Naavi calling for banning of Crypto Currencies is old news. I have many times faced the question if Crypto Currency (say Bitcoin) is so bad, why is it that USA among other countries is not banning it?. Now I can take a little comfort that a Noble winning economist in USA also has called for shutting down Cryptocurrencies. (Refer this article in financial express)
Whether US bans Bitcoin or not, it is necessary for us to remember that our needs are different from other countries and we can take a decision that is independent of others.
In fact, if we have to have a common policy with US, we can make US dollars a legal tender in India because USA has made it a legal tender. But everyone knows that this is not recommended. If it is done, we will ruin our economy.
If making Rupee freely convertible to US dollar which is a globally recognized and stable is detrimental to the Indian interests, it is amply clear that making rupee convertible to the anonymous, privately regulated Bitcoin will be catastrophic.
Can we regulate what is not recognized?
Yesterday, I had the privilege of interacting with a group of Legal officers from RBI in which there was a detailed discussion on Crypto Currencies. It looks that there is lot of doubt in the minds of the officers basically because, people asking for banning of Bitcoin are in the minority or at least less aggressive than those who are promoting Bitcoins in India.
One dilemma of RBI is that people are talking of “Regulation” and asking that RBI should regulate Crypto Currency. But this is a trap which RBI should avoid.
It is not conceivable how can RBI “Regulate” a transaction without “recognizing” what is being regulated. Whatever may be the scope of regulation, there will be always some loopholes for violation and they will be used to make part of the Bitcoin legitimate.
For example, if RBI says “Bitcoin” is banned, there will be 1000 other versions to substitute it. If RBI says a particular “protocol” is not acceptable, there will be tinkering with the protocol to escape the ban.
RBI cannot match with the techno marketers and fight the innovative ways to encash the Bitcoin Ponzi scheme. If it tries to do it, it will only meet with failure.
On the other hand, the RBI Act can be amended to include any form of Cryptocurrency as the sole prerogative of RBI by just adding the word “which term shall include crypto currencies” in section 22 of RBI Act after the words “Currencies”.
The threat of Libra
The Recent flotation of “Libra” by Facebook is an attempt to make “Face Book” the Central Bank of the Globe. While Bitcoin only threatened the existence of RBI, Libra may threaten the Central Banks of many countries.
Facebook has the membership strength which makes it one of the biggest congregation of people in any one single economic unit if we define it as one. The Crypto Currency Libra which Face Book wants to introduce and which our media seems to be enamored with (Refer this article in Hindu) will be managed by a “Founder Group” (Libra Association) which consists of Facebook, Mastercard, VISA, Uber and the Vodafone group.( A total of 28 influential corporate groups appear to be supporting Libra).
It is stated that Libra issue would be backed by a reserve of real assets though we donot know the nature of such assets. It is probable that the market valuation of the real estate owned by some of these groups and their promoter shares as well as their present wealth in the form of Bitcoins and other crypto currencies may be thrown in as their contribution to the reserves.
It is not clear how the initial stock of Libra would be developed. Will the founders be allocated some Libra stock in lieu of the assets contributed to the reserve? or as “Sweat equity” of the promoters with some freeze on sales for a certain period? Will the Company issue stock through an ICO?
It is possible that all these techniques may be used in combination so that the initial stock is credited to the Company as saleable stock. This may completely avoid “Mining” at the stage and the seed stock may be credited to the promoters as their contribution whether withdrawable or not. It may also be made additional security to the reserves kitty. Since the value will keep appreciating as the trading picks up, the value of the seed stock as reserve will also keep increasing without any effort from Facebook.
It is possible that “Mining” may be available as reward for using some resources of Face Book or as loyalty points etc. We can expect that all marketing acumen of Facebook will be used to create a stock of saleable Libra stock.
Having issued the stock, it will then be sold at market rate to the investors world over and the blocks will start rolling out. Mining may be introduced at this stage and may be limited to the block validation fee as a percentage of the transactions validated with a low level of difficulty.
The promoters in the Libra Association may provide their services against Libra and that itself would provide a huge market.
Unless law makers are able to understand how this scheme may be able to keep itself outside the framework of legacy laws, it is likely that Libra would get the initial traction enough to be a threat to the economy. (Refer this article in guardian.com for more details)
It is stated that Facebook may avoid launching this in India to avoid a confrontation with the RBI. But it is likely that many of the Indians may acquire and transact in Libra unless such transactions are not specifically prohibited in law.
It is therefore necessary for RBI and the Finance Ministry to take such steps as may be necessary to ensure that Bitcoin or Libra does not become the new conduit of global economic transactions that would hurt our economic interests.
If this requires amendment to ITA 2000, PMLA or FEMA, it must be done without further delay.
I also call upon the new Finance Minister Smt Nirmala Sitharaman to use the budget to make a specific mention that
“Crypto Currencies are not recognized in India and any transaction related to dealing with any Crypto Currency would be considered as a conversion of legit currency wealth to an illegal asset and punishable under Prevention of Money Laundering Act”
As regards meeting the threat of Libra in the long run, the strategy should be “Eliminating Digital Black Wealth” and must be taken as the foreign policy stand of India. We should lead the formation of a “Anti Crypto Currency Group” of countries and fight this global menace just like terrorism.
Ceding to Bitcoin and Libra is like ceding Kashmir to the separatists since separatism is also considered as “Freedom Struggle” by a few. If Kashmir is not negotiable for India, Rupee is also not negotiable. We cannot allow Bitcoin or Libra to make any inroads to the Indian currency system.
I hope RBI and the Finance ministry will recognize this and act appropriately.