Amid Cryptocurrency Boom – and No Regulation – What’s the Way Forward for India’s Policymakers? | #cybersecurity | #cyberattack

Bitcoin is making fresh headlines in India, but again for all the wrong reasons.

This time the cops themselves are connected with it. It appears that in January this year Karnataka police seized 31 stolen Bitcoins, worth Rs 9 crore from Srikrishna alias Sriki, arrested in November 2020 for hacking crypto exchanges. Sriki then appears to have tricked the police into believing he had transferred the Bitcoins to a police wallet for seizure. Now, those bitcoins seem to have vanished.

And, to make matters worse, in their charge-sheet related to the illegal hacking activities the Bengaluru police had not mentioned the Bitcoin seizure. The fiasco has taken a political turn with the Congress party alleging that the BJP government in Karnataka is trying to cover up, what it calls a “multi-crore Bitcoin scam”, demanding a Supreme Court-monitored Special Investigation Team (SIT)-led probe with experts from multiple agencies.

For the aspiring young investors, cryptocurrency portends an exciting and lucrative new financial frontier. India is ranked at number 2 in a poll of nations that use cryptocurrency the most, contributing to billions of dollars of trading volume. Global exchanges Binance and Huobi Global are likely to offer virtual assets (VAs) trades in rupee as well. 

For the June-July 2021 period, trading volume at three major Indian VA exchanges – WazirX, CoinDCX and ZebPay – stood at $3.1 billion (approximately Rs 23,000 crore). Web traffic feeds from SimilarWeb, Alexa and Ahrefs, reveal total unique visitors on these exchanges at over 24 lakh in the last few days. This increasing trade and participation in VAs in India is encouraging unregulated innovation and has increased difficulties for LEAs to track transactions. Since the Supreme Court struck down the Reserve Bank of India’s (RBI) ban on crypto transactions on March 4, 2020, the latter, while withdrawing its 2018 circular, advised customer due diligence for transactions in Virtual Currencies (VCs). 

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Lack of a regulatory framework

The existing legal framework is not equipped to deal with the many contentious policy issues surrounding crypto and its sub-groups, be it transaction mechanisms like Bitcoin, tokens like Ethereum or NFTs.

 The prime public policy concern revolves around financial stability and how consumer and investor protection can be ensured. The other concerns regarding illegal activity such as money laundering and terrorism finance remain. Also, there’s no control over the private crypto-exchanges enabling sale purchase of cryptocurrencies. And Blockchain, upon which crypto technology hinges, firstly isn’t immune to theft and then comes with the risk of no support or guarantee in case of any loss or hacking of the system.

Blockchain site Poly Network revealed that hackers had exploited a vulnerability in its system. There are other possibilities, for instance, can consumer and investor protection be ensured if crypto assets are taxed? The government is believed to be analysing all these aspects in order to ensure the security of the financial system and prevent misuse of technology driven financial instruments.

In “the largest single recovery of a cryptocurrency fraud by the US to date” the BitConnect Ponzi scheme scam, swindled thousands of people out of more than $2 billion worth of bitcoin. 

The risks to the safety of the financial systems vis-à-vis the potential of crypto assets is the paradox which is bothering several governments and major economic leaders. It is also a deeply polarising area of investment. For chair of the US Securities and Exchange Commission, Gary Gensler, they seem “like the Wild West”. Apple CEO Tim Cook rejected the possibility of Apple buying cryptocurrency, “I wouldn’t go invest in crypto, not because I wouldn’t invest my own money, but because I don’t think people buy Apple stock to get exposure to crypto.”

The Union government has indicated that Bitcoin and Crypto will not be accepted as a legal tender yet. This wariness is understandable. There is scarce understanding of the relation between Bitcoin price and global developments. The anonymity of crypto assets also creates data gaps that are being manipulated for money laundering and terrorist financing. Even if exchanges cooperate with law enforcement, the authorities are not able to break down the data, and may not be able to exactly identify the parties to suspicious transactions. 

The case of the vanishing Bitcoins in Bengaluru has highlighted the lack of protocols and expertise within the police in handling new age crimes involving crypto currencies and the dark net. This episode may not significantly impact financial stability, but as trading volume goes  up along with increasing number of unique visitors, the importance of crypto assets in terms of potential implications for the wider economy are bound to increase.

With ambitions of making this ‘India’s Techade’ as a leader in the field of electronics and information technology, the government has a difficult policy formulation on hand, that has to strike the right balance between reaping the benefits of a massive crypto-market and protecting the interest of the investors. 

Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat (NSCS) for nearly a decade.

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