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Decrypting the secrets of cryptocurrencies

  • What Sri Lanka should consider in its adoption of digital currencies

BY Sumudu Chamara 

The internet is filled with people who claim to have got rich by investing in cryptocurrencies such as bitcoin (BTC) and those who give life advice to others on methods to invest in cryptocurrencies in order to prevent losses. However, apart from several online business and trading methods which make payments and allow investments in conventional currencies, investing in cryptocurrencies has not been seen as a mainstream or valid form of investment in Sri Lanka so far. 

In order to change this situation and open Sri Lanka to newer forms of investments and digital currencies, the Government is now making plans to allow companies in cryptocurrency and digital banking-related activities and fields to bring investments.

Expert Committee

Last week, the Cabinet of Ministers approved a proposal submitted by Minister of Youth and Sports, Minister of Development Co-ordination and Monitoring, and State Minister of Digital Technology and Enterprise Development Namal Rajapaksa to appoint a Committee to look into and report on the necessary and relevant laws, rules, and regulations required to attract investments from companies in digital banking, blockchain technology, and cryptocurrency mining fields. It is aimed at approving cryptocurrency mining companies to invest in Sri Lanka and to allow the Board of Investment (BOI) take the necessary steps under the provisions of the BOI Act No. 4 of 1978 as amended.

The Expert Committee comprises PricewaterhouseCoopers (PwC) Sri Lanka Managing Partner Sujeewa Mudalige as the Chairman, and Securities and Exchange Commission (SEC) Chairman President’s Counsel (PC) Viraj Dayaratne, Colombo Stock Exchange (CSE) Chief Executive Officer (CEO) Rajeeva Bandaranaike, Central Bank of Sri Lanka (CBSL) Director (Payments and Settlements) Dharmasri Kumaratunge, Information and Communication Technology Agency (ICTA) Director Jayantha Fernando, Mastercard Sri Lanka and the Maldives Director Sandun Hapugoda, and Sri Lanka Computer Emergency Readiness Team (SLCERT) CEO Air Commodore (Retd). T.G.J. Amarasena as Committee Members, and Government Information Department Additional Director General Milinda Rajapaksha as Committee Member and Convenor.

The Government said that this decision was arrived at as a result of identifying the necessity of developing an integrated system consisting of digital banking, blockchain technology, and cryptocurrency mining, as well as other essential services to facilitate the creation of an environment favourable for digital businesses.

Adding that many countries in the South Asian region have already started to pay attention to and develop these fields, it was also stated that the Government is hoping to deal with these countries competitively and that necessary steps need to be taken to enable such relationships.

Sri Lanka and cryptocurrency-related businesses 

To a considerable segment of internet-literate youth in Sri Lanka, cryptocurrency is not a completely new topic, even though cryptocurrency-related transactions and businesses are not very prevalent. Although Sri Lanka is yet to see how the Government’s plans would pan out, some experts, such as cyber security expert Asela Waidyalankara, see the Government’s plan as an initiative that can benefit the country, even though there are some inherent risks associated with cryptocurrency-related transactions and businesses. He told The Morning that to truly benefit from this initiative, proper implementation and regulation of the use of such currencies is extremely crucial.

Waidyalankara said: “We must welcome the way the Government is planning to go about this decision. Rather than hastily trying to introduce legislation, taking measures to appoint an Expert Committee which consists of experts in the banking sector and the CBSL who have a strong financial background, is what Sri Lanka needs. To make this initiative a success, we must understand the nature of it, regulate it, and create the right environment for such investments. Also, we have to be conscious about the implementation part.”

He also spoke about how and whether the common man can also benefit from such initiatives, noting: “Starting to allow cryptocurrency-related trading activities will lead to so many investment activities. Like the CSE, this would lead to a lot of benefits even for the common man depending on the extent to which cryptocurrency-related investments would be open to Sri Lankans. If parts of this initiative were open to any person like the stock market is, the people can participate in investment and market-related activities very easily. In fact, there are some similarities between investing in the stock market and in cryptocurrency, due to their structure. However, since cryptocurrency-related activities involve a huge risk, it is the responsibility of the Expert Committee to make sure that their recommendations are drafted in such a way that they are up to international standards and are acceptable and accessible to everyone.
“One of the main things we must focus on is preventing unlawful ways in which cryptocurrency can enter the country and certain ways in which cryptocurrencies can be misused. In addition, the proper implementation of this initiative would depend on what measures the Government takes with regard to regulation, financial control, and monitoring transactions. Those are the kinds of things we have to pay attention to in order to make sure that this process is properly standardised.”

Moreover, he stated that for Sri Lanka, being a country that is urgently seeking investments and solutions to the declining foreign exchange issue, this sort of initiative could help address those two issues.

“In the post-Covid-19 pandemic situation, we see a massive tendency towards having cryptocurrency, mainly due to its decentralised nature,” he noted.

Cryptocurrency

Cryptocurrency, or commonly referred to as crypto, is a form of digital currency that uses cryptography (in this case, the computational practice of encoding and decoding data) and blockchain (a decentralised ledger of all transactions across a peer-to-peer network) to encrypt, secure, and verify transactions and proof of ownership. Even though the total number of cryptocurrency types in existence remains unknown due to the diverse nature of various types of cryptocurrency, some sources claim that it can be as high as over 12,000, with cryptocurrencies such as BTC, ethereum (ETH), and dogecoin (DOGE) being the most prominent ones.

