On Misconceptions About Bitcoin In India.

Fear of the unknown has been a part of human nature since time immemorial.

Our fear of seemingly natural phenomena such as thunder and lightning made us once believe that they are the fury of the gods. Some used to believe that the earth rested on a turtle’s back, while others were concerned that sailors who went far off the coastlines could fall down into the void darkness of space. What seems obvious now terrified society a few centuries back.

However, equipped with knowledge and understanding, the man reaches new heights every day and conquers his fears. That is what has enabled us to go from foragers and nomads to a species capable of setting foot on the moon. Where knowledge prevails, opportunities and possibilities arise. Where it doesn’t, fear and uncertainty spread.

Over the past few weeks, Indian markets have been rattled by fear as multiple media-houses came out reiterating statements made by members of the government in regards to Bitcoin and virtual currencies. Whilst these statements came from experts in the field of finance, their lack of understanding of the way Bitcoin functions or its utility in India was evident in the way they portrayed the emerging technology.

We will be making an attempt to address some of the concerns displayed by the average Bitcoin users in the nation, explain why a complete ban would be the wrong route to take and attempt to shed light on why the concerns displayed do not rest on solid ground.

Our end goal is not to create a biased one-sided view of how things are, but rather to initiate an open discussion towards how some of the concerns displayed by the government can be addressed while ensuring that we see the benefits and possibilities Bitcoin makes possible for the average individual.

To begin with, let us deconstruct what the government has said about technology so far.

“The absence of counter parties in usage of virtual currencies including Bitcoins, for illicit and illegal activities in anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism laws”

-Minister of State for Finance, Arjun Ram Meghwal

Whilst there have been previous statements from the RBI warning users of the possible dangers in investing in high-risk mediums such as alternate currencies, the new line of warning comes with attached implications of the use of the technology for the purpose of laundering money or supporting terrorism within the nation. These concerns are further fuelled by the countless cases of drug-related arrests that have occurred in the nation where the primary currency used for the transaction was Bitcoin. Although these concerns do hold value, there are a few things that need to be pointed out.

1. By default, all Indian exchanges require AML / KYC document submissions at the time of opening an account.
   
   With the exception of Localbitcoins, almost every exchange in the nation requires individuals to submit their PAN card at the time of opening an account. In addition, none of these exchanges permit the purchase of Bitcoin through any medium other than a bank transfer. All purchases of Bitcoin leave a paper trail that can be directly traced to the individual purchasing the coins in question. What is even more advantageous in the case of Bitcoin is the fact that a trail is left on the Blockchain too. The blockchain is a decentralized ledger that maintains a record of every transaction that occurs through Bitcoin. If a pattern is revealed through the opening up of multiple accounts, or coins from proven sources of drug-related platforms are found, an investigation can be launched with relative ease. There is an ample number of platforms that provide intelligence off transactions on a blockchain. Entities like Chainalysis closely work with financial intermediaries to warn them of their platforms being used for the transfer of illicit funds.
2. The vast majority of Bitcoin purchases leave a trail
   
   A good chunk of individuals using Bitcoin utilizes it as an investment medium or a tool to speculate upon the rise or fall of the value of alternate cryptocurrencies such as Ethereum. The decentralized currency permits individuals to trade in a countless number of exchanges around the world. However, at the time of purchasing Bitcoin or converting it back to normal Indian rupees for utility in one’s daily life, the currency leaves a paper trail in the bank. The vast majority of exchanges, including peer-to-peer exchanges such as Localbitcoins use bank transfers as the preferred mode of transfer of money. This means, if the government does wish to investigate an individual for the misuse of Bitcoin for illicit purposes, they can find a clear and evident trail through bank accounts that were used for the purchase or liquidation of the coins. The possibility of laundering money is virtually impossible as the bank is a major part and parcel of the process of converting liquid money to crypto-currencies.

