On 6 May 2017, Wipro received an anonymous email-threat demanding a ransom of Rs500 crore, payable in bitcoins. This incident underscores the potential for abuse of crypto-currencies, such as bitcoins, owing to the difficulty in monitoring, tracking and regulating the global trade in bitcoins. The word crypto-currency is itself an insidious marketing tactic, for a virtual unit, the value of which is determined only by demand and supply can scarcely be called a currency.
The generation or ‘mining’ of crypto-currencies like bitcoins, as a medium of payments, is not authorised by any central bank or monetary authority and its value is determined by a combination of amorphous parameters, which makes it ludicrous for bitcoins to be labelled as a currency. Undeniably, the underlying blockchain technology is likely to be the backbone of peer-to-peer transactions without any intermediary. Blockchain technology has limitless applications, most of which will render traditional reconciliation and settlement systems redundant. Tragically, bitcoins, which have become synonymous with blockchain technology, have the dubious distinction of being beyond regulatory purview, not just in India but across the globe.
The Indian government’s move to demonetise high-value currencies of Rs1,000 and Rs500 denominations had the unintended consequence of fanning opportunistic promotion of bitcoins as a substitute to currency. The bitcoin lobby seized this opportunity to promote their interests by attempting to cloak bitcoins in legitimacy by feeding off the goodwill generated by the deployment of blockchain technologies. It is therefore critical for regulators to distinguish the technology from bitcoins. The unsuitability of bitcoins to substitute a currency are starkly obvious, since it is neither recognised or backed by a government, nor does it have a stable value and is prone to speculation-induced volatility. The attempts to promote bitcoins as a quasi-currency are particularly malicious, given that the Reserve Bank of India (RBI) had cautioned against the use of crypto-currencies, which are neither a derivative, nor a currency with a determinate value.
To allow financial regulators to view and appreciate blockchain technology, untainted by their views regarding bitcoins, perhaps it is time to clearly dis-affiliate crypto-currencies, such as bitcoins, from the underlying blockchain technology.
While I do not intend to single out bitcoins, it happens to be the most ubiquitous cryptocurrency in the world, owing to which the instances of using bitcoins for nefarious purposes would presumably be the most common. Globally, crypto-currencies in general and bitcoins in particular, have gained a certain notoriety since they are the preferred medium to circumvent exchange control and anti-money laundering laws, and receive payments for the global trade in contraband such as narcotics.
Transactions between bitcoin users are almost entirely anonymous. There is no requirement for a bitcoin user to enter their name, address, or any other details that might later be used to identify them. A randomly generated code used to denote the identity of a user is all that is needed to confirm that a transaction did indeed take place. Users can use a different code for every transaction they wish to enter into.
The blockchain technology underlying bitcoins has a decentralised infrastructure, which is both inter-dependent on each participant and yet severable from any jurisdiction, thereby allowing the blockchain network (or for instance, bitcoin exchanges) to continue functioning even if some components of the worldwide blockchain are taken offline. Blockchain technology was developed to ensure transparency since the digital ledger that is composed of blocks, is considered to be ‘incorruptible’ and tamper-proof. Ironically, it is this very feature, which also helps ensure anonymity of the blockchain users when it is transferred from one person to another, making it virtually traceable to track blockchain ownership while the transfers itself can be verified. This makes the task of regulating bitcoins a regulatory nightmare.
Cryptocurrencies have been burgeoning, as intended, without any regulation or centralised repository. This has led to multiple crypto-currencies, each with its own framework to support the distributed ledger based on which it functions. Practically, this makes banning crypto-currencies an almost impossible task and has been vexing regulators globally.
In India, the RBI issued a warning regarding the use of crypto-currencies in 2013 and also highlighted the possibility of its use to undermine anti-money laundering provisions. Subsequently, the Enforcement Directorate (ED) too had raided a bitcoin exchange citing violation of exchange control laws. Despite this, the bitcoin boom continued unabated. Since bitcoins are neither a security, a currency, nor a derivative, or an instrument with a predetermined value, it does not fall squarely within the jurisdictional purview of the RBI or the Securities and Exchange Board of India (SEBI).
The RBI had also recently issued a warning about the potential financial, legal, and security risks arising from the use of bitcoins and had emphatically stated that bitcoin and virtual currency users, investors and traders of bitcoins and other crypto-currencies will be doing so at their own risk. Assuming that regulators ban cryptocurrencies outright, there is practically no way in which this can be enforced. Perhaps this explains why regulators are not taking a more stringent stance, since banning crypto-currencies would be mere lip service. One possible method to crack down on bitcoin exchanges and enforce a ban would be for the Telecom Regulatory Authority of India (TRAI) to issue a diktat to internet service providers to cease to offer connectivity to bitcoin exchanges and miners. This would need internet service providers to first identify bitcoin exchanges and miners based on their internet traffic, raising more complex issues of privacy and net neutrality.
Taking a more tempered and pro-business stance, if the RBI were to take a view that all bitcoin exchanges must maintain a list of users which are shared with the central bank and also allow it to step in to conduct audits and supervise their functioning, it may proffer a solution, albeit incongruent to the traditional concept of a decentralised and self-regulating system. If regulators in India adopt the concept of regulatory sandboxing, they could allow bitcoins to function within predefined parameters, which allow for a certain degree of regulatory oversight without impugning the autonomy of the distributed ledger system.
In India, the Bitcoin Association of India has agreed with the RBI’s notification regarding risk associated with virtual currencies. They have continued to argue that per se bitcoins are not illegal. Crypto-currencies have courted controversy by being the preferred method of payment for activities evading regulation. While virtual currencies do indeed have legitimate uses, it would be very hard to justify its use over other forms of payment. In India, pursuant to the demonetisation of high value notes last year, bitcoins have been promoted opportunistically as if they are a substitute to e-wallets, which store actual currency, whereas crypto-currencies are speculative products closer to derivative instruments than virtual currencies.
Bitcoins are not recognised by Indian foreign exchange laws and therefore cannot be used to make payments for import or export of goods and services. Its use to circumvent exchange control regulations is well established and, while proponents of virtual currencies insist that there is a strong argument for the use of bitcoins, bitcoins have been courting controversy since they have typically been used in transactions to deliberately avoid regulatory scrutiny.
The Wipro case, where the ransom is being demanded in bitcoins, should perhaps be the last nail in the coffin. To alleviate Wipro’s misery, the RBI along with the ED, could notify the use of crypto-currencies as illegal and prescribe penalties for the purchase or ownership of crypto-currencies on the ground that they are an instrument to circumvent foreign exchange and anti-money laundering regulations. While this may not resolve the immediate situation, it could essentially stall future attempts to demand a ransom through bitcoins. While proponents of the bitcoin may cry foul and claim this is a knee jerk reaction to the abuse of bitcoins, this well may be an opportune moment to divorce the concept of crypto-currencies from blockchain by banning the former. The end of the toxic matrimony between blockchain and bitcoins could help refine the industry’s focus on the development of blockchain products without being eclipsed by the nefarious reputation garnered by cryptocurrencies.
(Akash Karmakar is an associate at AZB & Partners. Opinions expressed in this article are personal.)