One of the main reasons cryptocurrency is becoming more and more popular is the rapid price and value fluctuations which allow owners of such currency to gain astronomical profits due to more value increases than decreases. BTC, for example, was priced at US dollars ($) 0 in 2009 (the year it came into existence as the first cryptocurrency type), and by April 2021, it had reached the highest value recorded so far, i.e. $ 64,863. Different parties have estimated that the value of BTC could rise up to $ 500,000, or lose its value significantly, by 2030. Some have predicted that BTC and other cryptocurrencies could actually become the next world currency.

However, international investment and financial experts warn the people against investing in cryptocurrencies due to a multitude of concerns relating to credibility and legitimacy, criminal activities, and unpredictable value fluctuations. 

Speaking on the increasing popularity and use of cryptocurrencies, Waidyalankara said that more than before, many big financial institutions have started investing in cryptocurrencies – the main cryptocurrency being BTC – and that some of these investments by US-based institutions are as high as $ 2 billion. He added that this is due to such digital currencies being recognised more as an asset than as a currency. 

“However, thus far, there is not enough maturity to look at cryptocurrencies as a currency, even though some counties such as Argentina have started using it as one, and such experiments are also taking place in the online and financial world,” he added.

Argentina recently became one of the early adopters of cryptocurrency in a bid to protect its savings against inflation, and to face the prohibition on purchasing and transferring foreign currency abroad.

“Countries like Singapore and Japan have also started using more cryptocurrency. Fast food chains in some countries have actually started accepting cryptocurrency, especially BTC as valid payments. Digital currencies are becoming a mainstream form of currency and there is also a movement supporting it,” Waidyalankara noted, adding that Sri Lanka too should benefit from such initiatives.

Cryptocurrency and crimes 

Illegal activities including crimes have, over the years, become an integral part of the discussion about the use of digital currency, and these activities include both online and offline crimes. Among them, money laundering is one of the most prevalent crimes committed using cryptocurrencies.

According to experts, there are many pros and cons in investing in cryptocurrencies, and anonymity is often viewed as both an advantage and a disadvantage. They claim that having unregulated currencies, which can be converted to physical currencies and are not bound by a majority of mainstream laws, is both a risk and an advantage, when anyone can anonymously engage in such activities. While it is advantageous to those who value their financial and online privacy, it is a challenge to law enforcement authorities endeavouring to tackle illegal activities related to money, as criminals also use the anonymity feature to their advantage. Cryptocurrency is also the main digital currency used on the dark web to pay and charge for criminal activities.

When questioned about criminal activities related to the use of cryptocurrency, Waidyalanakara opined that financial crimes could occur in any currency system, and that such can be prevented with proper regulatory measures.

He explained: “Usually, cyber criminals use anonymity, the decentralised nature, and the very low traceability of cryptocurrencies for their activities. Spreading ransomware is also prevalent in this process. When it comes to cybercrimes, an extension of such activities is cryptocurrencies being used to transmit ill-gotten gains, and this will always be a matter of concern. However, such risks depend on the country as well. For example, countries such as Singapore and Japan have regularised as to which currencies can be used and exchanged. In addition, there are also some restrictions relating to the improper use of cryptocurrencies. However, these are inherent dangers that have come about due to cryptocurrencies. On the flipside, money laundering can happen even with physical currencies, and reports such as the Panama Papers prove it. Regardless of the nature of a currency, such illegal activities can always happen.”

Early this year, the CBSL raised awareness about the risks associated with investing in digital currencies in the country. The CBSL said that there are no regulatory safeguards relating to the usage, investment, or dealing in virtual currencies in Sri Lanka, and that therefore, investing or using them in the country poses significant risks such as users and investors having no regulatory or specific legal recourse in the event of any user or transaction-related issue or dispute; high volatility of the value of virtual currencies, as it is dependent on speculation, exposing the investment of virtual currencies to a risk of making large losses; and the high likelihood of virtual currencies being associated in financing terrorist activities and used by criminals to launder criminal proceeds.

The CBSL said that it would also amount to a violation of the Foreign Exchange Regulations, adding: “As virtual currencies are traded as assets in exchanges, purchasing virtual currencies from abroad would lead to a violation of the Foreign Exchange Regulations, as virtual currencies are not identified as a permitted investment category in terms of the Foreign Exchange Act No. 12 of 2017 as amended. Electronic fund transfer cards (EFTCs) such as debit cards and credit cards are also not permitted to be used for payments in foreign currency related to virtual currency transactions, in terms of the Foreign Exchange Regulations.”

The Expert Committee appointed by the Government will look into the prevention of the above-mentioned risks as well.

It was reported that the Committee will be mandated to study regulations and initiatives by countries such as Malaysia, the UAE, the Philippines, and Singapore and those in the EU region, and thereby propose a suitable framework for Sri Lanka. Moreover, this study will also focus on laws and regulations with regard to criminal activities, money laundering, and terrorism financing in other countries.

However, a number of countries have either banned or restricted the use of cryptocurrency, especially BTC, due to various reasons including those pertaining to money laundering. Among these countries are Indonesia, Iran, Algeria, China, Colombia, Nepal, Vietnam, Bolivia, and Egypt. 

Embracing new inventions is part and parcel of the world’s forward movement, and benefiting from it depends on how it is done and how the abuse of such inventions is thwarted. With regard to cryptocurrencies, there are many examples for Sri Lanka to learn from, such as other countries, in this regard.
At the end of the day, whether Sri Lanka succeeds in doing so will depend on the Expert Committee’s recommendations, and their implementation.