'Mining' Nothing but a Grave
As players in the crypto market hold their breaths waiting for a new regulatory bill to hit the benches of the Indian Parliament, a cloud of risk and doubt looms over its FinTech space once again. Monetary authorities have now been debating the existence of a parallel decentralized economy for three years; the tangible outcome of which has been a draft of rigid laws and a detailed report strongly backing an outright ban of the trillion-dollar industry. Although our Finance Minister recently refuted the statement regarding this blanket prohibition, it is safe to say that stakeholders — at home and abroad — have had multiple premonitions of restrictive financial freedom for a long time now. What is surprising, however, is the degree of constraints and the severity of penalties developed to deter transgression. It seems that the government is not only planning to stop all forms of trading but is also stressing on disallowing any Indian entity from retaining crypto assets. If the draft holds, investors will be given a period of six months to liquidate their capital, post which any violations will be punishable by a jail period ranging from one to ten years and a fine triple the value of transactions.
The outrage following this proposition has already led to more than one lakh individuals voicing their concern to lawmakers, and an even larger number joining the social media campaign of India Wants Bitcoin. Why then, are Indian financial bodies fixated on moving forward with such profound measures of control?
Centralisation: The Status Quo
According to the Inter-Ministerial Committee (IMC) — responsible for taking a call on crypto’s future in India — the problem lies in the decentralized section of the entire framework. Ironically, this feature is exactly what defines cryptocurrency and sets it apart from the general fiat structure of an economy. Before moving forward, let’s address this idea of decentralization and distribution by comparing how money is accounted for in both systems.
Our current financial configuration has a central bank — the RBI — responsible for issuing new currency and manipulating its value using gold and foreign reserves. It accounts for every note and transaction by keeping a track of how money is distributed among entities. While it’s unaware of the exact capital a specific individual has or what they have spent, all of this information is indirectly connected and relayed to the RBI by banks possessing the actual accounts. So, the tree representing how information is shared and structured has RBI as the nucleus and banking institutions as the primary nodes. Each bank is in-turn connected to millions of accounts acting as secondary branches. Thus, not only power but even knowledge is concentrated at the central level.
Bitcoin completely revolutionized this setup when it was established in 2008 by introducing blockchain technology. Blockchain transformed the previous information tree into one that rendered each entity as a node connected to every other node in the system. This made it possible to distribute and share the ledger containing transactions among all members. The value of money in such a system was purely based on demand and supply principles, and any creation of money value was attributed to the volume of successful transactions rather than an authoritative decision by one node.
Now it’s understandable that no central agency with regulatory powers over the Rupee will undermine its authority by permitting the reorganization of how money is perceived and valued among its citizens. However, in context of an increasingly globalised world, the State might want to reconsider its stance, since a complete ban hardly sends a positive message regarding the adaptability of contemporary ideas in India.
Another interesting aspect of this entire debacle is that the restrictions on cryptocurrencies are perhaps their best advertisement. Saifedean Ammous, a Bitcoin economist, believes that if the government is adding constraints to what you can and cannot do, then maybe it is time to think about decentralizing power —
“… I am sorry, if you’re telling me that I can’t send money from my bank account to buy the things that I want, then, that’s not really my money.”
Alternatives and Substitutes
Nonetheless, it would be unfair to say that the policies are entirely short-sighted. They do make an excellent case for diverting our attention towards the underlying technology of blockchain. The IMC’s report lays out a series of arguments in favor of embracing the cryptographic data structure, but only in projects other than cryptocurrencies. This proposition is designed as a solution to the issue of citizens demanding trading rights to Bitcoin and Ethereum. However, suggesting alternative products with the same mechanical properties under the hood, is hardly a solution. Especially when India has over six million crypto investors holding a figure north of Rs. 10,000 crore in valuation. In essence, the government’s point is well taken — we do need to start looking at blockchain-based applications, which without a doubt remain vast unmined fields. Nevertheless, it’s a bit ignorant to force stakeholders to liquidate their positions and in return offer them a blockchain-based KYC to make up for any losses.
An argument often triggered by this last statement is that the government has publicly announced an Indian crypto substitute for Bitcoin and Ethereum, which should work as a perfect middle ground for all parties involved. Unfortunately, this is not only a misconception but also a wasteful endeavor had it actually been true. Expanding on the former concern, the IMC has laid out plans for constructing a currency powered by blockchain known as the Central Bank Digital Currency (CBDC). However, this is only an imperfect substitute since it is centralized and tied to the value of the Rupee. One could even think of it as a digital Rupee that is tradable, secure, and inexpensive to transfer around, thus bagging few of the appealing features of Bitcoin. Nevertheless, it continues to serve as only another regulated version of money, governed by the same laws and restrictions as a paper note.
Secondly, having an Indian cryptocurrency while banning the rest isn’t all that feasible. Especially since replacing Bitcoin and Ethereum is almost impossible given the former’s market cap and the latter’s scalability. Start-ups around the world have already started building Decentralized Apps on top of Ethereum’s backend, which will soon take over the tech market by a storm. Even social media platforms are experimenting with decentralization to promote a more privacy-oriented future and reduce censorship concerns. So at a time when the next Twitter or YouTube might be driven by Ethereum or any other crypto for that matter, India cannot be left struggling to fix bugs in their own blockchain architecture.
The Big Picture
There is no guarantee that regulatory bodies will even be able to restrict the trading of Bitcoin or Ethereum. US officials have already concluded that controlling access to an open-source network application requires enormous control over the Internet itself. So the bill might just result in an even more restrictive digital space in India. Besides, an outright ban of profitable opportunities will only motivate people to find newer loopholes and open up black markets; none of which will positively impact the country’s own crypto.
The government seems to be approaching this issue with a binary vision as of now. However, the options are broader than just ‘ban’ and ‘not ban’. There is a need for deeper discussions and experimentation with FinTech. It is imperative, however, to acknowledge that the clock is ticking and if an environment of doubt is allowed to persist, the theory of Human Capital Flight will kick in. Not only will millennial investors start contributing to the FDIs of countries that allow crypto markets, but our extremely talented entrepreneurs will also be on the first flight out in fear of the dreaded regulations.
Weighing the scales, it seems that the argument of cryptocurrencies and blockchains being the next big thing since the Internet does fall on the heavier side. And so taking a backseat at this stage of development can only set us up for future disappointments.
Serhii Yeadokymov, Canva (Cover Image)
plesk.com (Blockchain Network Image)