Regulators need to look at the flaws beneath crypto-currencies

Focus on exchange rules, technology for safer trading

Markets of crypto-currencies are volatile as we approach the last week of the year, revealing gaps in its regulation and the technology that enables crypto-currency trading.
 

The bitcoin price (BTC) plunged below $13,000 on Friday, after nearly touching a high on $20,000 on the night of December 18.

While India does not consider crypto-currencies such as bitcoin as legal tender, regulators face challenges such as co-ordination among themselves, say analysts.
 

Indian crypto-exchanges haven’t faced problems with trading activities or with their technology platforms. Yet, the prices they offer are directly affected by the global-common blockchain technology and by the volatility in international BTC prices.

G Sreekanth, chief operating officer, Coinone, an Indian crypto-currency trading exchange, said: “Since the crypto-currency market is very volatile in nature, user surge can happen in any such situations. Exchanges dealing with multiple crypto-currencies will have these surges most of the time.”

All BTC exchanges are affected by prices reflected in competing crypto-exchange as they use a global-common blockchain network to process BTC orders and transactions.
 

Scalability is the biggest issue facing the industry despite substantial investments by exchanges in technology, says Sreekanth. “Exchanges in India and abroad should be capable of dynamic scaling with zero-downtime.”

The probability of these crypto-currency trading exchanges, which essentially are unregulated entities, going bust due to inadequate net worth or liquidity, is another headache in the crypto-currency trading terrain. 

Youbit, the South-Korean BTC exchange, filed for bankruptcy last week, after a cyber-hack last Tuesday wiped away a fifth of Youbits clients’ holdings. The exchange was hit by hackers in April as well, when thieves stole $35 million worth of digital currency. 

Regulatory stance

Exponential growth in BTC and other crypto-currencies’ adoption over the past two months have perplexed regulators and central banks around the world.

It is estimated that 40 per cent of the BTC market is owned and controlled by 1,000 people. It gives them a grip on activities such that the market can be swayed in any direction if they decide to coordinate their trades.

Finance Minister Arun Jaitley, on December 1, said that the government did not recognise the crypto-currency as legal tender. Similarly, the Reserve Bank of India (RBI) has so far issued three notifications related to BTCs and other crypto-currencies, warning investors and citizens of the risks involved.

On December 20, Ajay Tyagi, chairman of the Securities and Exchange Board of India, said the government had appointed a panel to look into BTC and other crypto-currencies. The market regulator has said if BTC is to be considered a commodity derivative, then it might regulate it. 

High volumes with nascent technology 

During the weekend of December 8-10, there was a surge in the number of orders waiting to be confirmed by the BTC-blockchain network, according to Blockchain.info. 
 

The BTC blockchain network has a capacity of four transactions per second, but can only at best process three to three and a half transactions per second, which multiple experts have noted as sub-standard. 

Experts say that the greater the number of orders-in-wait, the higher the transaction fees and greater room for manipulation which causes large price swings.

Raj Chowdhury, managing director of HashCash Consultants, a blockchain consultancy, said: “In any blockchain network there is a compromise between liveliness and security; you can reduce the cost and speed up the network by minimising the computational intensity of mining a block, or, you could modify the block size to hold more transactions, but then you will make the network security weaker.”