CryptoCurrencies: Why India’s Finance Minister is wrong about them?
In his recent Budget speech delivered on the 1st of February 2018, India’s finance minister- Mr. Arun Jaitley- declared the India would not declare CryptoCurrencies as legal tender and would also begin a ‘crackdown’ on those investing in this new form of ‘money’. He also added that his government would instead attempt to use the Blockchain technology in traditional payments systems. The Finance Minister is wrong, and this is for three reasons which I will explore in this article.
But what is the difference between CryptoCurrencies and Blockchain?
CryptoCurrencies (such as Bitcoin, Ethereum etc.) are a new form of money that people began exchanging to buy and sell other tangible items on the internet or in person. They work by storing our wealth in an online wallet, and using unique user keys, allow us to transact. Traditional online payment systems such as Funds Transfers, Credit Cards, or systems such as Apple Pay or PayTm, is that all these systems require a central authority to monitor and keep a track of transactions to ensure payee’s are not duped- a problem called ‘Double Spending’. Think about it, if someone you do not know happened to meet you on the street, offered to buy your watch for $200, how would you know if he actually had that amount? You know because the transaction you made using Apple Pay was successful. In this process, you trusted the payment settlement mechanism at Apple Pay to check if the other person had the requisite $200 and that hereafter that money would be transferred to you and recorded as such. The same role is performed by banks for our cheques and funds transfers, and by companies such as American Express, Master Card and Visa for our Credit and Debit Cards. With cash, the function is performed by the Central Bank by ensuring consistent quality, and monopoly of issuance over banknotes. Thereafter, anyone with the note is considered to possess the equivalent amount of money.
CryptoCurrencies on the other hand maintain a public ledger on all the participating computers where all transactions from the beginning of time are recorded. Put simply, when someone transacts using the CryptoCurrency a verification process takes place where a number of computer nodes (miners) read the entire ledger to determine if the payer is making a valid transaction and then credit the same to the account of the payee. This happens in a distributed manner, through a consensus of all participating nodes and there is no centralized authority involved, reducing costs and providing several other benefits. This underlying verification mechanism is called ‘Blockchain’ and has several applications elsewhere.
For instance, the current problems with land records in many countries including India is that they can be altered by compromising the person incharge of the file, usually a local official. With blockchain (aka Distributed Ledger Technology), due to the public ledger, it would be impossible to do so as literally every participating node in the system will have a copy of the ledger, and to alter it, more than 50% of the nodes would have to agree. For a bogus transaction, this would be impossible. Similarly, the technology has the potential to obviate the role of the Central Bank in inter-bank transactions, stock exchanges in equities and a lot else. Cryptocurrency is only one aspect of the technology, and in this regard, the Indian Finance Minister’s embrace of the technology must be appreciated.
"Similarly, the technology has the potential to obviate the role of the Central Bank in inter-bank transactions, stock exchanges in equities and a lot else. Cryptocurrency is only one aspect of the technology, and in this regard, the Indian Finance Minister’s embrace of the technology must be appreciated."
What are the downsides to Cryptocurrencies?
Anonymity. While the ledger of transactions is public, it is impossible to identify a particular person with the cryptocurrency as the ledger has usernames. There is no bar on a person creating a new username and no authority to verify if the credentials lead back to the person making it. (You don’t need an Aadhar Card for it, yet- a bad attempt at humour which only those in India will understand). This makes many governments uneasy. They claim that this can lead to transactions of illegal nature and tax avoidance as there is no way of pinning accountability, unlike bank accounts and cards.
But don’t we have drugs and arms purchases in cash already?
Yes we do. But here the argument made is that because of the logistical and practical constraints of carrying a large amount of cash for making such transactions, they are still limited. In addition, it is possible to enforce civil forfeiture laws for extra vigilance. Basically, you can only carry so much cash publicly or hide under your mattress, before inviting attention. However, with cryptocurrencies, there are no such concerns, transactions can be carried out using your phones and this increases the threat of aiding terrorist financing, drug and human trafficking and all other sorts of evils. They argue that both the volume and value of illicit transactions will increase, not to mention the enormous amounts of presently existing untaxed wealth that could easily be transferred into these anonymous instruments.
