Banning cryptocurrency will not slow down the changing trends in currencies, but only put certain countries at a disadvantage versus others.
On 26 October, one day after President Xi Jinping elevated blockchain to be a Chinese national priority, the Chinese Cryptography Law was passed and will be in effect in January 2020. This is the same month the Supreme Court of India is expected to hold a hearing on a draft bill to ban cryptocurrency throughout India, proposed by the Inter-Ministerial Committee (IMC) in July. The two neighbouring nations are seemingly heading in different directions for what the columnist believes to be the next great technological leap of humanity, as such India must formulate a comprehensive crypto strategy in this new arena of nation-state competition.
This arena, which has stirred the imaginations of entrepreneurs and governments alike, is filled with buzzwords, but IMC has done a good job defining the core terms in its crypto-ban bill. Distributed ledger (or blockchain), outside of the scope of the proposed crypto ban, means “any technology that enables transactions and data to be recorded, shared, and synchronized across multiple data stores or ledgers, or a distributed network of different network participants…” In plain English, blockchain is the next-generation technology for record keeping that has the benefits of being immutable, transparent, and accessible. In practice, blockchains can cut out in any economic activities the requirement of a middleman, who is often a cost to efficiencies and prone to errors—I call blockchain an earth-flattener that collapses the vertical gaps of information and organisations.
Some real life examples here. Blockchain-enabled upgrades to land records in at least eight states including Uttar Pradesh and Maharashtra, and other countries such as Mexico and Ghana have been explored. Voters in several counties in the United States can now vote on their blockchain-enabled smartphone apps, hence greatly improves voter inclusion and reduces fraud. Australian and US stock exchanges are testing faster blockchain-enabled settlement to reduce the time and manpower cost of trading. In the not too distant future, ownership of assets around the world could also be “tokenized” into fractions to allow participation by common people in the equity of assets now accessible only to the privileged few—the ultimate financial inclusion. Lastly, in the social justice sphere, censor-proof blockchain in the form of cryptocurrency has served as a truth machine that records stories to aid the rise of the #MeToo movement. All is great with blockchain, and I suspect the ultimate use case for this technology has not even been discovered yet. Now, onto its evil cousin Crypto, the subject of the proposed ban by IMC.
CRYPTO
Cryptocurrency “means any information or code or number…providing a digital representation of value which is exchanged…with the promise or representation of having inherent value in any business activity…or functions as a store of value or a unit of account…” according to IMC. It is understandable that governments tend to take a reserved or even opposing position, as in the case of crypto, when facing new technology that might disrupt their status quo. Yes, cryptocurrency could pose as a substitute threat to fiat currencies, but more as a result of the internal weakness of fiat created by Central banks after years of monetary experiments. The paradigm shift is coming in currencies, as they always do every 100 years, and banning cryptocurrency will not slow down such trends, but only put certain countries at a disadvantage versus others. There are also concerns of money laundering risks with cryptocurrency, which in reality is a myth. Cash and USD are the preferred currency for the criminal for good reasons, because by design the public records of all transactions on Bitcoin, the leading cryptocurrency for example, give law enforcement agencies a leg up in catching bad players, as they have done so in the past. The real problem, the real objective of this column, is to highlight the crypto ban as proposed by IMC will not work in practice and might also suffocate the developments of blockchain. India, or any country, does not want to fall behind in this technological race with national security implications.
First of all, cryptocurrency is essentially a string of letters recorded in an immutable blockchain. The proposed ban (of holding, expressing, and exchanging letters) raises a fundamental challenge to the freedom of speech as enshrined by Article 19 of the Constitution. In practice, superior cryptos such as Bitcoin and Ethereum are censor-proof (going back to the #MeToo example). Many countries have tried banning cryptocurrency and failed, and in some other cases such efforts have further increased the usage of Bitcoin as a reflection of the distrust in the system by the people. Banning cryptocurrency is a lost cause, anecdotally and technologically.
Secondly, it is difficult to separate cryptocurrency from blockchain—you can try, but some of the blockchain end-product might lose its core traits, like separating butter from milk. Blockchain and cryptocurrency are two sides of the same coin, blockchain is the record keeping technology, and cryptocurrency describes the information recorded—one can imagine the difficulties in distinguishing what is legal (blockchain) and illegal (crypto) in the proposed ban. Regulatory ambiguity such as this is no friend to innovation. There is another critical aspect worth considering, that cryptocurrency is what ensures the safety of the underlying blockchain. Not to get too technical here, but much of the cherished safety trait of blockchain comes from thermal energy sunk into the chain, block after block of transaction records—to temper the record and break the chain, one needs to input even greater energy than that which has been stored in the existing chain. Cryptocurrency provides the incentive and resource allocating mechanism for the energy sink, and without it, the blockchain itself becomes much weaker.
Blockchain, along with artificial intelligence and biotechnology, are the three technologies that will define the decades to come. Blockchain and cryptocurrency in particular will have deep implications beyond the traditional realm of a typical technological breakthrough. How will the said truth machine operate in this post-truth world, how will the first challenge to the nation-money marriage in a millennia look like, and how will the people prosper in a middleman-less environment? All these questions are worth the government to think through, and without the ban.
James Lee is the Founder/CIO of HOBA Global Investors