A REGULATORY NIGHTMARE IN CRYPTO - Bhanu Sripada

With governments growing unstable and citizens losing trust in sovereign national currencies, cryptocurrencies offer a universally accepted peer-to-peer transaction solution, which was the original intended purpose of bitcoin. Furthermore, they can be customized based on the application to suit the purpose. Governments and central banks are now trying to come forward with their own cryptocurrencies. This begs the question of the ability of governments to scan the nooks and crannies of this neo currency frontier for illegal activities, and if cryptocurrencies would usher in a peer-to-peer revolution, a new era of financing of crime or terrorism or both. 

 

According to various research papers and articles published (even by the IMF and The New York Times), Bitcoin was a perfect medium of exchange for illicit activities on the dark web where the users could get away with using Bitcoin as a currency, as it is near impossible to trace it back to them. Close to one-half of Bitcoin transactions (46%) were found to be associated with illegal activity and approximately one-half of Bitcoin holdings (49%) through time were found to be associated with illegal activity (link to research). We could also hypothesize that the underworld made gains and booked profits when investors poured money into bitcoin.

This drop-in of illegal users after 2016 is evident from how ransomware attacks later started demanding Monero, Ethereum, and Zcash instead of bitcoin payments. The market for bitcoin is still strong but it is based on perceived value and demand alone, which could be unstable as witnessed by how Dogecoin’s price was driven up by Elon Musk’s tweets which later fell equally steeply. This is the result of the open hand of the market in an unregulated currency.

 

This might give a new shadow dimension to national currencies and the opening-up of a new chapter in financial crime. Since Bitcoin can be traded across borders and has exchanges in almost every country, anyone from India can sell INR to buy Bitcoin, and transfer it to anyone abroad who can then exchange it for their national currency, effectively skirting the legal currency exchange mechanism, and acting as a pseudo exchange mechanism which can bypass authorities. This also means every single law passed to prevent money laundering, terrorist and other illicit financing (like FATCA, CFT, and AML related) is now moot. 

 

The Chinese government banned all cryptocurrencies in 2021 September for this same reason, that allowing free-range cryptocurrencies into the financial ecosystem is basically analogous to the relinquishment of financial regulation and authority.

However, RBI’s steps to ban crypto trading were reversed by the Supreme Court; a step, which in my opinion, is a case of sheer judicial overreach. How is an independent body expected to regulate the national currency, prevent money laundering and ensure a stable economy if it is handicapped by judicial overreach?

Having said that, cryptocurrencies are here to stay. They have a neo user base, the demand, and acceptance necessary to sustain themselves. In failing economies like Venezuela, Argentina, where citizens have lost trust in the government and the currency, cryptocurrencies like bitcoin are being adopted by the people as a universal payment mechanism, and an alternative to their failing sovereign currency. Perhaps it also allows the benefit of having a community-controlled currency that isn't bound by inflationary pressures, the balance of payments equations, and is independent of the money supply dynamics.