Smart regulation needed for cryptocurrencies


Bans that go the way of Gold Control and Prohibition are not the way forward for a country intent on a smooth transition into the 21st century, writes Prof. Madhav Nalapat

Laws may shortly be passed to ban Indian citizens from participating in the market for cryptocurrencies, which in actuality refers almost exclusively to bitcoin. This columnist is far from being an expert on the subject, but has been tracking its development. There is zero intrinsic value in bitcoin, even less than is the case for paper currency, which has an admittedly minuscule value per currency note, in terms of the paper and printing.

As yet, bitcoin (and other cryptocurrencies) has very limited utility as a unit of exchange, as there are relatively few transactions in which physical goods can be exchanged for bitcoin. And unless such exchanges of cryptocurrencies for physical goods or services become mainstream, such “currencies” will continue to have a much more limited utility as a store of value than, for example, gold. While some have gained in bitcoin trading, others have lost. Their advantage, in the eyes of backers, is the absence of transfer charges.

Many in the Middle East toil for long hours to earn money that they send home to their families. They face the cost of such transfers, which usually goes unmentioned, but is substantial to an individual only a few inches removed from subsistence level. The conventional banking system imposes costs on each transaction, something absent in cryptocurrencies. And while paper currency can be printed in greater and greater number, there are digitally imposed limits on the number of units that can be created where cryptocurrencies are concerned. Bitcoin, for example, is said to have a limit of 21 million that was set into place by Satoshi Nakamoto, the inventor who released his discovery free of cost.

The world within years began showing substantial interest in this new internet-enabled instrument. Interest in bitcoin has multiplied by several orders of magnitude, as has its trend value on the market. As any mainstreaming of its use would denude central bankers of their power to regulate money supply, it is small wonder that both the Bank of China and the Reserve Bank of India favour banning all cryptocurrencies, especially bitcoin. The US Federal Reserve Board has not joined them, because such currencies are valued in terms of the US dollar. Any expansion in their use would therefore strengthen the position of the US dollar as the reserve currency of the globe, a perch from which the PRC, the Russian Federation and a few countries close to them are seeking to topple it.

Across the world, more and more transactions are being carried out through the use of cryptocurrencies, and what is needed is that taxes due on such transactions made by other means get paid. Those countries that shut the door on cryptocurrencies ensure that an opaque market get created for such dealings, many though the Dark Web. The fact is that cryptocurrencies can be tracked by countries with sophisticated methods such as India, relying as they do on Blockchain.

Unless the EU, the US, the UK and Japan, all four of whose currencies are global units of exchange, come together in an effort to enforce a ban on cryptocurrency transactions, banning them in India may turn out to be as futile an exercise as was Finance Minister Morarji Desai’s Gold Control Acts of 1962 and 1968. Morarji had been a junior official in the early years of his life, and unlike most others from Gujarat (who are usually practical and self-starting), believed in the efficacy of controls enforced by the police. This in a country of abundant population and limited ability of the government to enforce its writ, especially in matters as destructive of livelihoods and as intrusive into lives as Gold Control was before getting scrapped in the 1990s. Under Prime Minister Narasimha Rao, this period saw economic common-sense in state policy.

Prime Minister Narendra Modi has stressed the importance of the democracies coming together in dealing with the expansion of currencies into the digital space. Few governments share the confidence of the official machinery in India that police and the passing of laws can ensure a satisfactory level of compliance in a country where the legal and regulatory system is already far more complex than is suitable for growth. A ban on cryptocurrency is about as easy to implement as a ban on acts between consenting adults that are “contrary to the laws of nature”, whatever these may be. Or using those colonial favourites, instruments of persuasion such as the police truncheon and our crowded prisons to stop people from consuming a bottle of beer or a glass of wine. The race for quantitative measures of success is usually a short-cut to failure.

In the 1960s, General William C. Westmoreland of the US army concentrated on body counts as a measure of success for the men under his command who were fighting the Viet Cong. This led to an explosion in the killing of non-combatant civilians simply because they wore the same pyjamas and tunics as did the Viet Cong. The mass murder of civilians by the US army and their South Vietnamese auxiliaries ensured that opinion within the towns of villages of the South turned towards the Viet Cong as the only possible saviours against such killings on the ground by US-led forces, as well as from sea and air. By the close of the 1960s, South Vietnam had been lost despite the rising “body count” sought by General Westmoreland.

Laws that attempt too much achieve little in practice. India has got among the most severe laws on narcotics in the world, and every few months, media erupts with the news of some celebrity or the other “caught in the net”. At least two Chief Ministers known to this columnist made a habit of planting narcotics inside the homes of opponents and then raiding and locking them up as “drug kingpins”. It may make more sense to legalise “soft” drugs and concentrate on “hard” drugs. By using an all-inclusive approach, the kingpins who trade in hard drugs escape while minnows consuming soft drugs get caught. Whether it be regulation or taxation, less is often better.

Regulation and taxation of gains (moderate enough to ensure widespread compliance) is essential in the expanding field of cryptocurrencies. Bans that go the way of Gold Control and Prohibition are not the way forward for a country intent on a smooth transition into the 21st century. India needs to shed the many remnants of the 19th and 20th centuries that remain embedded in the governance system.

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