Off late, there have been news reports about Indian government mulling a ban on crypto currencies. This seems to be guided by such views as only sovereign has the right to issue currencies, Bitcoin has no intrinsic value and it is a pure speculative play etc.
However, the above views are archaic and not aligned with the realities of a fast-evolving world. Before arriving at a decision to ban the cryptocurrencies or their trading, many of the following factors need to be taken into consideration.
Technology as an enabler of business
While Bitcoin may be the most popular coin, as of January 2021, there are more than 4000 crypto currencies out there. Many of these are cutting edge technologies solving some of the real-world business problems. While Bitcoin (BTC) is a store of value, Ethereum (ETH) enables Smart Contracts and Decentralized Applications (DApps) to be built and run without any downtime, fraud or third party interference. Chainlink (LINK) is a decentralized oracle network that bridges the gap between smart contracts (like the ones on Ethereum), and data outside of it. AAVE is a DeFi (Decentralized Finance) protocol that enables lending and borrowing of digital assets etc. to name just a few.
A smarter policy would be to find ways to leverage these Blockchain based technologies in the areas of financial transactions and fraud prevention etc.
Rapidly increasing corporate adoption
Many of the world’s largest organizations have found ways to leverage cryptocurrencies instead of shunning them.
Technology firm Microstrategy’s has invested around $445 million in Bitcoin while digital payments firm Square has invested $225 million too. EV giant Tesla recently invested $1.5 billion and plans to accept Bitcoin as a form of payment. One of the world’s largest Investment Bank Goldman Sachs has resumed a Bitcoin Trading desk for its clients. Digital Payments giant PayPal has started buying and selling digital currency on its app. Credit Card giants Visa and MasterCard have announced plans to support cryptocurrency services though their networks.
While the corporates in developed world adopt this innovation, a government ban would become a bottleneck for India Inc.
- The India connection
The abundant pool of India’s software developers and engineers is already at the forefront of crypto currencies space.
One of the most prominent issues in Etheruem (ETH) currently is that of scalability. The Ethereum network is congested and is unable to cope up with a rapidly growing number of transactions. This has been tackled head-on by an India based start up Matic Network (recently rebranded as “Polygon”). It has demonstrated a promising potential towards resolving the issue of ETH throughput by developing layer 2 aggregation SDK that can host multiple technologies simultaneously.
In addition, there are many other India based coins which have received a positive reception by the crypto community due to their business potential. This includes Mantra DAO (OM), Saffron Finance (SFI), and Akash Network (AKT) to name a few.
Recently, Nasdaq quoted MATIC for its potential in addressing one of the most challenging issues currently being faced by the crypto world (that of Ethereum’s network congestion) while the Entrepreneur applauded India’s Blockchain Ecosystem as “a hotbed of Crypto innovation”
India has an opportunity to build a competitive advantage in the global economy by leveraging its vast pool of software developers and creating more jobs / income for the country. A ban would not only be regressive but also hugely counterproductive.
- Wealth generation opportunity for investors, tax revenue for government
It is believed that Crypto transactions could be used for money laundering. While that is true in its current form, it could easily be addressed through regulation. A government policy framework that regulates crypto markets like other financial markets would be a better alternative than a blanket ban.
Government rules enforcing KYC (Know Your Customer) regulations like those applicable in banks with identity documentation can establish traceability and accountability. Infact most of the crypto exchanges in India (CoinDCX, WazirX, ZebPay etc) already onboard users only after proper KYC process and documents verification.
If crypto ecosystem is allowed to flourish, it has the potential to become a larger system than the stock markets in India. To illustrate the size of opportunity, one of the world’s biggest crypto exchanges Binance (originally Chinese, now based in Cayman Islands) crossed $ 1 billion revenues in 2020.
With tens of crypto exchanges, hundreds of coin organizations and millions of traders, India could create an ecosystem that not only generates jobs and wealth for citizens but also billions in corporate tax and capital gains tax for the government.
On the other hand, if a ban is imposed, companies like MATIC might shift to other countries, exchanges like WazirX and CoinDCX would shift base too and users would still continue to access exchanges but by using VPN. In other words, if banned, the ecosystem won’t disappear, but will merely move to grey markets territory and risks including those of money laundering / terrorist financing will actually become stronger because the regulators would lose sight of the activity.
It might be a better alternative for the government to potentially create a regulatory body (like SEBI that governs stock markets) and let it manage the cryptocurrency ecosystem in India, while enjoying the income and tax opportunities associated with developing a large market.
- Evaluation by an Independent committee not RBI
The decision to ban Bitcoin and other crypto currencies seems to be based on recommendations by Reserve Bank of India. This is obvious because crypto currencies are by design supposed to be a “decentralized” alternative to currencies controlled by central banks. Any central bank would see them as competition and recommend killing them.
Interestingly, RBI has suggested to create India’s own digital currency. This might be a futile exercise too. India already has the one of the best payment systems in the world with real time payment transactions across all the banks. NPCI (National Payments Corporation of India) has been doing a stellar job and UPI already has wide-spread adoption. Government creating another conflicting system with its existing successful system would hardly have any benefits.
The opportunity presented by crypto currency world needs to be analyzed by an independent committee of technical and business experts and not by the RBI. Surely, there could be synergies to be leveraged from crypto currencies and fiat currency with both co-existing and each providing their own benefits.
While most of the developed world is embracing crypto currencies and they are becoming more and more mainstream every day, a ban in India would be a regressive step and not aligned with the country’s long term strategic aspirations.
Mr. Modi has the image of a tech savvy and business friendly politician. He had pioneered “Digital India” soon after taking over as India’s Prime Minister in 2014. Well, here’s a digital technology revolution, presenting a once in a lifetime opportunity to create wealth and taxes, which could not have come at a better time than now when the country is going through Covid induced economic slowdown. It would be interesting to see whether the Prime Minister would go by the recommendations of bureaucrats known to resist change, stifle innovation and create restrictions like “License Raj” that the Indian corporates used to face in pre-1991 Congress regime.
Or would he live up to his image of a technology promoter, business supporter, embrace the change and create a policy framework that lets a new industry and ecosystem thrive, thus unleashing an era of high intensity growth.