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Blockchain and cryptocurrency: The good, bad, and the ugly

By Skandha Gunasekara

As Sri Lanka looks to introduce blockchain technology and cryptocurrency, a closer look revealed the benefits and risks in its uses.

Experts told The Sunday Morning that while the economy may benefit from the introduction of blockchain technology, a move to legalise the use of cryptocurrency could open the door to money laundering and lead to serious fiscal control risks if not properly regulated.

However, to get the most out of these new technologies, experts stressed that Sri Lanka will need to modernise and update some of its policies, broaden digital services, and introduce procedures and practices in line with international standards.

Blockchain is a system of recording information in a way that makes it very difficult or near impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems.

Need for end-to-end digitisation

Economist and Centre for a Smart Future Co-Founder Anushka Wijesinha opined that the introduction of blockchain would be advantageous to the economy and commended the Government for taking a progressive step to bring in the new technology.

“I think a government recognising blockchain and cryptocurrency is certainly positive. I believe there’s more to be gained from recognising blockchain technology right now, given that it can be used in many different spheres. Cryptocurrency, meanwhile, is a nice thing to have, but it is not urgent for Sri Lanka, with everything that is going on,” he said.

Wijesinha pointed out that trade finance and traceability were two areas in which blockchain technology could help take Sri Lanka a step further, adding: “It would make trade finance more accessible, more seamless, more efficient, and more cost effective, particularly for SMEs (small and medium-scale enterprises). Blockchain usage in trade finance is growing. It has gone beyond proof of concept and is now being deployed further.

“Blockchain technology is also being used to improve traceability and establish provenance of products, particularly agriculture commodities as well as other products that require traceability. Consumers and buyers in the West are demanding it more and more.”

Diving into the subject a little more, Wijesinha explained that traceability via the blockchain will allow a buyer or consumer to pinpoint the source of a product, narrowed to such an extent so as to identify not just the country of origin but the individual producer.

He explained: “For example, if a customer or buyer wants to know where a particular crop, agricultural good, or agri processed product came from, they can access this information through this technology. The entire supply chain is visible, all the way down to which farm it was sourced from. This is vital at a time when Sri Lanka is moving towards organic agriculture, as the value proposition in this area is the source, the authenticity of the source, and the provenance of that good.

“Essentially, blockchain technology can provide traceability to the consumer. Say they are buying a packet of tea. If blockchain technology is deployed across that supply chain, that consumer will be able to scan a code and trace that packet of tea all the way to the estate where that tea was plucked. It would be the same with other export commodities such as cinnamon, coconut, etc.”

He noted that it would help Sri Lankan products maintain their niche in the market, as being of the highest quality.

“The practical economic benefit here is that at a time when Sri Lankan products aren’t really known to be the cheapest in the world – and we don’t want them to be – being able to attract a better price in premium markets by harnessing this traceability and provenance trend can be quite a big boost,” he noted.

With regard to trade finance, Wijesinha said that it would help not only major exporters, but also SMEs in particular, to get paid in a timely manner.

Wijesinha added: “There is a huge trade finance gap for SMEs globally and in Sri Lanka as well, and blockchain technology offers more efficient ways of executing trade transactions and delivering trade finance to those who need it. The economic benefit is that the trade finance gap can be bridged through the use of blockchain technology, as it would address the issue of the inability to receive funds in the required amount and time within which it is needed.

“When using blockchain for trade finance, it essentially triggers a payment when the goods have reached the intended buyer. So, rather than waiting for long durations as a result of bank and intermediary processes, SMEs or exporters can get paid faster, within less time and with less cost disadvantages than at present. Blockchain enables you to get paid today – I’m oversimplifying, but essentially, that is what it does.”

However, he noted that prior to blockchain being successfully implemented, other, more basic digital financing facilities needed to be established to ensure smooth digitisation of the economy and trade.

“Blockchain essentially operates digitally, and to harness its full potential, there are some basics we still have to get right. For example, digital signatures. In Sri Lanka, digital signatures are not fully authorised formally across the board. While the Electronic Transactions Act and the amendments therein were passed, there are still issues in accepting digital signatures. Digital signatures would be a basic requirement in a fully digitised end-to-end transaction,” he emphasised.

He pointed out that it was high time Sri Lanka looked at some fundamental aspects of trade that needed digitisation, such as the Customs Department and its functions.

