The fears can be reasonable but it would be better if regulators took a brave leap of clarity on cryptocurrencies and blockchain. India’s current confusion makes a strong case for that
Half of the atlas is inching closer to accepting crypto, the rest are either downright against the very idea, or fiddling with it intellectually. There is nothing wrong with it. As long as one is clear where we all stand. China, Pakistan and Egypt can have their own arguments and the likes of Switzerland, Singapore and Japan can move forth with their own reasons. By the same set of worries and excitement around crypto, there are those who are still in the grey zone – like the UK, the USA, Germany and France. As to India, after RBI issued a circular in 2018, where it advised all private banks to refrain from processing any crypto-related transactions, the future has been more iffy and slippery for crypto-players than ever before. And recent discussions have changed the pinch of salt into a lemonade of sorts.
A Barber Paradox?
The recent report by the Inter-ministerial committee also had a draft ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’. The stance is leaning strongly towards banning private crypto-currencies as they, according to the report, seem to be a ripe ground for facilitating criminal activities and, also, having ‘no underlying intrinsic value’ and lacking ‘all the attributes of a currency’.
What is intriguing, though, is the curiosity on Distributed Ledger Technologies (DLT) and the idea of a government digital rupee. The committee has put in recommendations like – ‘it would be advisable to have an open mind regarding the introduction of an official digital currency in India’. Another recommendation that turned up was that ‘the RBI examine the utility of using DLT-based systems for enabling faster and more secure payment infrastructure, especially for cross-border payments’. It has been suggested that blockchain-based systems may be considered for building a low-cost Know Your Customer (KYC) for reducing duplication of KYC requirements for individuals. DLT-based systems have also been advised for use by banks in areas like loan-issuance tracking, collateral management, fraud detection and claims management in insurance, and reconciliation systems in the securities market.
The suggestion stretches to even evaluating the use of DLT for Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) as an alternative to the present system of issuance.
There is also something for Securities and Exchange Board of India (SEBI) for examining whether the depository systems can move to DLT-based system and for exploring the benefits of DLTs for removing errors and frauds in land markets by using DLTs in land-records management.
Meanwhile, globally, work has, supposedly, begun on a system that should be ready by 2020 and will collect and share personal data on individuals who conduct crypto-currency transactions – thanks to some recent Financial Action Task Force (FATF) rules. Updated standards from this huddle – that has 30 member countries and economies – aim to curb money laundering by using this platform. There are some 15 countries, including the G-7 members, Australia and Singapore that are going to develop the new system.
Many countries (imagine 70 per cent of financial authorities worldwide) are already exploring their own digital currencies, backed by a state bank, as per a report by the Bank for International Settlements.
Wait, crypto-currencies should be banned but their networks and technologies can actually be used to fight the same fears they haunt regulators with!?! And to launch a digital version of what they, idealistically, oppose?!!
Sounds a little confusing, doesn’t it?
DLT and Digital Currencies -The Same Crypto-DNA, Duh!
There will be no research if you ban crypto and threaten to put people in jail, says Nischal Shetty, CEO, WazirX without mincing any words about the contradictions that the draft Bill in India seems to have. “The bill cannot possibly be banning and encouraging technology at the same time. This shows how flawed the draft bill is and it needs to be changed by working closely with the crypto industry of India.”
Sidharth Sogani, CEO – CREBACO Global echoes the same sentiment. “They want to promote DLT and Blockchain! But they have not understood the point. A blockchain can serve its purpose only when it’s decentralised.”
He pulls out the paradox and confronts it directly. ” The government and the bill doesn’t understand that a decentralised blockchain needs a reward token on top of it otherwise nobody would mine it! That’s crypto. If you make a blockchain and keep the servers in your own house, technically its blockchain but practically it’s not reaching the consensus of people!”
But Uncle Murphy Said So
Speaking of paradoxes, it is a bit like Sod’s law that is, perhaps, making many governments flinch. It is right to be cautious. It is okay to dip your toes before jumping into anything new and huge.
Given the slew of hacks, frauds and scams that the crypto world has suffered from, it is not hard to understand why a regulator would not have its own share of fair misgivings.
Sogani does not shrug away the elephants of security and stability that occupy this new room. But he piques one’s mind by presenting a latent irony. ”Exchanges are getting hacked due to lack of regulations. Many times exchanges declare a hack but the management gulps down the entire investment of the client. Because no standards are set to report the transactions to the authority, nothing much can be done. ”The regulation will reduce this drastically, he contends well.
Zac Cheah, CEO, Pundi X empathises with regulators who, he feels, are put into a difficult position of balancing interests: they have a duty to protect the interests of their citizens and, at the same time, they are, for the most part, incredibly supportive of innovation – and, particularly, innovation that can improve the lives of their citizens through financial inclusion, more efficient and responsive government, controlling corruption, etc.
“And while Blockchain is not a panacea, it is providing a platform that can deliver great benefits to society. Having said that, the future now looks optimistic as regulators, with the help of the industry, are finding ways to balance between controlling abuse while at the same time not stifling innovation – or innovative ways of fundraising.” Cheah weighs in.
Flipping the Irony
In Sogani’s opinion, regulators can actually play their own role in removing the fears that make them hesitant about the new crypto-world. “Third-party custodians must be introduced. BSE is an exchange but Central Depository Services Ltd (CDSL) and National Securities Depository Ltd (NSDL) are third-party custodians of Stocks. Volatility will dissolve with time. See the initial price charts of Gold; you’ll know what I’m talking about. The bigger the user base, the less the volatility.”
Anything new is vague and, hence, hard to understand and trust. Shetty accepts that every new technology has its pros and cons, and let’s not forget that blockchain is a very nascent technology.
“This is why it needs regulation, and not a ban. We need strict guidelines for Initial Coin Offerings (ICOs) to protect consumer interests just like there are laws for stock investments.”
He cites what Japan has done to regulate crypto, and feels that India could learn a thing or two from them. “For example, from April 2020, Japanese cryptocurrency exchanges will have to manage user’s money separately from their own cash flow and involve a third-party (auditor) for the same. That’s a good thing. KYC and Anti-Money Laundering (AML) policies will help prevent misuse of crypto.”
Sogani brings the same possibility for token scams as well. “Token scams are happening because of a lack of regulation. There must be a minimum requirement to launch a token. Scams are happening because regulations don’t exist. Further to clarify, Bitcoin is not a token!! Most mistake it. Further, I think the biggest scams are being done by the governments over the globe! You cannot regulate the regulator himself!”
Blockchain technology offers a wide array of applications and banking and finance is prime for blockchain as it is best suited for the requirements it poses, Cheah points out an interesting symbiosis possible here. “We are a blockchain company and are constantly applying the technology across industries for better processing, security and streamlining. We believe that blockchain has great potential to transform industries.” The technology answers that crypto presents are, indeed, too radical and potent to be ignored by the financial systems on account of bias or ignorance.
Avenge Vs. Solve Vs. Evolve
There is no denying the fact that the war with financial crime and technology-abuse is only going to get more gruelling and baffling as we move ahead into the future. That is why a clear understanding of anything new is not a nice-to-have footnote but a must-have part of any scrutiny. Objectivity, instead of prejudice, and adaptability, in the place of rigidity, are weapons that both sides need. Who knows well-intended crypto-players, users and regulators can actually be on the same side of the battle – fighting common enemies?
‘We Are Groot’…How does that sound?