By mid-2017, India had become one of the top three or four global centres for cryptocurrency trading. These instruments are now in a strange regulatory limbo so far as India is concerned because while they are not legal tender in India, they are not illegal either.

It has become obvious over the past several years that it is impossible to stop these instruments from being traded — it is simply too easy to carry out crypto-transactions, off-exchange and entirely unrecorded, if anyone so desires. In the case of bitcoin, for example, an anonymous trader only needs to memorise the password that operates a digital wallet — and the same individual can hold a million or more wallets. Bitcoin can be bought and sold on many exchanges across the world with payments being made in multiple fiat currencies and transferred to bank accounts anywhere. Such trades can, therefore, be carried out almost undetected. This aspect of cryptocurrencies became obvious during the Greek crisis of 2009 when many people circumvented bans on the conversion of euros by buying bitcoin in euro and selling it in dollars. China has now spent several years attempting to proscribe cryptocurrency trading, and reluctantly came to the conclusion that regulation and recognition is a more pragmatic way to counter excessive speculation and criminal activity in these instruments.

By lowering the boom on legitimate exchanges, where such instruments can be traded by individuals who are willing to submit KYC norms and are prepared to pay the capital gains tax, the Indian central bank has created a strange situation. Hawala channels have received a boost as criminals have discovered that these instruments are excellent via media for illegal forex conversions and a good medium of payment for delivering illegal goods and services. Most governments dislike cryptocurrencies, however, the more pragmatic ones such as Japan, Australia and South Korea have accepted these instruments are here to stay and have set up regulatory systems to oversee trading in such instruments. That would be the way to go. It is amply clear that blanket proscription will not work and Indians who traded cryptos legitimately on exchanges before the RBI issued its instructions this March should have a right to enjoy their assets without being compelled to break the law. The government should urgently review its policy on cryptocurrencies.