State Versus BigTech To Control An Enchanting And Vexing Technology By 0
Parliament is expected to soon vote on Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 that seeks to ban all private cryptocurrencies and create a legitimate framework for official digital currency while providing certain exceptions to promote the underlying technology driving the digital currency.
Uncertainty prevails whether cryptocurrencies like Bitcoin and Ethereum are going to find favour with the government/RBI.
A rundown of recent developments, issues, concerns and key concepts behind the crypto and digital currency debate:
Any new technology is exciting and unsettling, solving some problems, and creating others.Cryptocurrency is no exception.
Beenz launched in 2000 and wound up in 2001 was perhaps the earliest experiments in virtual currency.The idea was to credit sort of reward points to the account of users spending money or time on a website which could be used to buy stuff from partner merchants.
Digital discount coupons fall in this category.Websites tied up with merchants to reward users with a part of their advertising revenue.Facebook’s similar proposal in 2019 to launch Libra cryptocurrency, rebranded Diem, met with official resistance.
Central banks worldwide are concerned that private tech companies might overwhelm official currencies through assorted virtual currencies (VCs).People are speculating on the likely impact of private VCs/CCs or Digital Euro or Digital Yuan on official paper currencies in general and US dollar dominance in particular.(In September 2019, US dollar was on one side of 88 per cent of all trades and SWIFT banking network showing its dominance in global interbank money transfers.)
After repeated warnings to users, holders and traders of VCs including Bitcoins about associated risks, RBI directed (April 6, 2018) banks and NBFCs to stop dealing in VCs or provide services for facilitating any person or entity in dealing with or settling VCs within three months.
In 2019, an inter-ministerial committee had recommended banning private cryptocurrencies, criminalising any activities related to virtual currencies.Supreme Court found RBI restrictions disproportionate to the concerns and quashed (March 2020) the notification while accepting RBI’s inherent powers to regulate VCs in the interest of the banking system, monetary stability and sound economic growth.
Theoretically, ‘currency’ is anything that enjoys wide perception as something valuable and carries sufficient trust among people to be accepted as a means of exchange of goods and services.
Kings used to issue gold, silver, copper coins to be used as currency.
It was replaced by paper currency where the issuing sovereign promised to pay a certain quantity of gold on production of the paper.
Such a paper and coins could be repeatedly used to ‘pay’ for goods and services.People seldom went to collect the promised gold and eventually the ‘gold standard’ was given up.
The paper currency must now be accepted as a legal obligation even if it can never be exchanged for gold.Official currencies and promissory notes save the hassle of carrying precious metal.
With a move towards a less cash economy, even physical cash is being replaced by digital money.
Children use postage stamps, glass marbles, mollusk shells or such trinkets as means of exchange.Big businessmen and bankers issue cheques/demand drafts/pay orders/promissory notes which instead of being encashed can be used to pay for goods/services.
Some dairies issue fixed denomination coupons; small shopkeepers issue signed/stamped ‘promise to pay’ loose sheets when they don’t have change to return the balance amount.
These can be used in lieu of cash.
Now, one can pay through transfer of data from one mobile to another (restrictions apply).
They are like privately issued ‘currencies’.
Cryptocurrencies are based on ‘Distributed Ledger Technologies’.DLT allows decentralised recording, sharing and transfer of data without the need for a central record keeping agency as in the case of a traditional ledger.
Such records are immutable and non-repudiable and serve as authentic proof of transaction.Blockchain is a special DLT used by Bitcoin cryptocurrency.
DLT-based systems can improve efficiency of loan-issuance tracking, collateral management, fraud detection and claims management in insurance and reconciliation systems in the securities market.
There are several implementation issues like scalability, transaction speed, cyber-security, data protection, interoperability and backward integration with existing financial systems.
Bitcoin was the first blockchain-based cryptocurrency, which still holds its position as the most popular and most valuable type.There are over 3,000 different cryptocurrencies.When Satoshi Nakamoto created bitcoin in 2010, he set a limit of 2.1 crore on maximum units of bitcoins to be mined by 2040 and 1.8638 crore bitcoins had been mined by February 24, 2021.
Cryptocurrencies are not issued by any central authority like the RBI.Bitcoins are like gold, require heavy computational work to “extract” for which ‘miners’ are rewarded at a decreasing scale.
“Mining” of cryptocurrency is an energy-intensive operation since it involves very high computer usage to verify transactions.
Cambridge researchers estimated the activity to annually consume about 121.36 terawatt-hours.
DLT/Blockchain technology can revolutionise payment systems, bring enormous efficiency, cut costs, increase speed and speedily authenticate transactions.
However, there are major concerns about cryptocurrencies, making the governments and central banks nervous all over the world.There are potential risks to financial stability, to traditional banking, of harder-to-detect cybercrimes.
The whole financial sector is now guided by Know Your Customer philosophy to try keeping miscreants and criminals away from regulated markets in currencies, stocks and other securities.
One major concern about any VC or any private currency is that it may be used to pay for ‘illegal’ sales which are hidden from the gaze of tax authorities.
So encrypted and anonymous transactions being used for tax evasion, money laundering and crime/terror finance are some of the worst fears about VCs spooking the governments.
