Apex court votes for bitcoin, but...

First up, bitcoin is a cryptocurrency; like Coke is a soft drink, and Xerox is a photocopy machine maker. Bitcoin is the best known example of cryptocurrency, so, the two words are used interchangeably. 

Since cryptocurrency refers to money, you would expect that there would be a centralised administrator to oversee it? No such luck. In fact, proponents of cryptocurrency argue that this is its precise plus point! The currency can go from user to user without the need for intermediaries.

To use technical jargon, the transactions are verified by network nodes through cryptography (aka technology) and recorded in a public ledger called a blockchain, without anyone playing Peeping Tom. Now, a bit of history. 

Bitcoin was developed in 2008 by Satoshi Nakamoto, (believed to be the pseudonym for the developer or a group of developers). This coin can be exchanged for other currencies, products and services. There have been several criticisms on bitcoin, the chief of which is that it is used for illegal transactions. Leading economists have dismissed it as speculation. 

Because, by the same argument, even ordinary currency can be used for illegal transactions. The more significant worry is the absence of a regulator, which is the main reason why many are not excited about bitcoins and have raised the red flag. Globally, countries have been cautious. 

The Reserve Bank of India, the country’s central bank, is known to be stoic and conservative, the twin attributes of a traditional banker. Of course, it deserves kudos. If India came through the global credit crisis of 2008 smelling of roses, a big part of the credit goes to the RBI. 

The same kind of caution was in display when the central bank banned bitcoin. A lot of points have been raised flagging the risks. Like the theft of bitcoins. And since these coins are not traded through any authorised central registry, the loss could be permanent. And for the exact same reason (a missing record), there is no established framework for seeking recourse in case there are disputes. Also, as there is no underlying asset, the value of bitcoins can be volatile and speculative. 

Finally, there is a fear of bitcoins being used to fund illegal activities and, in the absence of information on counter-parties, could subject the users to unintentional breach of Anti-Money Laundering (AML) laws. Cyber insecurity and a regulatory ban by governments are significant threats. 

Bitcoin’s main advantage is that it eliminates the need to hold physical cash and is in line with the thinking of the digital era. It is technology-driven and neutral to geographies. That way, it can answer the call for a single world currency. 

In early March 2020, the Supreme Court of India overturned the RBI’s ban on trading in virtual currencies. This decision means that India can enact rules and regulations that will allow the fintech industry to reap the exponential growth in blockchain technology. 

But, mark it, the real challenge for us is in law enforcement. Unlike China, we cannot muzzle down dissidence. And unlike the US, we are still prisoners of hopelessly outdated colonial laws, and our courts take an enormous amount of time to deliver judgment. In a sense, the RBI banned it for that single reason. 

This decision by the Supreme Court doesn’t address the law enforcement issue, but it paves the way for creating rules that are nuanced and well designed. The regulator could be SEBI. SEBI has been a knowledgeable and successful capital market regulator, and importantly, has also handled failure. Since cryptocurrency will be traded, it makes sense to bring it within the ambit of the SEBI. 

There are many who believe that a principal function of cryptocurrency is to finance the development of Web 3.0. This third generation of internet services will focus on using machine learning to provide a data-driven web. The ultimate goal of Web 3.0 is to create more intelligent, connected, and open websites. 

So far, in the absence of cryptocurrency financing, there has been little incentive for India’s developers to prioritise blockchain technology ahead of opportunities in traditional software development. This does not mean that we will have bitcoins beginning tomorrow. 

For this to happen, the RBI, the SEBI, and the government will have to be on the same page. But for now, the RBI is planning to file a review petition to curb cryptocurrency transactions. Its main contention is that allowing these transactions will jeopardise the banking system.