Banning Cryptocurrency
Buy the rumor; sell the news
Something that the cryptocognoscenti don’t appreciate, or perhaps refuse to engage with, is the possibility that a state will move to ban cryptocurrencies. The usual response, if there is any, from aforesaid cryptocognoscenti, is to note the uneforceability of the ban. If illegal drugs are still consumed in vast quantities in spite of their ban, surely cyrptocurrencies will be used in places whose governments try to ban them. And that may well be true! But it doesn’t actually, you know, engage with the argument that a government wields vast power over its citizens’ activities.
But that’s the situation India may soon find itself in, as Bloomberg reports:
While details of the possible crypto ban remain unclear, a draft bill from 2019 bears eerie resemblance to the 1970s controls. It would criminalize the possession, mining, trading or transferring of cryptocurrency assets. Offenders could face up to ten years in jail as well as fines.
Such a blanket prohibition would be foolish on multiple levels. For one thing, enforcing the law would be even more difficult than under the License Raj. Raids once aimed at seizing dollars and gold bars would face the challenge of locating a password or seed phrase holding millions in Bitcoin. Nor can the government size or even access the network of computers scattered across the world mining cryptocurrency and maintaining blockchain ledgers.
To enforce a ban, authorities would have to develop an intrusive surveillance system that could track all digital and internet activity in the country. Thankfully, India does not have the state capacity to pull that off. More likely, its efforts will only drive the cryptocurrency market underground.
I don’t know enough about India to speculate about why they, in particular, are debating whether to ban cryptocurrencies. And, I don’t think that a ban is enforceable. But we can think about this more generally, and come up with some reasons why governments may think banning (or, really, attempting to ban) cryptocurrencies is a good idea:
Politicians like to be seen doing things, which the public easily understands. Banning various things is a favorite sport: it is easy for the median voter to understand, it is easy to communicate to the public, and it is a concrete action allegedly taken to care for the government’s citizens.
Bureaucrats view cryptocurrencies as a threat to their currency creation and seigniorage prerogatives. Politicians often act at the behest of, or in consort with, bureaucrats, to further either or both their goals.
And, India’s is not the only government to contemplate banning cryptocurrencies. Wikipedia has a whole entry on cryptocurrencies’ legal status in various countries and territories.
If a country moves to ban cryptocurrency, we can anticipate a few effects:
Those people who are technically savvy may simply move their wallets or mining operations offshore.
Society will bifurcate along technical knowledge lines: those who know how to offshore their cryptocurrency holdings or mining operations will be able to participate in the global crypto-ecosystem, while their less technically inclined countrymen will be isolated from the crypto-economy. Given the tens of billions of dollars pouring into this nascent asset class, to say nothing of the approximate trillion dollars worth of notion value of crypto, it is clear that the economy of the future will be at least partially crypto- and blockchain-based.
It will become much more expensive for ordinary citizens to transact in cryptocurrencies or to use blockchain technologies, as black markets are invariably more expensive than transparent and legal ones operating in a competitive market.
It looks like India’s interest here is in minting its own digital currency, as reported by Reuters:
The measure is in line with a January government agenda that called for banning private virtual currencies such as bitcoin while building a framework for an official digital currency. But recent government comments had raised investors’ hopes that the authorities might go easier on the booming market.
India is not the first country to contemplate creating its own digital currency. Back in 2017, Singapore announced a plan to tokenize its dollar. The problem, of course, is that tokenizing fiat currencies is, necessarily, centralized, and brings with it none of the benefits of decentralization. So, if India was to enact this law, it would shut out its billion-plus citizens, save the ones savvy enough to conduct operations offshore, from the broader crypto-economy. Given India’s aspirations to compete on the world stage, isolating its citizens from cryptocurrencies and blockchain technologies would be a devastating blow.