Tremendous volatility noticed in the ‘value’ of some CCs has also raised hackles because ordinary investors may be lured into it without realising the tremendous risks associated with wild fluctuations in their ‘market price’.
Price can be pumped up/manipulated by hidden agents with little track and trace of who is behind the transaction.
Sale/purchase/gift by means of non-official currency with transaction not in the knowledge of the State means a tax loss.Governments today will frown upon a return to barter system because that would mean non-cash sales, dodging taxes.
Screws are tightening on cash sales, undocumented sales precisely to boost tax revenues.
U.S.Securities and Exchange Commission has repeatedly refused to approve applications for a cryptocurrency-linked exchange traded fund but Canadian securities regulators recently approved launch of a Bitcoin ETF.
There have been reports of cybercriminals gaining access to critical computers or otherwise exploiting vulnerabilities to blackmail people into paying ‘ransom money’ in the form of CCs.
Such forced and desperate demands may also be behind the high prices of CCs and may be a ploy to pump up prices.A research report which tracked illegal Bitcoin use worldwide using data from 2009 to 2017 found that close to half of all transactions in Bitcoin were associated with buying and selling illegal goods and services and that one in three bitcoin users were involved in such illegal activity.
Australian Police recently arrested persons accused of running a money-laundering criminal syndicate to converting cash into bitcoin.
US Department of Justice recently pressed charges against NetWalker, software-as-a-service model used for corporate blackmail.
Once the targeted computer system was infected by their malware, the victim company would receive a ransom demand for the encryption to be removed.
The ransom payment was often made with cryptocurrency.Kia Motors America suffered a ransomware attack and a $20 million ransom call in bitcoin.
The DOJ also acted against Emotet, a botnet used to spread malware to infect more than 1.6 million computers.
It could control all infected computers in a coordinated manner to steal data and then demand illicit payments from the impacted entities.
Emotet was dismantled when DOJ hacked the hackers.
There are serious implications to a wide spread of cryptocurrencies for monetary policy and exchange rates which are key drivers of economic decisions by corporates and governments.
Currencies are no longer backed by gold, but by force of law, which itself is backed by economic and military might.
Despite all these scary risks, DLT/ blockchain technology that drives cryptocurrencies can be harnessed to improve banking operations.
Central Bank Digital Currency (CBDC) is a new concept that may become a reality soon.
Unlike cryptocurrencies, CBDC are Central bank-backed digital currencies that promise less volatility and greater security having the support of country’s central bank for ensuring financial stability.
CBDCs are different from cryptocurrency.Cryptocurrency is decentralised, not backed by any sovereign guarantee and in limited supply, but CBDC is issued and regulated by a central bank like normal currency with only difference being no conversion being permitted to paper notes and coins.
CBDC is different from digital payments like UPI because these payment transactions are ultimately linked to traditional currency notes deposited in banks.
RBI-appointed Nandan Nilekani committee on digital payments has advocated launch of a CBDC designed to promote non-anonymity at the individual level, monitor transactions, promote financial inclusion by direct benefit transfer and even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare.
The blockchain technology underlying cryptocurrencies is superior to the existing technology used by monetary systems which suffer from lack of traceability affecting accurate end-to-end monitoring of fund flows to individual entities, inability to effectively target funding to particular sectors and lack of real-time almost instantaneous payment.
Blockchain offers all this and that can revolutionise banking.With blockchains, it may be possible to differently set interest rates even for each transaction, a huge refinement of one-size-fit-all monetary policy.
A CBDC is digital form of a national currency.CBDCs are different from digital payment mechanisms of traditional debit cards, credit cards and mobile wallets.
CBDCs are a complete replacement of cash starting with its digital issuance by the central bank itself.Much like national currencies, CBDCs are backed by assets and carry a sovereign guarantee.
However, unlike physical cash-based currency, CBDC can be programmed for a particular type of transactions.Government can, for example, issue a CBDC filled mobile wallet which can be used only for certain types of transactions or to only certain types of payees.DLT/Blockchain technology enables efficient track and trace of place and purpose of digital payment capturing minutest details of transaction to serve as an unalterable record.
It can trigger auto programmed linked transactions like instant credit of taxes, subsidies, loan EMI, social security payments, insurance premia, tips, charities and service charges to respective accounts saving huge time and cost involved in remittances and reconciliation.
This is transformational.
A year ago, Chinese Central Bank rolled out pilot tests in the cities of Shenzhen, Suzhou, Chengdu and Xiong’an by transferring salaries to government workers in the form of a new Digital Currency top-ups in mobile wallets and tying up with a set of designated merchants to facilitate transactions using the currency.
China plans a full roll-out by 2022 Beijing Olympics.Digital yuan can be a State controlled alternative to Alibaba-affiliated Alipay and Tencent’s Wechat Pay apps, which currently process over 95 per cent of digital payments in China.
Hopefully, we will soon have a DLT-enabled digital rupee, revolutionizing banking in years to come while risk mitigation mechanisms would be in place to ensure that all transactions are properly accessible to regulators and some sort of KYC norms are in place to keep potential miscreants away.
Hopefully, Indians will be in the forefront of harnessing this amazing technology for wider public good.
(Author is an IA&AS officer and former Special Secretary, Ministry of Commerce and Industry).
