Cryptocurrencies in recent years have managed to capture a spotlight in the mainstream financial markets and media. Across the world, people have started investing in cryptocurrencies, especially after the astonishing success of Bitcoin. Although it (cryptocurrencies) has received opposition by economic experts, terming it as a bubble that can burst anytime; it has managed to gain the attention of the policy makers of one of the largest economies in the world, India and it seems the news is unpleasant.
The Indian Government, recently renewed its efforts to ban the mining, trading and possession of cryptocurrencies in India through a legislation in the parliament. Though it had assured the people last month that it was keeping an open mind regarding the move, it seems to have reverted on that stance. As the parliament is in session, top officials in the government (As reported by Reuters) have reportedly decided to move ahead with a legislation to ban cryptocurrencies in India. The opacity of the Government over its stance for the last few months has kept crypto-investors on edge. Why is the government of India contemplating banning cryptocurrencies?
Before we answer that question, it is necessary to have an understanding of the concept of cryptocurrencies (Hence referred to as “cryptos”).
Decrypting Cryptocurrencies
In a nutshell, cryptos are digital or virtual currencies that can be used to purchase goods and services on the internet. They work on a technology called ‘Blockchain’. It is a decentralized network of computers that manage and record the transactions that take place with cryptocurrencies. The technology is considered to be secure and does not allow replication of cryptocurrencies unlike hard currencies which have to deal with the problem of counterfeits. This security is also one of the most appealing aspects of blockchain and cryptocurrencies.
Cryptos can be mined (generated) by anyone in the world. They are not dependent on a ‘Central Bank’ for their ‘printing.’ There is a catch however, cryptos are in limited supply. They cannot be generated beyond a certain limit. For example: there can be only 21 million Bitcoins. As of now approximately 18 million Bitcoins have been mined. It becomes relatively more difficult to mine Bitcoin as the number of mined Bitcoins reaches the 21 million mark. Since they do not have a centralized authority controlling their supply, the values of cryptocurrencies are determined by the market itself through supply and demand mechanics. To acquire cryptos, you will have to pay its value in hard currency (As of 18th March 2021, 1 BTC = $58,886.30).
How many types of cryptos are there? There can be an unlimited types of cryptocurrencies, however the number of ‘coins’ of a particular crypto are limited. Popular cryptos include Bitcoin, Ether, Litecoin etc. Anyone can make a new cryptocurrency if they have the necessary understanding of the technical aspect of it. The process can be anonymous, no one knows who made Bitcoin!
Transactions carried out with cryptos are completely anonymous. Moreover, you can carry out transnational transactions without having to pay any form of fees or tax as is the case with ‘hard currencies.’ You retain your privacy while making such purchases. On the flip side of the coin, this has raised concerns amongst governments and international organizations. Cryptos allow terror organizations, drug syndicates and other illegal activities to be carried out with virtually no method of tracking them.
This leads us to the question of why India (and potentially other nations) want to ban cryptocurrencies. It is important to note, the government wants to only ban cryptos and not the ‘blockchain’ technology on which it is based.
Chaining of Cryptocurrencies in India
The legislation in question proposes to criminalize the possession, issuance, mining and trading of digital-assets like cryptocurrency. After its passing, it will give investors six months to liquidate their digital assets, beyond that time limit they will be penalized. One of the reasons assumed is India’s plan to create a national digital currency of its own, and issue this cryptocurrency like regular RBI bank-notes.
Cryptos are also highly unstable. Unlike regular currencies, due to their decentralized nature, the monetary value of cryptos fluctuates drastically on a day-to-day basis. If you track the crypto markets, you would see that the value of a crypto can shoot up by 40% in a single day and drop back at the same rate the very next day. It can be potentially disastrous for investors as they can lose out on money instantly. The government does not want citizens to expose themselves to this risk. Moreover, cryptos exist only in the digital world. The risk of technical glitches and hackers stealing your cryptos is always present, something the government won’t be able to prevent or control.
Due to its anonymous nature, the government cannot levy taxes on transactions carried out through cryptocurrencies. Which means that if businesses and individuals start using it on a regular basis, the Government can lose out on large amounts of tax revenue in an already parched revenue collection pipeline. The decentralization also removes the power of the government over monetary and fiscal policies. This power shifts into the hands of the people. Apart from political power, governments derive their sovereignty from economic power. Since the ancient era, governments have been exacting control by taxing the people to maintain the services it provides. If cryptocurrencies take over regular currencies then the same government loses its sovereignty.
Should the government move ahead with the legislation then? The above-mentioned reasons are genuine causes of concern.
The Good, The Bad, and The Ugly
Issuing its own cryptocurrency; while it is a welcome move, stands diametrically opposite to the concept of cryptos. The decentralized nature of cryptocurrency is its most appealing aspect. Further, this is somewhat reflective of the protection era of Indian economy. For many years after independence, domestic industries were given a breathing space to grow, away from the competitive nature of the open market. Eventually the economy had to be opened up because it was unable to sustain itself. The 1991 economic crisis is a prime example. Let India’s crypto grow amidst the competition, it will let it acquire a more robust and competitive nature which will be beneficial in the long run.
Yes cryptos are unstable and subject to the market risks. But so are the stock markets! Anyone delving into crypto trading must be given the benefit of doubt that they understand the risk of investing their money into cryptos. Risk taking capacity of the individual can be measured by themselves.
If an individual wishes to take the risk, let them. Economic liberty is one of the core features of a democracy. Yes, there cannot be regulating authorities like the Securities Exchange Board of India (SEBI), but the technology of blockchain in itself is taking care of that role.
The government cannot be fearful of the changing economic systems. Banning cryptocurrencies is reactionary. Instead it should look at more progressive policies to accommodate cryptos. Losing out on taxation revenue is serious, but a solution to that can be achieved. I do not have an answer for what policy measures can be adopted as I lack the data and the knowledge. But whenever change has taken place, institutions have adapted to it. The introduction of computers was vehemently opposed as people feared that it would eat up their jobs. But not only did it make our lives easier, it set up a whole new industry which now employs 4.36 million people (Source: Economic Times). Maybe the answer to this question lies in a further technological advancement yet to be made?
Litmus Test for Capitalism?
According to me, cryptocurrencies can also be the true test for the capitalist system. This system works on ‘laissez–faire‘, a French term which literally means ‘leave alone.’ It argues that less-government in the economy will allow businesses to be better off and in-turn the society will be in a far better position. Even Marx’s critique of capitalism could be tested out. He had said that capitalism had an inherent tendency to fall into crisis. He believed that these crises would get worse, and would impose unemployment and other problems on the working class. And thus the working class would be motivated to get rid of it. Cryptos reduce government’s involvement in the economy.
“The universe is dynamic. Change is the product of the interplay of various factors and variables. A small event such as the chrysalis of a caterpillar to a butterfly can have riveting effects over the existence of this universe. Embracing this constant is the only way to move forward.”
Resisting against the growing influence of cryptocurrency may be successful in the short run, but in the long run we will be left behind as the world moves on. Think of Nokia when Apple introduced the concept of smartphone. Who would’ve thought that this juggernaut would no longer be relevant in a matter of a few years? Maybe our policy makers should keep this in mind while contemplating over this ban.
–Priyamvad Rai
