By Imesh Ranasinghe  “If somebody is doing some other transactions, they should take the risk of their action,” Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal said last month, revealing the stance of the country’s apex body in the financial sector. Despite this announcement, many of the businesses and shops have started accepting payments in bitcoin while platforms such as GemPay were launched as a cryptocurrency payment gateway and processor for merchants. Cabraal went on to say: “This is not like a barter system. Sri Lanka’s currency unit is the rupee. Only the rupee is approved by the Central Bank as the transaction unit. Nothing else has been approved.” In April 2021, CBSL issued a public notice against most of the risks that come with crypto investments, citing a lack of legal or regulatory recourse. But, barely a month after the notice, the Central Bank shortlisted three banks for creating a proof-of-concept for a shared Know Your Customer facility using blockchain. However, a cabinet-approved steering committee was appointed to report on the acts, rules and regulations to attract investments and investors in the areas of digital banking, blockchain-related industries such as cryptocurrency. “This committee will be mandated to study the regulations and initiatives of other countries such as Dubai, Malaysia, the Philippines, the EU, and Singapore, etc., and propose a suitable framework for Sri Lanka. The committee will also study the laws and regulations of other countries in terms of anti-money laundering, terrorism financing, criminal activities, and the Know Your Customer processes,” the statements issued by the Government Information Department said. Is regulating crypto possible? Speaking to The Sunday Morning Business, University of Moratuwa (UoM) Lecturer of Computer Science Engineering Dr. Sapumal Ahangama, who is also the Founder of Xeptagon, a software company that works with local and foreign businesses, said that regulating cryptocurrency is not easy as it is designed in a decentralised manner. He said the intention of creating cryptocurrency was to remove centralisation. “It operates as a peer-to-peer network so that any person can be part of the network. If you try to restrict in some way, some of the peers drop out, but still, the network will go on,” he added. For example, he said that when China banned crypto, the people found a different way to get through it.  In September, China, where most of the crypto mining took place, banned all transactions through crypto through a crackdown by the state. This was after the People's Bank of China and the National Development and Reform Commission outlawed cryptocurrency mining and declared all cryptocurrency transactions illegal. Speaking on the possibility of depreciation of currencies due to crypto, he stated that there definitely will be an impact on the currencies, since crypto was first created in 2009 by the pseudonymous developer Satoshi Nakamoto, in order to have a currency that is decentralised after the global recession of 2008.  “The whole intention was to create a currency where you remove the centralised part and create a peer to peer currency…” he said. Meanwhile, GemVault, the parent company of GemPay, said that it will not threaten the dominance of the Sri Lankan rupee but in fact, it is designed to help strengthen the rupee through the acceptance of cryptocurrency payments.  According to them, GemPay is a one-way system that takes cryptocurrency and converts it to rupees for merchants through the intermediary of the US dollar. Each time there is a transaction on the GemPay system, there will be corresponding US dollars entering Sri Lanka for settlement. Ahangama said that from the trading perspective, there are two types of people using cryptocurrency; one set of people for the technology and the other for the capital gains from trading. He said instead of regulating, the CBSL should present a policy framework on whether crypto trading is allowed in Sri Lanka and whether it is an asset class. For example, Ahangama said that Singapore had done the framework in the very early days  where they had allowed the shops to accept payments in bitcoins but had to disclose the transaction and pay taxes. Port City, a good place to make bitcoin payments   Ahangama said with the Port City coming, it would be a good opportunity for Sri Lanka to legalise the payments in crypto within the Port City. He referred to Dubai's newest free zone KIKLABB, which started accepting bitcoin payments earlier this year. “If you have a region like the Port City within which transactions are allowed, that will be an opening for the future. We can’t ignore it as lots of companies and governments are investing in crypto, we have to go with the trend,” he said. Businesses accepting bitcoin payments  Regarding the local businesses which have already started accepting payments in bitcoin, he said they will face certain risks and issues without