IN recent years, there has been a sudden upsurge in the use of bitcoin; a leading player in the larger global phenomenon that is cryptocurrency.

It may be useful to think of cryptocurrency as a ledger-keeping system that can be accessed by multiple computers. Bitcoin is simply a network over which the ledger, called the blockchain, is maintained. The process of trading entails that any bitcoin you send will be deducted from your ledger and added to the recipient’s ledger.

This way each bitcoin can be traced backwards through every transaction it has been through. At virtual currency exchanges you can “trade in” your traditional currency for bitcoin and vice versa. Bitcoin has a built-in protocol for several protective mechanisms, the most fascinating of which is the way it regulates the supply of bitcoin.

It incentivises “miners” who produce bitcoin, and get a certain amount of coins in return. Beyond a certain level of supply, this incentive ceases and without it, people stop mining. Like with most radical innovations, a cautionary approach to bitcoin is perhaps not unwarranted.

Advocates and critics of bitcoin cite the same reason for their stance: the decentralised nature of the currency, in that, it completely eliminates intermediaries between the two parties transacting.

Operation costs of bitcoin and its exchanges are far lower than those of traditional banking institutions. A decentralised system also means that the currency does not need to appreciate or depreciate in value depending on any one country’s economic circumstances

However, what bitcoin users are most attracted to is the complete privacy and anonymity that the decentralisation allows, i.e. a bitcoin you send to someone may be traced back to your account, but not to you. Bitcoin’s current growth rate also makes it an attractive high risk-high reward investment.

Critics, usually government bodies, insist that currency regulation is the domain of the central bank alone and giving leave to a private entity would entail a certain violation of the law. The State Bank of Pakistan (SBP) is the only authority that can make monetary policy and regulate money supply; but in the world of bitcoin, it is little more than a spectator.

Concerns about bitcoin trading usually pertain to issues of a financial-legal nature: money laundering and tax evasion. These apprehensions manifest themselves when illegal money is used to buy bitcoin and the money enters the network completely laundered.

Anonymity entails, in this context, that money laundering is a very real danger. There is also the chance that people put their money into the network to evade taxes, since it cannot be traced to them. To most, it may seem clear that such a system must entail several infractions of the law.

An article in Bitcoin News quotes the findings of a financial consultant, Mr Faisal Khan, who suggests, “For bitcoin to be considered for money-laundering, it has to be defined into an asset class whereby (bitcoin) has been declared (money) or some form of an asset as per ‘some’ legal definition in some law in Pakistan.”

This, he says, is not the case, considering the SBP’s refusal to recognise it in any legal (or illegal) capacity. Whilst bitcoin is defined as a currency in its own right, it does not fall within any definition of currency in any legislation (Coinage Act 1906, Foreign Exchange Regulation Act), because SBP has refused to recognise it as legal tender.

This means that regulatory requirements imposed on local and foreign currency are not automatically applicable to bitcoin. Despite authorities’ conviction in the matter, there really is no stopping the use of bitcoin beyond shutting down known currency exchanges.

It is perhaps in the best interest of Pakistan to jump onto the proverbial “bandwagon” like others have done. Banking facilities in the country remain, even in this day and age, inaccessible to scores of people and those that do have access, often lose a significant amount of money in transaction costs or bank fees.

Bitcoin, since it eliminates banks from the equation, offers a solution to both problems. Moreover, beyond facilitating the traders, the state can also benefit from the arrangement if it places appropriate mechanisms to tax capital gains; should a user make money off of his/her investment, the government could tax this profit.

Additionally, the operation costs of bitcoin and its exchanges are far lower than those of traditional banking institutions. A decentralised system also means that the currency does not need to appreciate or depreciate in value depending on any one country’s economic circumstances.

Though many contend that the lack of a centralised operating system entails unreliability, one can still argue that bitcoin’s protocol itself calls for mechanisms to verify transactions; furthermore, since there is no single access point to the network, it cannot be easily hacked.

Recognising bitcoin as legal tender whilst imposing regulations on it would, at the very least, allow people to conduct exchanges freely but with restrictions of the law, instead of the under-the-table transactions they must resort to currently.

The writer is a student of economics at the Lahore University of Management Sciences

Published in Dawn, The Business and Finance Weekly, May 28th, 2018