Govt faces an uphill task if it wants to keep cryptocurrencies at bay

First, cryptocurrencies exist in the digital space and outside the purview of governments. This means that though a government can ban exchanges from operating and stop companies from listing new coins, it cannot stop users from buying/selling cryptocurrencies.

Second, people used to trade in cryptocurrencies much before exchanges were launched in India around 2016, as Naimish Sanghvi, founder of a crypto media outlet CoinCrunch, pointed out. At that time, cyrpto enthusiasts and buyers would turn to peer-to-peer (P2P) exchanges that are not based in India.

The government could introduce a Bill to ban these websites within India, but the implementation would be as effective as the ban on porn, Sanghvi said.

Further, P2P trading does not require crypto exchanges. A hawala-like system can continue irrespective of what a Bill dictates, Sanghvi and others in the industry noted. Cryptocurrencies can be transferred from one user to another through pen drives, too, which is how many trades used to happen before 2016.

Even on P2P exchanges, the exchange often holds the cash in crypto, while the two parties meet in person and transfer crypto to each other, he said.

“Barter is not illegal in India and it is tough to track it as well. If I’m giving you flour in exchange for rice, I don’t have to do KYC (know your customer) or anything,” said Anoush Bhasin, who works with many crypto projects and investors. “I can easily find somebody who has bitcoin and send him money from my bank for a barter transaction. That is going to be very difficult to crack down.”

Traceability is another issue that is not easy to address with a ban on cryptocurrencies.

Centralized exchanges operating in India such as WazirX and Coinswitch provide the so-called ‘custodial wallet’. This means that all the crypto is actually held in a central wallet in the trader’s name and can be tracked by both the company and governments.

Non-custodial wallets, however, cannot be tracked by any authority as they are almost always anonymous. A transfer of crypto from a non-custodial wallet to another happens over the internet, without a third party. Even if crypto exchanges are banned, users can transfer their holdings to a non-custodial wallet such as Metamask or Ronin and transfer cryptocurrencies among each other. The fiat equivalent of this can be transferred in cash or people could use bank transfers.

“The only thing you need for crypto to run is the internet and a wallet,” Bhasin said. “You don’t need an exchange to have a wallet. There are so many apps on Apple and Google’s Play Store, which will sit on your devices. It is going to be very difficult for a government to identify a non-custodial wallet, even if they were to come up with regulations to stop exchanges,” he said.

Transfers like these ideally require the internet. However, there are solutions to circumvent even that. Canada-based Blockstream sells a product called Blockstream Satellite, which allows people to add base stations and connect to the bitcoin network without being connected to the internet. It is meant for miners and really serious players, but is a good example of just how difficult it is to ban cryptocurrencies.

A person can sell crypto anywhere, unlike equity and stock, according to Bhasin. So, most people will also find liquidity overseas. A wallet made on Metamask operates across borders and crypto can also be moved from exchanges such as WazirX to Metamask.

That said, a ban could affect retail investors who do not quite understand the technology behind crypto. It could also spell trouble for crypto exchanges operating in India.

Crypto exchanges will have to return the money they hold for these investors, said Anirudh Rastogi, founder of law firm Ikkigai Law, which represents many crypto firms. “A ban will lead to criminal liability only if the new bill specifically provides for it. If you look at the 2019 draft, which was the only draft ever issued to the public, it does mention criminal liability,” he said.

prasid.b@livemint.com