Banning crypto sites will not work. This is a major lesson learned from the ban on porn sites, which could not prevent the users from accessing them. Perhaps, the investors and traders are already using Virtual private networks (VPNs) and other channels where it becomes difficult for the ISPs to track the sites that their users are visiting
The biggest advantage of the cryptocurrency has also been the biggest headache for the economy. Most countries have banned cryptocurrencies as they create a parallel economy where the government loses all its capabilities to control and correct the market.
But individuals keep on investing in the grey economy, which can pose a serious threat to the national economy.
The Government of Nepal has been claiming that the recent drop in remittance is due to investment in cryptocurrencies. The depleting level of foreign exchange reserves supports the claim, though this is not enough to conclude if it is indeed because of investments in cryptos. The traditional methods of controlling the economy become obsolete when it comes to a crypto-based market.
Regulating the crypto is essential. But the Nepal government lacks expertise in both regulating cryptocurrencies and, most importantly, in banning them.
If proper methods are not used, it can be fatal to the national economy. The traditional methods of using secondary information can help track a few investors, but the crypto economy will keep flourishing and hampering the fiat economy.
The government has been focussing on cracking down on the network based on analysis at the secondary level, by monitoring transactions carried out through the banking channels. The central bank, Nepal Rastra Bank, has instructed banks to submit the transaction history of people who have withdrawn or deposited more than Rs 7 lakhs in cash.
There will be a huge number of people who have withdrawn or deposited such an amount in the last six months.
Analysing individual transactions and finding the crypto investors is like finding a needle in a haystack.
This is a typical example of the government working hard but not smart enough because individuals will always find a way to circumvent a poorly made and implemented rule.
Analysing banking data is not just a waste of time but also an opportunity for the traders to secure their transactions and become less vigilant.
The analysis of banking data might help in tracking a few traders, but it will not establish a system that can continuously track, monitor and control the trade of the crypto. As it is obvious that these transactions happen outside the banking channel, the government should instead focus on creating a system for the future that will track only such transactions and use them to penalise past transactions.
The government can instruct the Internet service providers (ISPs) to track the suspect users who could be investing in the crypto, based on the traffic sent through the ISPs. This decision to be made in the future can be challenged in the court, but the court is likely to issue an order to proceed with the decision.
Blame this on the weak consumer rights and lack of technical awareness.
Generally, ISPs can and should never give out the browsing data of users, but with limited development of consumer rights, especially in the context where cryptocurrencies are criminalised and the national economy is threatened, this is more than likely to happen.
ISPs can track the traffic sent over popular cryptocurrency wallets like Coinbase, Ledger and Exodus along with the traffic sent over sites like Cryptopanic and Coingape. The information can be sent to the central bank later to check for the financial background of users.
Banning the sites will not work. This is a major lesson learned from the ban on porn sites, which could not prevent the users from accessing them. Perhaps, the investors and traders are already using Virtual private networks (VPNs) and other channels where it becomes difficult for the ISPs to track the sites that their users are visiting.
Much will depend on the expertise of the task force that the government recently formed on how it tracks these users and transactions. But if there is the will, there is always a way. By the level of anxiety that the government has shown recently over cryptocurrencies, ISPs can track any suspicious traffic related to both cryptocurrencies and VPNs. But it is important to understand that technically sound users will eventually manage to hide their traffic from the ISPs and, perhaps, already do so.
Although the cryptocurrency can flourish and nurture in an unregulated economy, harvesting the investment, liquidating the earnings, and consuming the value on the return still require a regulated economy.
There is a feeling of insecurity amongst the investors already. Investors might want to convert cryptocurrencies into fiat currency, fixed assets, or any good of value that can be resold or owned. Their reentry into the regulated economy can be monitored so that they can be taxed or fined.
The accounts maintained in platforms like Payoneer or Wise pose a major challenge. The likelihood of using a Payoneer and Wise is higher as the government cannot control or access the information in them. However, these platforms still send master cards and banking information through the mail and are operated online through the ISPs, which are potential areas to keep eyes open for.
Using Hundi-based methods might be used more in such a situation.
These have always been a challenge for the government and will continue to pose a challenge in the case of the crypto also. If a proper mechanism is developed and implemented at these levels, then value level interventions can be fruitful in reaching out to the targeted group.
Though banning cryptocurrencies is not the wisest decision, this is still the only option for the government to streamline the economy. Banning and penalising crypto investors requires a deeper understanding and knowledge of cryptocurrencies. Instead, it would be ideal if the government could build a mechanism where individuals could pay a crypto-tax or file for a crypto-license.
This way the shadow economy and the mainstream economy can still benefit from each other and continue to flourish.
Dahal is research fellow at the Center for Research and Development (CERAD)
A version of this article appears in the print on February 10, 2022, of The Himalayan Times.