In short, exchanges with the kind of liquidity needed to help move large amounts of Bitcoin for the purpose of money laundering cannot be used for the same without leaving an eventual paper trail. The alternative will be to find individuals with thousands of Bitcoin in their holding looking to liquidate their coins into cash. This too will leave a paper trail as at some point in time, the individual selling his coin will have to buy property, deposit it into a bank or move the funds into a safer location. All of which will considerably be easy for those from the government to track down or verify. In other words, Bitcoin as a medium to launder hundreds of millions of dollars will not be able to provide either the kind of liquidity or the kind of ease of acquiring needed to enable an individual to do so effectively. While a certain amount can be purchased from black-markets at a premium, doing it at scale with no trail left is relatively difficult.

What one ought to notice is the fact that while the medium of transaction does leave a trail, it is only ‘relatively difficult’ and not impossible for an actor to misuse the same. What the government can do is regulate the industry instead of initiating an outright ban. Heavy levels of regulation combined with active cooperation of the exchanges with the government will be the only way forward for the government. In the event of a complete ban, as with most commodities that are completely banned, the technology will continue to exist in a tiny fraction of the crowd in black-markets. This crowd will continue to use the technology for illicit purposes whilst stripping away all of the benefits the average retail consumer can attain from Bitcoin.

Amidst all the concern displayed by the government as a regulatory body concerned for its constituents, the fact that there has been a lot of positive sentiment towards the blockchain from research entities within the government has been ignored by media houses reporting on things. This whitepaper by the RBI reveals that a team of experts have been looking at the positive attributes of using a blockchain over conventional mediums of transaction and was released in January, 2017.

Similar sentiments were relayed by former RBI governor Raghuram Rajan, in an interview stated that whilst there are concerns in regards to how Bitcoin works, the future will be one that runs on the blockchain.

For anyone with an educated eye, the multi-faceted approach of the government is visible. Whilst there are experts within the government coming out and explaining the benefits of the blockchain as a medium of the transaction; as a regulatory entity, it is the duty of the government to warn its citizens about the high stake gamble involved in investing in some of these coins.

While the ecosystem attacks Bitcoin, we attack an emergent technology that can fundamentally disrupt sectors such as education, healthcare and even democracy itself. Bitcoin runs on what is commonly referred to as a Blockchain. It is a publicly available, open ledger that is consistently updated in systems around the globe on a routine basis.

Once a transaction is confirmed on the blockchain, it cannot be reversed (through simple means) unlike banking transactions that can be edited or hidden at the click of a button. The blockchain makes it possible for anyone to access a transaction and trace its source and endpoint. Unlike fiat currencies, Bitcoin’s route can be traced right from its source of generation to the final storage address it is kept in, helping government agencies analyze and understand the nature of funds. As a matter of fact, this very technology helped crackdown on an FBI Agent that was involved in fraud and extortion during an investigation on the billion-dollar drug operation. In comparison, mainstream banks have been the preferred banking institute for laundering billions of dollars as there are no publicly verifiable ledgers or flow of money the government can trace with such ease.

Like with all emergent technologies, the government might be possibly falling short on a team of individuals working internally with the kind of expertise required for policymakers to have a concrete understanding of the implications of the statements they are making.

The need of the hour is for the government to reach out to enterprises within the nation working closely with the Bitcoin ecosystem and have active discussions with stakeholders. Until and unless there is a transparent bilateral discussion between those representing the best interest of the community and those representing the technology, finding a middle ground that works towards the best interest of all parties involved will be next to impossible. What we ought to realize is that Bitcoins are a lot more than a way to launder money. They are a revolution- 9 years in the making. Born around the time of the recession of ’08, they provide average individuals a means to diversify and protect their wealth at a time when banks and governments alike have proven that their ability to handle money is far from perfect.

Governments around the globe are in the process of creating regulatory structures around it and what we are seeing from the Indian government in the recent past is a reflection of the same. It might take a while before the government creates concrete structures around Bitcoin, but until then, as a community, and as citizens of this beautiful, vivid nation of ours, it remains our duty to reach out to those within the Government and be a proactive part of the process.