Mr Arun Jaitley, the Finance Minister of India, in his Budget speech on February 1 has unequivocally said that Government will not recognize Bitcoins and other crypto-currencies as legal tender of value.
This may come as a surprise to all crypto-currency aficionados, but not to those who were predicting this doom for a long time. If we look into the genesis of Crypto-currencies, one of the early creators of them Wei Dai was motivated by Tim May’s crypto-anarchy concept where in government is not temporarily destroyed but permanently forbidden and permanently unnecessary.
He came up with a protocol ‘b-money’ by which money services can be provided by untraceable entities where senders and receivers are identified only by digital pseudonyms, referred to in the computer world as public keys. The creator of Bitcoin under the pseudo name Satoshi Nakamoto was influenced by Wei Dai and proposed privacy of Bitcoins in such a way that only transactions were made public, but not the identities. This has resulted in usage of Bitcoins and other cryptocurrencies for various illegal, forbidden activities all over the world, including money laundering.
While the privacy of identities is protected in Bitcoins, the primary reasons they were invented by Satoshi Nakamoto, as per the introduction section in his white paper Bitcoin: A Peer to Peer Electronic Cash System are
- To facilitate commerce on the internet without relying on financial institutions serving as trusted third parties.
- To promote possibility for small casual transactions based on cryptographic proof, instead of trust that arises on account of, or the presence of third parties.
This ensures that transactions are computationally impractical to reverse and would protect sellers from fraud. The small casual transactions on the internet are bound to grow significantly in the coming years on account of factors such as Machine to Merchant Commerce (IOT - connected devices making payments), Person to Person commerce (sharing assets such as cars, sharing self-produced solar power and making necessary payments). Crypto-currency based payments are most suited for this owing to their ability to facilitate micro payments, for e.g. the smallest part of Bitcoin called Satoshi is equal to Rs 0.006 at current prices) and the cost of processing such payments is much lower compared to processing a conventional payment, either by Cash or electronic money.
Today, Bitcoins and other crypto-currencies are gaining value in global markets and so too in India on account of market speculation rather than based on pure utility they provide. People dealing largely in such currencies don’t even know and realize that crypto-currencies are nothing but a chain of digital signatures and are generated by a computer program. So, it is quite understandable that Government of India would like to protect such gullible and ignorant people from falling prey to various tech-savvy people coming up with Ponzi like schemes.
However, the Government of India shouldn’t enforce a blanket ban on them. If we study the history of evolution of money, it clearly demonstrates that countries that have adopted latest forms of money or payment mechanisms have been able to stimulate their respective economies. In 600 BC Lydia’s King Alyattes minted the first official currency, the coins were made from Electrum a mixture of Silver and Gold that occurs naturally and stamped with pictures that acted as denominations. In the streets of Sardis, circa 600 BC a clay jar may have been priced at coins containing two owls and a snake. Lydia’s currency which was state of the art then, compared to Asian cutleries that were used as money, helped the country increase both its internal and external trade and made it one of the richest empires in Asia Minor.
In current days, the same impact is seen in Japan. The Japanese government officially recognized Bitcoin as a legal payment method because they had proper regulations and laws surrounding crypto-currencies. Analysts in Nomura believe that Japanese investors in Bitcoins will lead to a potential boost to consumer spending of 23 to 96 billion yen on account of their investments. The Nomura analysts further estimate a potential boost to real annualized quarter on quarter growth of real GDP by about 0.3 percentage points. Another country that has harnessed this well is Belarus which legalized crypto-currencies and gave them a tax-exempt status for the next 5 years, in hopes of attracting companies to start operations in their country.
With significant portion of commerce moving to the internet, rise in digital payments for small casual transactions either by people or machines, Government of India is ought to consider formulation of favorable regulation around cypto-currencies. The blanket ban on them will be counter-productive as it will impact trade and also losing competitive advantage in this space to others. Even if Indian Government considers porting fiat currency on Blockchain technology; the technology that powers crypto-currencies, it may not serve the purpose. They need to come up with a currency that is divisible much more and beyond the current two decimal points.
However, various progressive states where incumbent governments would like to increase their potential to win elections again and again primarily based on development oriented agenda seem to be leveraging Block chain technology for various Government to Citizen (G2C) services such as Land titles, Managing Government Benefits / Subsidy Management, Issuing Government certificates such as Birth, Tax etc primarily to eradicate corruption and counterfeit perpetrated by middle men or intermediaries. Indian government is also keen to promote Blockchain in Banking systems, primarily to decrease the cost of banking services in the areas of International Money Remittances and regulatory compliances such as ‘Know Your Customer’ and ‘Anti Money Laundering’. Indian Government will also explore leveraging Blockchain technology to promote Cybersecurity on account of Blockchain technology’s ability to support decentralized applications (DAPPS).
Thus, Indian Government should certainly be bearish, in fact severely bearish, on misuse of Crypto-currencies and not crypto-currencies per se. Else, a time will come when Indian Government will have to make extra efforts to liberalize this space, pretty much like the efforts were made to liberalize Indian economy and industry to catch up with other advanced economies.
The author is the senior vice-president of market development in Quatrro Global Services