Then why not ban them?
Because we can’t and should not. It is easy to understand why its largely impossible to enforce any law that out-rightly bans cryptocurrencies- the same reason why authoritarian states cannot completely ban online dissent, and India couldn’t ban porn. The very idea of Internet is based on anonymity and any such law would mean adopting a pigeon mentality to the problem- ignoring it without doing anything substantial about it.
Most of the people this law will turn away are going to be those who intend to invest in them legitimately for speculative purposes. It would not stop those who intend to use this already existing technology for nefarious purposes because they are already doing something far worse from a legal standpoint and wouldn’t be afraid of a law that seeks to curb their payments infrastructure. Even without the benefit of anonymity, in the tangible world, we have counterfeiting of currency despite laws against it. When we are unable to enforce laws against those who can be caught red handed with tangible infrastructure in their possession, to think that a law will stop a terrorist financer is being too optimistic.
On the other hand, there are real benefits to this decentralized currency that any freedom espousing state like India should embrace. The biggest among them is ‘Censorship Restraint’. In 2010, when news emerged that donations to Wikileaks were stopped by payment services like Visa and MasterCard, it stated accepting donations through Bitcoins. Now, this article does not concern itself with the good and bad of Wikileaks, but, does the citizen not have a right to choose which organisation they intend to donate money to in a free political society? We must remember that Wikileaks was not a banned organisation at the time and therefore, a private corporation having a veto over a citizen’s decision to spend cannot be deemed appropriate. Further, traditional payments systems are costly, they are reflected directly (through upfront fees) and indirectly (in the costs of institutions, and thereby the interest we earn on our deposits), the distributed and lower costs of transaction in cryptocurrencies could open up possibilities for bringing the poor into the 21st century payment infrastructure as well- a social responsibility to prevent digital and economic divides.
With regards to the concerns of tax avoidance and nefarious activities. While it is true that these problems are aided by the cryptocurrency framework, there are mechanisms to reach a middle ground. For instance, the state could allow cryptocurrencies to function, but lay down strict guidelines for those exchanges from where people procure them, or even open an exchange of its own. Regulated exchanges would obviously benefit from increased visibility and trustworthiness, major constraints for those wanting to invest. This could also involve transparency norms, such as establishing who moved in and out of the ecosystem. This would allow for capital taxation at entry and exit points, like in stock exchanges, and also allow some semblance of control in the system. At the same time through a double blind process (one that ensures the username of the person visible on the ledger is not disclosed to the state, by creating a second one at the time of buying cryptocurrencies, much like how answer sheets for examinations are tracked without disclosing the identity of the examinee to the examiner), a person could enjoy complete autonomy and privacy over what she does with her money.
By refusing to engage with this revolutionary technology, one that was the result of a massive technological breakthrough, arguably the biggest since the internet- The Blockchain- India seems to have turned down a massive opportunity in leapfrogging into the cryptocurrency age. It is true that there are risks to cryptocurrencies, but given the relatively small scale of the cryptocurrency economy, this was the time to take the risk and understand the system further. Anonymity in payments systems could have opened doors for ensuring privacy for those suffering from diseases considered a taboo in our society, or aided journalists in covering sensitive stories and upheld the cardinal right of a citizen to her autonomy. Reduced costs would have helped those working far from their families, attempting to make ends meet, to avoid the hassles and costs of transferring money and brought them into the digital age. Most importantly, increased revenue from taxation at regulated exchanges could have expanded the state’s ability to provide for its people. The decision of a scientifically advanced nation, at the cutting edge of technological development, and a massive economy to shun away, without much thought is, to say the least- unfortunate.
About the Author
Prashant Khurana is a student of Law at the Faculty of Law, Delhi University. He holds a Bachelor’s degree in History from Hansraj College, Delhi University. Prashant is an accomplished debater, and an active participant and organiser of Model United Nations Conferences and was recently invited as a Chairperson at the University of Kent, United Kingdom for their MUN conference. He has appeared as a guest panellist on Headlines Today (presently, India Today) News Channel and has also interviewed personalities such as Mr. Mani Shankar Aiyar, Dr. Sambit Patra, the Ambassador of Canada to India, among others.