The question of what to do about bitcoin and other cryptocurrencies will not go away. In his budget speech, finance minister Arun Jaitley said he does not want bitcoin to be a legal tender. But the question of what to do about the growing trade in cryptocurrencies remains. There is the related topic of blockchain, which, as a technique, is increasingly becoming the next revolution in simplifying transactions. The Parliamentary Committee on bitcoins has not reported yet. We are told it may report by the end of 2018. This is a long delay. There are dealers in cryptocurrencies in India who self regulate but would prefer government regulation. The Financial Services Commission of Mauritius has decided instead to take the bull by the horn. It has decided that it would like to develop a market in these exotic assets and have appointed a committee to set up regulatory structures. Disclosure: I have been appointed the chairman and the committee has Australian, British (beside myself) and local members. The problem arose because of the brilliant, but misleading, decision to name a new asset as bitcoin. As I have written before in this column, had it been called a zen-token and not a bitcoin, it would not have led to the wild bubble that took its price to $21,000 last December, from where it has come down to $5000 or less. This, at least, clarifies that buying a bitcoin is not a one-sided bet. It would be sufficient for countries to issue the warning clearly that while trade in cryptocurrencies is legal, the risk is entirely borne by the buyer. So what is the nature of these cryptocurrencies? Firstly, they are not money in as much as they are not legal tender. They can be means of payment if some retailer accepts them. Otherwise they are tokens of variable value. They are not equity because they do not give you a claim on the capital assets of the issuer. They are tradable assets. They are bought by people with the sole aim of reselling them. They are stores of value.
Being assets but not equity, nor money, they need regulations as such. The usual fear is they could be used for money laundering or to finance terrorism or as black money. But the technology of issuing these currencies using blockchain makes these assets different from cash in one respect. Cash is anonymous. If someone picked my wallet I could not claim that the currency belonged to me. But bitcoin and other cryptocurrencies are not anonymous. If someone hacks into my wallet and tries to resell, the blockchain would be alerted. A string of computers store the information that I bought the bitcoin. They know my password. Thus, fraud in bitcoin is traceable and we have examples of this already. Recent raid on the hot wallet of the XEM cryptocurrency was a result of Coincheck, the Japanese issuers being careless and leaving the wallet internet accessible. But it will be difficult for the hackers to sell, as each coin has an identifiable numerical code. So, while Coincheck has lost $500 million worth, it is not clear who has gained. The total number of XEM coins being reduced, the holders of these coins profit from a rise in price! ( FT, February 3, 2018)
There are many monetary authorities which like this aspect of the cryptocurrency. They are thinking of issuing such currency officially. The blockchain technology not only makes them safe but speeds up the recording of transactions. Banks and the central bank could be linked in the blockchain to share information on an instantaneous basis. Thus, like in many cashless payments technologies, issuing cryptocurrency could reduce transaction costs, it could make black money impossible since the anonymity of cash is gone. The blockchain is already being used to simplify mergers and acquisitions, since the two sides can directly work out the legal process on a distributed ledger without intermediaries. Now, if it is used to issue digital currency, it could hasten a cashless society. Of course, for this to happen, people’s ability to hold and spend digital currency would have to be made easily accessible via smartphones, and smartphones would have to be affordable. But the possibilities exist.
The issue of cryptocurrency thus merges into one of capturing the benefits of advances in technology. Thus, with AI making strides, the financial world is bound to benefit. Traditional banking, as we know for the majority of customers, can be made location free. Already high street bank branches are being closed in the UK, as who needs to go to a bank when you have ATM? Other functions performed by banks can also be made faster by going online. Indeed, human intermediaries can be minimised. For anyone having to deal with an Indian bank, that would be worth something!
While cryptocurrencies are distrusted by many monetary authorities, they herald technological benefits ( via blockchain)—which need to be exploited. There are risks, but they can be minimised. How to minimise the risks is the challenge.