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Business News/ Opinion / Columns/  Arguments against regulating cryptocurrencies are very weak
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Arguments against regulating cryptocurrencies are very weak

Self-regulation won’t work and the possibility of rules being evaded is no reason not to have them

Photo: iStockPremium
Photo: iStock

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is scheduled for introduction in Parliament this winter session. It has been in the works for a while, but in the meantime, crypto platforms or ‘exchanges’ have advertised heavily in India and grown big time.

The exchanges have committed to a self-regulatory code of conduct through an advertisement published on 3 November. The trouble is, there is a very basic problem with self-regulation.

Let’s take an example. The story goes that when ice-hockey players were permitted to play without helmets, very few actually wore them. Nonetheless, the players strongly supported the idea of making helmets compulsory. But if they wanted helmets made a must, why didn’t they just wear them on their own? As Robert Frank writes in Under the Influence: “Skating helmetless confers a competitive advantage, enabling players to see and hear a little better." Of course, on the flip side, as Frank writes: “If one side skates without helmets, opponents will feel compelled to respond in kind. In the end, no team gains a competitive advantage, and all players face greater risk of injury."

This is precisely why self-regulation doesn’t really work. Once one exchange puts out a misleading advertisement, like exchanges already have by claiming that crypto investments are safe and provide much higher returns than other forms of investing, rival exchanges are left with no choice but to match such claims. Hence, we need proper regulation.

The other argument being made by many crypto enthusiasts is that cryptos cannot be regulated. This seems like a classic muddle-the-water strategy straight out of what big tobacco companies in the West did for decades.

As Sanne Blauw writes in The Number Bias: “The scheme was best summarised by John W. Burgard, marketing director for one of the big tobacco brands, who… in a classified document, wrote: ‘Doubt is our product.’" Big tobacco companies questioned the prevalent research on the negative effects of smoking. They also called for more research and funded it as well. This was done to create doubt in the minds of people about negative findings. By stating that cryptos cannot be regulated, their enthusiasts are borrowing a trick from the tobacco toolkit.

Further, while the original crypto inventors wanted it to emerge as a form of money that could compete with fiat money, that hasn’t happened. Meanwhile, cryptos have emerged as an avenue for investment and any form of investment needs to be regulated.

For starters, crypto exchanges can be mandated to deduct a certain amount of tax when anyone sells tokens to make a capital gain. This will help maintain an accounting trail to check whether the right amount of tax was paid. Second, the government needs to clearly specify the tax that needs to be paid on capital gains made by investing in cryptos. Third, the use of the word ‘currency’ while talking about cryptos is something that needs to be outlawed because it misleads people, given that the word and the government are intricately related. Fourth, it should be conveyed clearly to everyone that cryptos are not legal tender.

Another argument being made is that crypto investors need not necessarily invest through crypto platforms, that they can move to peer-to-peer exchanges (P2P) exchanges located outside India. It has also been argued that people will resort to hawala-like informal systems or engage in barter, in order to get around regulation.

Of course, that is always a possibility. No regulation is perfect. But not having regulation because it’s not perfect is hardly an excuse. Further, just because there are ways of getting around a regulatory system doesn’t mean the entire lot of 15-20 million investors that crypto platforms claim to have are going to do it. And those who do it will be breaking rules knowing fully well what they are doing. This will be exactly like people who transact in cash because they don’t want to pay income tax, but that doesn’t mean that we do away with income tax.

There has also been talk of going easy on regulation because so many Indians have invested. This is actually exactly why regulation is needed. Too many people are involved.

To conclude, in The Future of Money, Eswar S. Prasad talks about three different approaches that countries have taken to regulate cryptos. Countries like China have banned cryptos entirely. Then there are countries which have adopted passive intolerance. As Prasad writes: “This involves not banning cryptocurrencies but discouraging their use by financial institutions and, in many cases, not clarifying the legal status of such currencies." South Korea has taken this approach.

Also, Prasad feels that “lack of regulatory clarity can certainly serve as an effective deterrent to the wider use of cryptocurrencies". That has clearly not worked in the Indian case.

The third and the most practical approach would involve not limiting investors from investing in cryptos and at the same time creating “a framework in which to regulate them and any financial products related to them".

The Indian government should follow this approach. In fact, this is something that should have happened by now. But as the old saying goes, der aaye durust aaye, or better late than never.

Vivek Kaul is the author of ‘Bad Money’.

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Published: 30 Nov 2021, 09:59 PM IST
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