Ever since Cryptocurrencies went from a small blip on the radar to a kind of financial sub-culture, governments and their central banks have been asking themselves what to do about cryptocurrencies.
Thus far, the consensus in Europe and North America is that the currencies are legal investments and legitimate means of conducting a transaction so long as all the parties to a transaction are happy to trade in cryptocurrencies rather than in traditional currencies or barter.
In Russia and China, cryptocurrencies are not technically outlawed, but nor are they recognised as a legitimate means of transaction by the state, while the creation of new cryptocurrencies in a process called mining is strongly discouraged.
South Korea recently considered an all out ban on Cryptocurrency trading and mining but instead agreed to regulate and tax cryptocurrency transactions. The value of many major cryptocurrencies, including Bitcoin took a hit upon this announcement. Currently, the most crypto-friendly country in Asia and arguably the most crypto-friendly country in the world is Singapore.
Today, however, the value of Bitcoin and other major cryptocurrency players took a nose dive on the news that India seeks to implement a total ban on the use of cryptocurrencies, including both trading and mining. India clearly has similar concerns as China and Russia regarding the potential to launder money and create a crypto-black market which avoids taxation and regulation.
However, for India, the question of “normalising” transactions that rely on traditional currencies, has been a matter of concern long before the advent of the blockchain technology used in the cryptocurrency trade. In 2016, Indian Premier Narendra Modi made a shock announcement that we would invalidate the use of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series in an attempt to reduce black market transactions using small banknotes. The demonetisation nearly crashed the Indian economy, wiped out the savings of many Indians who have never used traditional banking systems, created an economic shock-wave across the world among investors who immediately lost confidence in India and to add insult to injury, Modi’s move was made against the better judgement of many top economic advisers.
Even many supporters of Modi’s BJP thought twice about the economic competence of a party whose mass appeal has been generated not around intelligent policy making, but through populist Hindutva sloganeering which includes the frequent scapegoating of India’s minorities, particularly Muslims for the troubles that the country is facing.
For many young enterprising Indians, the cryptocurrency market has become a way to escape the economic uncertainties which were only exacerbated in Modi’s infamous demonetisation move. Now though, by attempting to ban cryptocurrencies, Modi will be repeating a similar mistake to the one he made during the self-made demonetisation crisis.
For those whose Cryptocurrency wallets will be eliminated by the government, there will be a new groundswell of anger, similar to those who found that their cash was rendered worthless over a 24 hour period in 2016. However, a longer term problem will be pushing the cryptocurrency trade further underground, just as the cash crisis of 2016 led many to resort to increasingly heterodox and often dangerous means of transactions, due to the shortage of cash.
India may claim it has the ability to digitally isolate Indians from the blockchain technologies that cryptocurrency miners and traders rely on, however, just as other internet regulatory schemes India has attempted have failed, so too will this also likely fail. The reality is that while both China and India pride themselves on their ability to ‘control’ the internet, China is actually able to do this successfully while India typically fails when it attempts to follow China’s lead.
For India, the solution should have been the creation of a state sanctioned cryptocurrency. Russia is set to launch a Crypto-rouble this year, while Venezuela has announced a 20 February pre-sale for El Petro, a cryptocurrency.
A state sanctioned cryptocurrency has distinct advantages and disadvantages over cryptos mined in the private sector.
–The likelihood of the coin being backed by tangible state assets–including oil, gas and gold
–Easy convertibility to traditional currencies or metals
–No danger of having the crypto market shut down by a state regulator
–Possible taxation on basic transactions
–Creeping red tape
–Prohibitions on international transfers.
When Russia and Venezuela weighed these pros and cons, they found that overall the advantage to state regulators and to crypto-traders would be safeguarded via the compromise between a libertarian free-for-all and an authoritarian ban on crypto-trading and mining. In a world of balancing these interests, a state sanctioned crypto, appears to be a very elegant “win-win” solution.
For India though, Modi has once again mastered the art of ‘lose-lose’. A prominent sector of the Indian economy will now be pushed underground, naive crypto-traders may lose their assets to an overzealous state regulator and in trying to enforce the new rules, the government will be spending more money than it will be making from perceived advantages of enforcing a crypto-free economy.
The authorities in neighbouring Pakistan which also has a large, vibrant and young IT sector should be monitoring this situation closely so as to avoid India’s mistakes and simultaneously take advantage of a hole in the market that would almost certainly be caused by an Indian ban on cryptocurrencies.
Furthermore, after the BRICS group announced the possibility of a BRICS wide cryptocurrency, India has once again found itself on the short end of the innovation stick. While Russia in particular is a BRICS state which is enthusiastic about the possibility of officially backed cryptocurrencies, India has blackened its own reputation while feeding the black market it seeks to subdue.