He explained: “Another example is, if blockchain technology is to be used in trade in general, there needs to be end-to-end enablement of digital payments. Many of Sri Lanka’s border regulatory agencies are not digitised. While Sri Lanka Customs is digitised, if you submit the customs declaration form through the digital portal, due to the relevant legislation not being passed, a manual submission must also be made.

“In other countries, there is national single-window clearance, where the border agencies and customs are part of a single gateway, so that a trader can do everything needed online.

“Therefore, while I am optimistic about what blockchain technology can offer, I must accept there are a few basics that we need to get right to be able to fully utilise the benefits of blockchain. You cannot have a semi-manual system in blockchain technology; it has to be digitised from end to end.”

While blockchain technology poses some exciting prospects for the economy, cryptocurrency may not be all that it was hyped up to be in the local context in the recent past, particularly in terms of the national economy.

First things first

Attorney-at-Law Dr. Shanuka Senarath, a PHD holder in financial regulation, speaking to The Sunday Morning, warned of a number of dangers it posed, especially to an economy like Sri Lanka’s.

Firstly, he pointed out the problems that the volatility of a financial asset such as cryptocurrency would have on the economy.

He said: “On the question of whether cryptocurrency is good for Sri Lanka at the moment, a few factors that need to be considered. One is the actual nature of cryptocurrency. The salient feature of cryptocurrency is that they are all very volatile. This can lead to market crashes, financial difficulties, and bankruptcy.

“So, if cryptocurrency is legalised and used as a means of storing wealth for companies, one concern is the effect it would have on such companies; whenever prices crash, it can lead to bankruptcy, and when one company falls, it can lead to a chain of bankruptcy.”

Dr. Senarath highlighted the increased risk of money laundering, which in turn will have a negative impact on the economy.

“This is one of the biggest concerns of the US Government as well, because with cryptocurrency, there is no traceability. For example, if I have some crypto and I send it to a person, there is no way to trace where I got it from, whom I sent it to, etc. It would not be mentioned in the national accounts, and no local authority, not even the Central Bank, can ask me how much cryptocurrency I have or find out themselves, unless I allow it,” he explained.

“It cannot be traced. As such, this is a prime way of laundering money. That is a big issue for a country like Sri Lanka, where corruption is high, and the Sri Lankan authorities should consider this if they are looking to legalise it,” he stressed.

Another dangerous aspect of legitimising cryptocurrency, at this point in time, is that it will give individuals or groups the ability to transfer capital out of the country, outside of the control of domestic authorities.

Dr. Senarath noted: “If cryptocurrency is legalised, that would mean there’d be a means of buying it. If people were able to buy crypto using credit cards, debit cards, or bank transfers, it would cause a financial dilemma in Sri Lanka. At the moment, in Sri Lanka, the capital account is closed, meaning you cannot transfer capital from Sri Lanka to outside the country without the approval of the Central Bank. Credit cards can be used to buy consumer goods, but capital cannot be transferred outside the country.

“That has been the law in Sri Lanka for decades. But if cryptocurrency is accepted as a legal currency in Sri Lanka, Sri Lankan regulators won’t be able to prevent people from sending cryptocurrency to someone overseas. Essentially, the capital market would be opened in an unofficial way.”

He said that this too would be another way to launder money, adding: “What I fear is that the Sri Lankan policymakers will keep the capital market closed for all citizens but allow the crypto market to function, which would mean those who have access to cryptocurrency – a very niche segment of the country’s population – would be able to transfer capital out of the country. Again, if you have black money you want to launder, this would be the easiest way to send it out of the country.”

He said that it was cause for suspicion that policymakers were jumping at the opportunity to legalise cryptocurrency – a volatile financial asset with a number of drawbacks – while failing to introduce basic, fundamental digital financial tools.

He added: “I believe that before crypto is introduced, the capital market should be opened, and basic financial tools should be introduced. Without implementing basic, primary tools to at least develop SMEs, presenting cryptocurrency as legitimate shines suspicion on what the actual intentions are.

“The essence of the blockchain is that it’s decentralised and, as such, untraceable. So, no matter what regulations are brought in, this aspect of cryptocurrency cannot be tackled. The only way the Government can control it is if cryptocurrency is purchased using domestic tools such as credit/debit cards and if cryptocurrency is cashed out domestically.”

Several attempts to contact State Minister of Digital Technology and Enterprise Development Namal Rajapaksa, who has taken the lead in the Government to introduce these two technologies, failed.

Whether the policymakers would take into consideration these dangers of cryptocurrency or whether these are the very aspects of cryptocurrency that are being sought after, is yet to be seen.