The system of money-laundering was efficient and discreet, but it did not destabilise the financial system. But when the carriers are not refugees, the object of countertrade is not physically traceable, and the sheer volume of such transactions can challenge ‘macroeconomic and financial stability’, such a system is a cause for concern.
Former head, Citi Merchant Services, USIn the 20th century, one of the easiest ways to transfer and exchange articles of value was through the process of countertrade. A refugee fleeing Nazi Germany could carry the equivalent of thousands of dollars through rare postage stamps pasted on a used envelope. Upon reaching a safe haven, these stamps could be traded at an exchange for money, other stamps, or bartered for something else.
The system of money-laundering was efficient and discreet, but it did not destabilise the financial system. But when the carriers are not refugees, the object of countertrade is not physically traceable, and the sheer volume of such transactions can challenge ‘macroeconomic and financial stability’, such a system is a cause for concern. This is the view of Shaktikanta Das vis-à-vis private cryptocurrencies. And the Reserve Bank of India (RBI) governor is right. Ever since March 4, 2020, when the Supreme Court showed an injudicious haste in striking down RBI’s April 2018 circular that prohibited regulated banks from dealing with cryptocurrency transactions, the industry has taken it upon itself to grow at a frenetic pace.
Earlier this year, Sathvik Vishwanath, CEO of the cryptoassets trading and blockchain company Unocoin, had written that ‘the government tried banning porn, but anything that is accessible to everyone, or is made available on the cloud, can never be fully tamed. The same goes with the decentralised and open source-based cryptocurrencies.…’ One wonders why Vishwanath did not also compare cryptocurrencies to something as accessible as, say, cocaine.
On its part, the government, mindful of the machine but not its effects, is reportedly considering taking a ‘nuanced’ view of a nascent technology, enabling cryptocurrencies as investments like shares, bonds and gold, while prohibiting their use as legitimate transactional currency. This, along with other cryptocurrency-related issues, was apparently discussed at a high-profile meeting chaired by the prime minister on Saturday. Assuming that this ‘not currency, but assets’ approach is the result of misunderstanding and not disingenuousness, there are at least two notions that need to be corrected. First, cryptocurrency is not a technology.Blockchain is.
And blockchain, as Das pointed out on Tuesday, continues to thrive and grow outside the heady world of cryptocurrencies. It is used by companies for things as mundane and routinely important as the management of contracts, the verification and authentication of raw material sourcing, digital identification, retail loyalty and rewards management programmes, data-sharing, and awhole host of other activities that have little or nothing to do with speculative investments. If anything, blockchain’s growth and acceptance is likely to grow undiminished, even in countries like China where cryptocurrencies have been banned altogether. Second, prohibiting the use of cryptocurrencies as a medium of exchange is an exercise in superfluity.
Like rare postage stamps, their value is pegged to their countertrade value at a point in time. They never challenge the supremacy of a fiat currency, because without the latter, these cryptos would lose not only their tradable value but also their very reason for existence. Indeed, cryptocurrencies, more than promoting the aim of seamless payments, only aid and abet the aims of a central bank like the US Federal Reserve, guaranteeing the supremacy of the dollar through a new avatar. In any case, central bank digital currencies (CBDC) are more than enough to ensure the cheaper, faster and safer transmission of digital money.
But more worrying than the lack of understanding is the scant regard, conspicuous by its absence, paid to the challenges of oversight and monitoring. Das, cognisant of the threat to capital controls and to the overall stability of the financial system — in which banks and non-banking financial companies (NBFCs), even if they are not fully disintermediated, may end up carrying most of the financial risk without sufficient safeguards and adequate returns — has been unequivocally opposed to any form of compromise. In a country where it has been impossible to impose an anti-money laundering apparatus, or infrastructure to safeguard both institutions and citizens against fraud, is it so very difficult to imagine a future in which cryptocurrency exchanges are used by more than common or garden criminals, and less than upright public figures, to game the system and evade government restrictions? The truth is that cryptocurrencies are almost impossible to regulate.
They were built to enable easy countertrade across borders and to circumvent the plodding safeguards of the financial system. This is what makes them so vibrant, valuable and volatile. Banning them is easier than standing up expensive and extensive surveillance architecture. It is equally true that GoI has no business deciding the fate of cryptocurrency. In Plato’s 4th century BC Gorgias, Socrates deplores the fact that the power of oratory is used to persuade people based on misguided belief rather than logic and knowledge. GoI would do well to heed his lesson and let the more knowledgeable RBI have its way on this matter.