The regulatory authorities finally appear to be taking cognisance of the booming trade in bitcoin and other cryptocurrencies along with the explosion of various money-laundering schemes and outright fraud that this new phenomenon has enabled. Effective regulation of trade in cryptocurrencies will require coordinated action by multiple agencies. Last week, the finance ministry decided to set up a panel for reviewing such deals. The income tax department has also undertaken surveys of several exchanges dealing in these virtual assets and has reportedly sent out notices to many high net worth individuals who might have been trading in these. The Securities and Exchange Board of India (Sebi) is considering monitoring the market for fraudulent issues of new virtual currencies. On its part, the Reserve Bank of India has cautioned users, holders and traders about the risk of these currencies and has clarified that it has not issued any licence or authorisation to any entity or company to operate such schemes or deals.
Bitcoin has appreciated by close to 2,000 per cent in the past year. A huge number of new “copycat” currencies – well over a thousand, at last count – have been created. Some of these cryptocurrencies, such as ethereum and litecoin, are generated by complex but transparent mathematical algorithms similar to bitcoin and these virtual currencies apply similar principles of open source verification using blockchains. But many other such “coins” are issued by fly-by-night operators out to deceive gullible investors who have been sucked into this bubble by greed. “Initial Coin Offerings” (ICOs), where such fraudulent cryptocurrencies are launched, have become popular. They have been banned in many countries as they attempt to entirely bypass market regulators and break all the rules for raising start-up funding. Quite apart from fraudulent ICOs, bitcoin itself is easily misused for money laundering and illegal cross-currency transactions. It is possible to buy bitcoin for cash in one currency and sell it in another, with little trace of either transaction left in the global banking system. Alternatively, it may even be possible to buy bitcoin in rupees, sell for a profit in dollars or yen, and claim export benefits on the trade.
Warnings and advisories against trading in these assets issued by the central bank as well as Sebi have simply not been enough. And it is possible to bypass restrictions on trading, as China has discovered to its cost. The fact is that these assets fall into a regulatory black hole. Regulating them first requires recognising them — something the government has so far been reluctant to do, though the income tax department is clear that tax has to be paid on all cryptocurrency transactions. However, it may be time now to bite the bullet. Japan, Australia, Estonia and a few other nations have already recognised bitcoin and a few other cryptocurrencies as currency. South Korea is considering similar legislation. These nations have introduced know-your-client and net worth norms for exchanges dealing in these assets and have strictly defined “valid cryptocurrencies”. This enables their use as a medium of exchange for legitimate purposes while also providing regulators the leverage required to crack down on illegal activities.