The tech holes that ensure that crypto can never be effectively banned

News: Experts have stated that it is not possible to enforce an effective ban on cryptocurrency in a foolproof manner.

Why banning Cryptocurrency is not possible?

Peer to Peer networks: Users can always transact using peer-to-peer networks. This is exactly what happened in India post RBI’s restrictions on Indian banks in 2018.

Defi platforms: Users can trade or transact in Crypto via Decentralised finance (Defi) platforms. These platforms can be used without any intermediaries like banks or standard cry­pto exchanges. User sign-ups are completely anon­ymous on these platforms, without any identity markers like name, email-id or location.

Banning ports would lead to unintended consequences: One way to block these DeFi platforms and cryptos would be to ban the ports, which are the interfaces that allow computers to communicate regarding a software with each other. But this would mean blocking other genuine software that use a particular port. For instance: Port 8333 is used by Bitcoin, but also by cloud computing major VMware.

Exchanges can move abroad: The simplest option for a ban is to block local crypto exchanges in the country. In that case, the exchanges would move abroad and attract users through virtual private networks (VPNs). It would just reduce the government’s ability to track and tax transactions. There will be money laundering and scams.

A ban on crypto in India would not stop people from amassing such assets in other jurisdictions. For example, a crypto user giving freelance services to a company abroad, can take the payment in crypto. His Crypto assets could sit in the foreign jurisdiction untouched until they are traded in INR transactions in India.

Also, as per Financial Action Task Force re­cently issued Guidance on Virtual Assets and Virtual Asset Service Providers, the proliferation of these instruments req­uires accommodation in any go­vernance model.

What have been the implications of a blanket Crypto ban?

At present, two countries have banned Crypto: Nigeria & China, and both have failed at curbing their usage.

A ban only boosts adoption of Crypto: In countries where a blanket ban was imposed, it eventually resulted in an even greater adoption of Crypto. For instance: Nigeria & China

– Nigeria: Nigeria’s central bank curbed local banks from working with cryptocurrencies in February 2021. It warned of severe regulatory sanctions and freezing accounts of companies and users using them. But a Reuters report in October said that crypto adoption in the country increased following the ban.

– China: In May 2021, China first cracked down on crypto mining operations in the country and then followed it up with a blanket ban on all crypto related activities, including trading, in September. But, there has been an increased activity on decentralised finance (DeFi) platforms.

Why Defi platforms cannot be banned?

Unlike crypto exchanges like CoinSwitch Kuber, WazirX or CoinDCX that are based on the respective servers of the companies, decentralised platforms are not controlled by a single server or group of servers.

They are like distributed peer-to-peer networks that are run by computers across the globe. This means that there is no single point of failure, meaning shutting down a few computers would not lead to blocking access for others.

Source: This post is based on the article “The tech holes that ensure that crypto can never be effectively banned” published in Business Standard on 3rd Dec 2021.