Bitcoin blues: Should the government block cryptocurrency, or regulate it?

Cryptocurrency is the new technological gremlin haunting the world’s exchequers. Governments want to rein it in, but punters have made fortunes in its trade.

Bitcoin is seen as quasi currency, much to the consternation of regulators. It has been described as everything but real money and dismissed as dogcoin. Paul Ford, a geek writing for Bloomberg, sees a bubble in Bitcoin. “Bitcoin is at some level just a set of rules, defined by software, that has become one of the world’s weirdest games. Bitcoin will crash because of course it will. Bubbles burst.” Yet, it is the most popular.

Bitcoin was created in 2009 by a mysterious figure using the alias Satoshi Nakamoto. It doesn’t exist in a physical form, there is no central bank and a record of each transaction, using anonymised strings of numbers to identify it, is stored in blockchain.

An estimated Rs 10,000 crore was traded in India in December when Bitcoin peaked at $20,000 before crashing to under $6,000 a month later. It is now clawing back amid what is believed to be strong Korean demand.
Bitcoin can only be created through mining. For each Bitcoin transaction, a computer owned by a Bitcoin miner must solve a mathematical problem. The miner receives a fraction of a Bitcoin as a reward.

“The currency is not legal tender in India but the government has not called it illegal either,” says Ajeet Khurana, head, Blockchain and Cryptocurrency Committee (BACC) of India. BACC is part of the Internet and Mobile Association of India. In December, India set up a panel to study the impact of cryptocurrencies and make recommendations to regulate them.
“I’m bullish on cryptocurrency. The government has to take a clear stand — to ban or not. Before the end of 2018, we should see some concrete decisions on cryptocurrency in India,” says Bipin Preet Singh, founder, Mobikwik. The mobile wallet company is considering cryptocurrency, as is reportedly RelianceJio.
Guru Malladi, partner, EY Advisory Services, says, “For any technology change, the impact is overestimated in the short term and underestimated in the long term. Reaction to cryptocurrency is no different. Bitcoin is no longer for governments to ignore.” There are, he says, “at least 5-6 million investors in India”.
Bitcoin, one of the 1,500-odd cryptocurrencies, is the most traded. Others include Ripple, LiteCoin, Etherium and Dash.
“There’s a grey area in regulation. There’s a need for investor protection, research and education. Digital currencies will evolve,” says Vivek Belgavi, leader, fintech, PwC.
Cryptocurrencies cannot be regulated because it is virtual. It does not share the nature of normal currency or fiat currency. Fiat currency has three basic functions as a medium of exchange, as a unit of account and as a store of value. “Merchants do not accept cryptocurrency. It is not stable, as fiat currencies tend to be and does not store value like gold,” says Naresh Makhijani, partner & head, financial services, KPMG India.
“Bitcoin is susceptible to being a Ponzi scheme but is not designed to be like that. And as the owner is unknown, it is vulnerable to fraud. Therefore concerns are genuine,” Makhijani adds.
Bit by Bit
Despite such concerns, the world is taking to it, bit by bit: in January, KFC outlets in Canada began a limited period offer to accept Bitcoin for up to Canadian $20. In South Korea, which has overturned an earlier ban on Bitcoin, sees trades at 30-40% premium over other markets, with some analysts referring to this as “kimchi premium”. Japan’s largest electronic retailer Yamada Denki is accepting Bitcoin payments. Russia’s largest state-owned bank, Sberbank, plans to bypass regulations at home by allowing its Swiss subsidiary to trade in cryptocurrency.
Cryptocurrency is easy to launch and most ride on existing network ERC20 or Ethereum Token Standard. Exchanges include startups like Coindelta, Zebpay, Koinex, BuyUcoin and Coinsecure, which earn revenue by charging crypto buyers a fee ranging from 0.3% to 1% of the value. “No single entity controls Bitcoins. We are happy with the government moves in this regard — to study it rather than completely shelf the idea of cryptocurrencies,” says Nischint Sanghavi, head of exchange, Zebpay.
Even as the Indian government is studying cryptocurrencies, it is more positive about the underlying technology. Finance Minister Arun Jaitley said in Budget 2018 that India would explore the use of blockchain to usher in digital economy.
Blockchain is decentralised and records all transactions in real time unlike the central command operations of core banking systems. The Rs 12,600 crore Nirav Modi scam, some experts believe, could have been nipped in the bud with blockchain. By working through user consensus and storing data across its network, blockchain eliminates the risk of holding data at one place. Already, ICICI Bank and State Bank of India are coming together to drive blockchain. A more secure infrastructure can be built for digital land records, asset records and bank ATM chains using blockchain, says Khurana of BACC.
“The next three-to-five years will see an explosion in blockchain and cryptocurrencies,” says Malladi. Experts that ET Magazine spoke to say cryptocurrencies will have a future if there’s regulation. “At present users are trusting an anonymous body. We need open, not opaque, structures,” says Makhijani.