Even as the Indian government is debating whether it should ban private cryptocurrencies in India, crypto industry experts poinnt out that enforcing a ban is near to impossible, given the nature of blockchain that is the underlying technology of cryptocurrencies.
To begin with, cryptocurrencies exist in the digital space and outside the purview of governments. This means that even though a government can ban exchanges from operating, and stop companies from listing new coins, it cannot stop users from buying or 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, points out. Back then, 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 (or ineffective) as the ban on pornography, adds Sanghvi.
Further, P2P trading does not even require crypto exchanges. Sanghvi and others in the industry noted that a hawala-like (illegal trade) system can continue irrespective of what a Bill dictates. Cryptocurrencies can be transferred from one user to another through pen drives too, which is how many trades used to happen before 2016.
In fact, 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, Sanghvi explains.
“Barter is not illegal in India, and it’s 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,” says Anoush Bhasin, who works closely with many crypto projects and investors. “I can very easily find somebody who has Bitcoin or is willing to buy my Bitcoin and send him money from my bank to do a barter transaction. That is going to be very difficult to crack down upon,” he adds.
Traceability is another issue that is not easy to address with a ban on cryptocurrencies.
Centralized exchanges operating in India like WazirX and Coinswitch, for instance, 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 since they are almost always anonymous, and do not require KYC. 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 like Metamask or Ronin, and transfer cryptocurrencies among each other. The fiat equivalent of the same can be transferred via cash or bank transfers.
“The only thing you need for crypto to run is the Internet and a wallet,” Bhasin added. “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. For a government to identify a non-custodial wallet is going to be very difficult, even if they were to come up with regulations to stop exchanges,” he added.
Transfers like these, ideally require the Internet. However, there are solutions to circumvent even that.
Canada-based Blockstream, for instance, sells a product called Blockstream Satellite. The solution allows people to add base stations and connect to the Bitcoin network without being connected to the Internet. The system is actually meant for miners and really serious players, but is a good example of just how difficult it is to actually ban cryptocurrencies.
According to Bhasin, unlike equities and stocks that can be sold within a country, a person can sell crypto anywhere. So, most people will also find liquidity overseas. A wallet made on Metamask operates across borders, and crypto can also be withdrawn from exchanges like WazirX to Metamask.
That said, a ban could affect retail investors who do not quite understand the technology behind crypto, and mean trouble for crypto exchanges operating in India.
Anirudh Rastogi, founder of law firm Ikkigai Law that represents many crypto firms, points out that crypto exchanges will have to return the money they hold for these investors. “A ban will lead to criminal liability only if the new bill specifically provides for it. If you look at the 2019 draft, that was the only draft that was ever issued to the public, it does mention criminal liability. If they carry on with a similar construct in this law then there will be penalties and punishment,” he concludes.