By Ateesh TankhaImagine an Indian hotel chain thats mortally afraid of the coronavirus. No cases have yet been reported at any of its properties, but, lacking sufficient information and medical infrastructure, the chain instructs its properties to cancel all guest bookings in line with what hotels abroad have done. A set of disgruntled guests take the hotel to court, claiming that the chain has taken disproportionate action.
Should the law rule be in favour of the guests because the hotel lacks empirical evidence that proves that the properties would have suffered reputational or other damage if the bookings had not been cancelled? A March 4 Supreme Court judgement overturning an earlier 2018 Reserve Bank of India (RBI) ruling on cryptocurrencies seems to suggest as much.
In April 2018, after five years of unregulated trading in cryptocurrencies, RBI issued a ruling to its member banks not to deal in virtual currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs.
Subsequently, a governmental committee urged GoI to ban and criminalise the use of unofficial virtual currencies in India. The reasons for this are neither so outrageous nor so far-fetched.
There are two parts to a cryptocurrency. First, theres the distributed ledger technology (DLT), like blockchain, thats a system of replicating, sharing and synchronising digital data personal details, transactions, etc without the need for a centralised authority or trusted service provider. The many advantages of this technology relate to activities ranging from the efficient collection and authentication of KYC (know your customer) and batch-processing micro-payments, to expediting cross-border payments and sharing defaulter data.
In short, DLT can make many processes in the world of payments and financial services cheaper, faster and more reliable. But then, theres the token, the actual virtual currency. As a store of value and as a medium of exchange, there are a few challenges that exist.
The least of these relates to the creation of technology integration and transaction processing speed. Over time, and with enough investment and innovation, these issues will be overcome. Far greater concerns exist in two principal areas fraud, and money laundering and illegal transactions.
Consumers have been the victims of virtual currency fraud for some time now. Let alone the 2018 Gain Bitcoin scam that defrauded the public of Rs 2,000 crore, there have been scams like OneCoin that make the former look like loose change. Add to this the fact that even legitimate exchanges like Bitpoint and Binance have had tens of millions of dollars stolen by cybercriminals. It is estimated that $4.2 billion was stolen from cryptocurrency users and exchanges in 2019. Its no wonder that RBI wishes to err on the side of caution.
An even greater regulatory and oversight challenge, however, exists when it comes to controlling transactions related to money-laundering and other nefarious activities.
Early on in the cryptocurrency saga in the US, it quickly became apparent that VCs were mainly used for completing transactions related to narcotics. Similarly, thanks to the Dark Web, many regulators have banned, or severely restricted, the use of VCs to control activities like terrorist financing, sanction circumvention, and other forms of illegal trafficking.
Which brings us back to RBI. As the official entity that oversees the health of the financial system in India, it is only to be expected that it will take a more conservative approach to enabling and regulating something as protean as cryptocurrency.
Critics complain that RBI does not fully understand the technology, or the power of VCs. This may be true. They also say that the purpose of RBI is to build a regulatory infrastructure around technology so that consumers are not defrauded.
This is true, but easier said than done. The recent debacles with both public and private sector banks should serve as cautionary tales for those advocating less stringent oversight.
And until RBI is comfortable with a way forward, it should not need to show empirical evidence of how its member banks have suffered any loss or adverse effect directly or indirectly on account of enabling VC transactions. There is sufficient global evidence and precedence for the stance taken by RBI.
As with the coronavirus, if you dont know what you dont know, and you are still likely to be held liable for an outbreak, enforcing a quarantine may be the best way to wait and watch developments.
(The writer is former head, partnerships and Citi merchant service, Citibank, US)
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View: Why it's better for RBI to just wait and watch on cryptocurrency - Economic Times
