Decrypting Nepal’s ban on crypto

The recent uproar over the use of cryptocurrencies in Nepal has given those of us interested in digital transformation and innovation much to chew on. A few weeks ago the Nepal Rastra Bank (NRB) issued a directive banning all Nepali nationals from buying or investing in cryptocurrencies. This was not a surprise given previous NRB declarations.

But the circular went a step further by also forbidding non-nationals living in Nepal from transacting in cryptocurrencies. This was followed by a series of news stories, quite obviously fed to the media by authorities, focusing on the use of crypto to defraud people looking to migrate for work as well for furthering capital flight.

I suggest we step back from the noise surrounding the recent circular to explore how novel technologies interact with extant systems via three ideas - affordances, disruption and domestication. This zoomed out exploration provides us some ways of thinking about why the NRB might be so worried about cryptocurrencies and how we might think about digital currencies more generally.

Let us start by accepting that migrant labour fraud, using hundi networks to underpay custom duty or even pandora/panama papers style capital flight are not new for Nepal. They seem to occur with a sufficient degree of frequency within the existing financial regime. So we cannot argue that cryptocurrencies are responsible for causing such fraud and flight. But cryptocurrencies might facilitate increases in the volume and/or frequency of such illegal actions. Let’s suppose this to be true, what about cryptocurrency could be enabling this increase?

Affordances

Cryptocurrencies have been the preferred medium of exchangefor the internet darknet markets. They become the preferred means of digital extortion schemes such as ransomware attacks, but more unexpectedly, they are also what off-line IRLkidnappers across multiple countries prefer. There are, in fact, some things (affordances)that are inherent in the design of cryptocurrencies that make criminals choose them. For one, their pseudonymous nature offers a particular kind of anonymity as compared to traditional financial institutions.

While traditional bank transactions are not visible to the public, the ownership of the account can be tracked fairly easily to a specific real world person. In the earlier, and still most popular, cryptocurrencies all transactions are visible in public. But it is difficult to know who actually owns the account. Even this relative lack of transactional privacy is being addressed by newer designs.

Those skirting the law also appreciate that law enforcement cannot easily freeze accounts because there is no central regulator or even physical asset. So, it is certainly possible that the Nepali officialdom is reacting to an increase in illegal activity facilitated by the affordances of cryptocurrencies. But there are other possibilities too.

Disruption

But the volume of unlawful activities in Nepal may not have increased because of cryptocurrencies. The NRB might instead be concerned that the power to conduct such activities has shifted from one set of actors to another. In other words, a new technology has caused a disruption. Why would such a shift worry the NRB so immensely? To answer that question, let us take a brief detour into the connotations of the word “setting” in Nepali.

A setting is a network of relationships utilised to ensure that a specific action, almost always involving getting the State to do something, can be carried out. Settings often do involve the exchange of money, but not always. They can be about forging new relationships or doing mutual friends or in-group acquaintances favors. A setting can range from the mundane, ensuring that a land transaction is carried out with minimal hassle, to much more significant.

One imagines that the extant networks involved in black or gray currency transactions have carefully calibrated settings encompassing political protection, the trading houses that invariably need their services, and even regulators. The emergence of cryptocurrencies may have, in a very real sense, disrupted these arrangements.

One plausible disruption is that financial regulators and political patrons have been cut out of the setting. Nepal now has a generation of digital natives with the skills to manipulate novel technologies. But that alone would not be enough to disrupt the setting without their access to the resources of the youth diaspora now working and earning in the West. Such a network is unlikely to have existing contacts with political forces nor with the officialdom, and thus unlikely to feel the need to involve them in any transaction.

Another plausible disruption is that cryptocurrencies, with their enforcement challenges and lower cost of transaction, have democratised certain illegal actions. In other words, regulators could be worried because you no longer have to be a powerful player with large sums of money and know how to hire expensive lawyers in the British Virgin islands to engage in capital flight. Any moderately wealthy Nepali family that knows a few kids who are good with tech now has access to the same gray market financial services that only the very powerful previously had. Such a case would worry regulators because while only a few people are in the former category lots are in the latter.

Domestication

We should also be cautious not to read the above with unbridled cynicism. There are reasons for good faith regulators, cognizant of the realities of corruption and political-criminal nexus in their milieu, to worry about the disruption of familiar black and gray market “settings”. The familiarity of the “settings” allows regulations to monitor such transactions and the informal powers of approval allow them to exercise some control over them.

If the disruptions brought on by cryptocurrencies allow for the setting to be dispensed with, the ability of regulators to influence these activities decreases. Assuming that black and gray market transactions cannot be fully prevented, there is a justifiable case to be made for trying to domesticate them by monitoring the key players, as well as influencing the volume and timing of these activities.

Informal influence through collusion is, however, not the only tool regulators and law enforcement have to domesticate emergent digital technologies. The next part of this piece will take a brief tour through how governments and regulators around the world are attempting domestication. These explorations might also shed light on how Nepal might prepare for the transformative disruption that the arrival of digital currencies will herald.

This is first in two part series on cryptocurrencies. The second part will be published in March.

Sakar Pudasaini, Founder at Karkhana, explores innovation, technology, education, and their social consequences in Makeshift, a new monthly column in the Nepali Times.