a proper policy framework on crypto since in bitcoin, the transaction is non-rivertable. “But if they can manage, it's fine,” he added. Recent reports showed a 706% increase in bitcoin payments in Central and Southern Asia and Oceania from July 2021 to June 2021. Based on the data shared by Chainalysis, the value of transactions in these regions reached 14% ($ 572.5 billion), with India accounting for the biggest global transaction value. Shanith Muhandiramge from MTB.LK, the first Sri Lankan company to accept payments in bitcoin, said that although people are eager to make payments in bitcoin, a lot of them have doubts on trading because of a lack of assurance from the Central Bank and the Government. “MTB.LK, which facilitates over 80 mountain biking trails and adventure tours, first launched accepting payments in cryptocurrency targeting the small section of foreigners who are trading in cryptocurrency,” he said. However, he noted that payments in bitcoin are not that great.  Meanwhile, a spokesman from Kelly Felder, which started accepting payments in bitcoin in October 2021, said the business is only accepting payments in bitcoin for online transactions and that bitcoin will be accepted in outlets very soon, on which they are currently working on. He said only a small number of customers are making payments in bitcoin but the business expects it to rise in the next few months as people get more and more exposed to the use of bitcoin. Central Bank Digital Currency  Earlier this month, CBSL Deputy Governor T.M.J.Y.P. Fernando said the CBSL is working on implementing a national remittance mobile application and completed the deployment and testing phase of the proof-of-concept, a blockchain-based shared Know Your Customer (KYC) platform. “More projects such as open banking, Central Bank Digital Currency (CBDC), and digital banking will be announced in the near future,” the Deputy Governor said. CBDC means the respective central bank will issue digital local currency which is pegged by an actual local currency. About 80% of countries are researching the use of CBDC, where designing, developing, and running such a system would be a major undertaking for a central bank according to Fernando. The Central Bank has been studying the use of CBDCs since 2017. In the US, US dollar tether created by private companies accepted deposits in US dollars and issued tokens, while in China it was digital yuan. How developed countries have approached crypto In the US, despite a large number of cryptocurrency investors and blockchain firms, the country hasn’t yet developed a clear regulatory framework for the asset class. The Securities and Exchange Commission (SEC) typically views cryptocurrency as a security. A recent report from the Biden administration outlines proposed legislation that would bring more regulation to the cryptocurrency market. And in recent months, US Federal Reserve Chairman Jerome Powell, and Security and Exchange Commission (SEC) Chairman Gary Gensler have both expressed concern over the lack of cryptocurrency regulation. In Canada, regulators have generally taken a proactive stance toward crypto. It became the first country to approve a bitcoin exchange-traded fund (ETF) in February 2021. Additionally, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organisation of Canada (IIROC) have clarified that crypto trading platforms and dealers in the country must register with provincial regulators.  Furthermore, Canada classifies crypto investment firms as money service businesses (MSBs) and requires that they register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). From a taxation standpoint, Canada treats cryptocurrency similar to other commodities. In the United Kingdom, cryptocurrency is considered property but not legal tender. Additionally, cryptocurrency exchanges must register with the UK Financial Conduct Authority (FCA) and are banned from offering crypto derivatives trading. Although investors still pay capital gains tax on crypto trading profits, more broadly, taxability depends on the crypto activities undertaken and who engages in the transaction. Japan recognises cryptocurrencies as legal property under the Payment Services Act (PSA). Meanwhile, crypto exchanges in the country must register with the Financial Services Agency (FSA) and comply with AML/CFT obligations. Japan treats trading gains generated from cryptocurrency as “miscellaneous income” and taxes investors accordingly. South Korea doesn’t consider cryptocurrencies as legal tender or financial assets. As such, digital currency transactions avoid capital gains tax. The South Korean Financial Supervisory Service (FSS) oversees crypto exchange regulation, with operators subject to strict AML/CFT obligations.  As of September 2021, cryptocurrency exchanges and other virtual asset service providers must register with the Korea Financial Intelligence Unit (KFIU), a division of the Financial Services Commission (FSC).