Why it won’t be easy to ban cryptocurrencies in India

Awaiting judgement.
Awaiting judgement.
Image: REUTERS/Dado Ruvic
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Plans are afoot in India to ban cryptocurrencies. While it is as yet unclear what exactly the government’s move against cryptocurrencies will be, what is clear is the fact that implementing it is going to be incredibly difficult.

If anything, attempts to ban virtual currencies could only fuel money laundering, illegitimate transactions, and tax evasion.

For cryptocurrencies are not bound by national jurisdictions but are powered by blockchain technology—a decentralised, distributed, public online ledger that is used to record transactions. A global network of computers manages the database that records all deals.

Tough to enact

Currently, there are approximately 10 large cryptoexchanges in India with an estimated user base of nearly 5-6 million.

Last month, India’s finance minister Arun Jaitley helmed a meeting of officials of the country’s central bank, the market regulator, and a committee tasked with framing rules to regulate the ecosystem. Together, they are said to have discussed banning “the use of private cryptocurrencies in India.”

However, it is expected that only buying, selling, and transacting in virtual coins will be prohibited and not their possession per se, according to experts.

Cryptocurrencies are not dependent on a cryptoexchange’s wallet as they can be stored on a cloud storage platform like Dropbox, a private digital wallet or even a pen drive or a laptop. “Therefore, even if the government decides to ban possession, it will be just impossible to implement it,” explained Nischal Shetty, founder and CEO of WazirX, an Indian cryptocurrency exchange.

Another way the government could prohibit citizens from transacting in cryptocurrencies could be by cracking down on the exchanges and forcing them to down their shutters.

But even that may not necessarily be the end of the road. “The government can successfully ban the known, big exchanges; but then small, hyperlocal exchanges will possibly come up and it will be extremely difficult to keep track of, and block them,” said Shetty.

Besides, if Indian exchanges are shuttered, a cryptocurrency trader can migrate to any of the several global bourses. These are, however, treated as foreign transactions and the Indian government has imposed checks and balances on such dealings.

And there are ways to avoid that, too. Cryptoinvestors may resort to peer-to-peer channels to transfer their investments into the overseas exchanges. “Once an Indian (citizen) is invested in a foreign exchange, it might become impossible for the government to trace his or her investments, because most foreign exchanges also allow conversion to private coins which makes transactions untraceable,” explained Tanvi Ratna, policy counsel, Incrypt, a firm that advises companies on blockchain technology.

However, the element of risk will be very high for such traders. “As any transaction in crypto will have to be settled in real currency, somewhere the formal system will be able to catch it, especially if a forex dealing is involved,” R Gandhi, former deputy governor of the Reserve Bank of India, the country’s apex bank, told Quartz.

Another possible step the government could take to curb crypto trade in India is to block the websties of global bourses in the country. But there are ways to circumvent such a move. “The government’s motive to curtail the macroeconomic impact of cryptocurrencies can be taken care of to a large extent with a ban but there are still ways to access the blocked sites by using a VPN (virtual private network),” explained Raunaq Vaisoha, CEO of Elemential, a blockchain platform.

Driving them under

To be fair, the government’s concerns about cryptocurrencies are not entirely baseless.

Transactions in the dark virtual world can be used for money laundering. The price volatility, the complex nature of these digital assets, and chances of consumer frauds are also pain points.

But the flip side is, with a ban, these illegal transactions will increase. Considering all transactions will be in cash in a parallel economy, money laundering and such unlawful activities will increase, which will be even tougher to trace in case of a ban, Shubham Yadav, co-founder of Coindelta, an Indian cryptocurrency exchange, said.

“Ironically, the only way these activities can be controlled better is under a regulated framework, by clearly defining entry and exit points and requirements from users and exchanges,” said Ausaf Ahmad, CEO of Eleven01, a firm that deals with blockchain technology.

In an earlier report released in September, Incrypt had also suggested a framework for blockchain and cryptocurrency in India which included safeguards through stringent bank KYC (know-your-customer) of exchanges, opening banking channels, bringing legitimate crypto earnings into the tax net, initial coin offerings (ICOs) for sandbox-registered startups (a security mechanism), and having a separate regulator for blockchain.

Chinese chequers

Several countries such as Japan, Australia, Malta, Thailand, the US, as well as the city of Abu Dhabi in the UAE, are actively looking at regulating this space. At the other end of the spectrum, China, Bangladesh, etc. have taken a tough stance on cryptocurrencies.

For instance, in September 2017, China banned cryptocurrency exchanges and ICOs due to the financial instability associated with the likes of bitcoin. It declared all ICOs and exchanges dealing in it as illegal. Bourses were also forbidden from allowing the user to convert crypto into fiat currency (and vice versa), or from providing any other brokerage or commission-related services.

Despite the ban, traders and investors are betting heavily on these currencies. Soon after the ban, peer-to-peer trading had increased while several other local exchanges shifted to more crypto-friendly jurisdictions.

“It is very interesting to note that despite the clampdown in China, the highest volumes in terms of peer-to-peer trade has been actually coming from there,” according to an official from another virtual currency exchange, requesting anonymity. “Another case in point to prove that a ban is not an effective tool.”

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