What should be the policy on Crypto Coins in Digital India ?

One of the issues that the Government of India is now trying to address is reduction in Black Money in the system.

E Banking and Mobile Banking are expected to assist in the reduction of use of cash in the economy as record keeping becomes easier for the Government. In fact it has become easier for the Income Tax department to keep a tab on transactions when they are done through e-banking. Extending the same logic, the use of “Crypto Currencies” which can replace the physical currency should not be harmful to the economy as long as the regulator can keep a watch on its usage.

One issue that bothers the regulators on the Crypto Currency system is that it tries to create a mining environment where non Government persons will become owners of the currency. This concern needs to be addressed.

I would like Regulators to exercise a thought… “In what way mining of Crypto Currency different from manufacture of a commodity like say a new mobile phone?

For example, I manufacture a mobile phone and sell it to those who want. I make a profit and pay tax to the Government.

The buyer may use it or re-sell it at either a profit or a loss and account for it in his tax payment. For manufacturing, I may obtain some kind of license so that Government knows what I am doing, how many mobile phones I am manufacturing, how much profit I am making etc.

In a similar scenario, If there is a crypto currency mining system in which Government (say RBI) knows who is mining, how much he is mining, what is he doing with his stocks, is he paying his taxes etc., why should any Government or a regulator have objection to such a system?

Whenever we think of Crypto Currency, we always think of Bitcoin. No doubt Bitcoin is important because it represents 95% market capital of Crypto Coins and is widely held, very popular, already recognized by a few , already banned by many Governments etc. But there could be a world beyond Bitcoin.

Bitcoin has already penetrated deep into the Crime syndicates and it is difficult to retrieve it from its taint. But it is definitely possible for us to think of a new Crypto Currency which is designed to ensure that RBI retains control on its gross stock and encourage public to use it, then we can reduce the printing and management of physical currency.

I am sure that there are pros and cons of introducing a new currency which is mined (or printed) by the public and mining of such crypto coin itself becomes a “Vocation”. Government can even consider legislating that all Crypto Coins are deemed to be owned by the Government though stocked by the miners.

Since the Government knows exactly how much of currency is there in the system and what is happening to it during transactions, it can have its monetary control exercised directly. Presently RBI controls inflation in the economy by regulating liquidity or  money availability in the market through its banking regulations such as CRR and SLR.

If Government wants to reduce Crypto Currency availability, it can use measures such as “Deposits out of every transaction” so that those who actually use Crypto Currency and disturb the liquidity alone are taxed for increasing the liquidity when the economy wants it to be reduced. At the same time,  if more liquidity is required, stocking may be penalized to discourage hoarding and transactions can be eased.

Today currency is printed by RBI and gets accumulated with the public who “Earn” it through various services they render either to the Government or others who already have earned it. Like the Bitcoin stock, this stock of currency already has a fair share of unaccounted and criminally gained wealth as well as fake currencies.  One way of reducing this is by “Demonetizing” certain currency denominations. This however creates needless inconvenience to genuine people who hold the demonetized currency.

Introducing a “RBI regulated Crypto Currency” on the other hand will start from a clean slate where every bit of the currency is accounted right from its creation through its  use and re-use.

The issue to be discussed however is whether a suitable system can be built which cannot be cheated in such a manner that currency is created without the knowledge of the regulator, which is similar to the issue of fake currency printing. Secondly, whether the system is secure enough that it cannot be hacked and misused. Technology experts need to answer this question and also whether the peer controlled approval mechanism can be good enough to secure misuse.

Look forward to more debate on this issue.

naavi